Question

Following are the auditor’s calculation of two key ratios for Audisys Corporation for the current year, previous year, and the percentage change.  The primary purpose of this information is to direct the auditor’s attention to areas requiring greater audit effort.

Ratio	Current	Previous	%
Quick Ratio	1.32	1.50	12.00-
No. of Days Sales in Accounts Receivable	53.24	47.53	12.01

Required:

State whether there is a need to investigate the results further and, if so, the reason for further investigation.

State the areas/accounts that would require special emphasis in the audit investigation.

What additional tests would be done as part of the investigation?

Answer 1

1. a. Quick Ratio- Basically the quick ratio is a measure to know how well a company can meet its short-term financial liabilities. Its formula is (Current assets – Inventory) / Current Liabilities.

That is how efficient are your liquid assets in meeting with your current liabilities. The higher the ratio the better is the performance of the company.

Since, there is a decrease by 12% in the current ratio, there is a need for further investigation..

b.  No. of Days Sales in Accounts Receivable means how mant days on average a customer takes to pay consideration.

In our case there number of days have increased by 12.01%, thus there is a need to investigate further.

2. a. To investigate quick ratio further each and every component of the formula must be divided and comparative analysis of change in each factor must be plotted. For example liquid asserts being cash, debtors, trade advances etc. and liabilities, oustanding payments, creditors but be compared with the previous year on one to one basis and then the factor which has high variance must be analysed in depth.

b.In incresed credit period, market conditiond of the area of business must be checked for mass level delay in repayment. Then ageing of debtors must be done to get party wise details. Customers who are delaying payment must be approached and efforts for quick recovery must be taken.