In: Accounting
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.
(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 :
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.
2018 | 2019 |
= 25,000/10,000 = 2.5 : 1 | 40,000/15,000 = 2.67 :1 |
2. GROSS PROFIT RATIO = GROSS PROFIT / NET SALES
2018 | 2019 |
= 15,000/25,000 = 60% | = 20,000/ 30,000 = 66.67% |
3. INVENTORY TURNOVER RATIO = COST OF GOODS SOLD / CLOSING INVENTORY
2018 | 2019 |
=10,000/2,000 = 5times | =10,000/ 4,000 = 2.5 times |