Question

B27 x for Analyze 4 additional analytical procedures that were completed in the planning Days Outstanding in Accounts Receivable is 3.09 and the industry average is 14.10. This ratio indicates that Earth Wear colects on sales much more quickly than the rest of the industry t o represents a sigricant improvement relative to prior years or EartWear and is beter than expected for this year. This ratio is consistent with a relatively lowwowance bir doubt accounts. Controller explains that tast collection rate is a result of increased bcus on collection activities and newly implemented incentives for early payment. We wil corroborate the clients explanation as a part of our testing in the sales & collection cyde. Analyze 4 additional analytical procedures that were completed in the planning process Earth Wear's Quick Ratio is 0.73 and the industry average is 0.80 Discuss the meaning of the analytical procedure and how it may affect risks relating to the EarthWear audit or your planned audit procedures Earth Wear's Inventory Turnover is 388 and the industry average is 6.20 Discuss the meaning of the analytical procedure and how it may affect risks relating to the Earth Wear audit or your planned audit procedures Earth Wear's Gross Profit Percentage is 43.90% and the industry average is 38.80% Discuss the meaning of the analytical procedure and how it may affect risks relating to the Earth Wear audit or your planned audit procedures EarthWear's Debt to Equity ratio is 0.50 and the industry average is 0.84 Discuss the meaning of the analytical procedure and how it may affect risks relating to the Earth Wear audit or your planned audit procedures Instructions Audit Planning Memorandum Print Out Work Paper 3-6 Common Size Balance Sh Ready a Type here to search

Answer 1

1. EarthWear's quick ratio is 0.73 and the industry average is 0.80:

This ratio indicates that Earthwear's short term liquidity position is not as good as the industry, and the most liquid assets of Earthwear are not as able to meet the short term payment obligations as the industry. This means that Earthwear should try to convert more of its current assets to quick assets in order to bring the ratio at par with the industry.

2. EarthWear's inventory turnover is 3.88, and the industry average is 6.20:

EarthWear is not being able to turn its investment in inventory into sales as fast as its peers in industry. EarthWear is obviously purchasing more inventory than it requires in the short term, and this does not indicate very well about the inventory management practices followed by EarthWear. Not only is the cost of investment in inventory higher, EarthWear is also running the risk of carrying obsolete inventory in its stock, and higher warehousing cost. It is possible that EarthWear would need to recognize loss in inventory value in the near future unless it can improve its inventory turnover.

3. EarthWear's Gross Profit Percentage is 43.90 %, and the industry average is 38.80 % :

Gross profit is the difference between revenues and cost of sales. This ratio indicates that EarthWear earns 43.90 % in gross profit per dollar of revenue, while the competitors are earning only 38.8 % per dollar. This can indicate that either EarthWear has better pricing power, or that it manages its cost of sales better as compared to the industry.

4. EarthWear's Debt to Equity ratio is 0.50, and the industry average is 0.84:

EarthWear has lower financial leverage on its books, which means that a third of the assets of EarthWear is financed by outside liabilities, while 46 % of the assets are financed by outside liabilities for the other players in the industry. This indicates that EarthWear prefers lower financial risk on its books, having lower finance cost, and enjoying greater financial flexibility for expansion or diversification.