Question

In: Accounting

You are engaged in the annual audit of the financial statement of moon star limited. Which...

You are engaged in the annual audit of the financial statement of moon star limited. Which operates and develops the commercial real estates, properties. The following information’s are extracted from the balance sheet and income statement.

Particulars

2018 (OMR)

2019(OMR)

Sales

25,000

30,000

Cost of goods sold (CGS)

10,000

10,000

Gross Profit (Sales-CGS)

15,000

20,000

Profit before tax

6,500

5,500

Inventories

2,000

4,000

Total current liabilities

10,000

15,000

Total current assets

25,000

40,000

Financial Analysis 2018

Financial Analysis 2019

Industrial Analysis

60%

66.7%

51%

2.5:1

2.66:1

2:1

2.3:1

2.4:1

1:1

1. From the above information, how would you recommend the analytical procedure in substantive test.

2. How the above analytical procedure helps an auditor to form overall conclusion on financial statements are consistent.

Solutions

Expert Solution

(1) The figures from the income statement as well as some extracts of the balance sheet can be compared for the 2 years. Comparison helps in futher analytical procedures.

The following table shows the figures from the income statement and their comparison :

  

  • Despite keeping the cost of goods sold constant and increasing the sales, the profit before tax has declined.
  • This might be due to the increase in the indirect costs associated with business.
  • However, the direct costs are under control, which has helped to increase the gross profit.

The following figure shows the changes in current assets and current liabilities :

(2) Financial ratios are used to compare any 2 items from the final accounts and establish relationships that exist between them. They also help us to form conclusions regarding the consistency of accounts.

  1. CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES
2018 2019
= 25,000/10,000 = 2.5 : 1 40,000/15,000 = 2.67 :1
  • Current ratio is a liquidity ratio that measures a firms' ability to meet its short term obligations. A ratio of 2 : 1 is considered ideal, however it varies from industry to industry.

2. GROSS PROFIT RATIO = GROSS PROFIT / NET SALES

2018 2019
= 15,000/25,000 = 60% = 20,000/ 30,000 = 66.67%
  • It is a popular profitability ratio used to assess operational performance of the business.

3. INVENTORY TURNOVER RATIO = COST OF GOODS SOLD / CLOSING INVENTORY

2018 2019
=10,000/2,000 = 5times =10,000/ 4,000 = 2.5 times
  • It is a turnover ratio that shows how many times a firm has sold or replaced inventory during a certain period.


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