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:

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

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

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

Answer 1

Ans:

1)

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

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

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

b. No. of Days Sales in Accounts Receivable means how meant 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 inspect further.

2)

a. To inspect quick ratio further each and every component of the formula must be divided and relative analysis of change in each factor must be plotted. For example liquid asserts being cash, debtors, trade advances etc. and liabilities, outstanding 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 increased credit period, market condition 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 delay payment must be approach and efforts for quick improvement must be taken.