Question

You are planning the audit of Buchanan, Inc., a publicly traded company that develops and markets products used in the prevention and treatment of infectious diseases. Buchanan markets two products and has eight new product candidates in various stages of development The following information for the current year is available to the auditor. All credit sales terms are 30 days BUCHANAN, INC. LIST OF FINANCIAL ITEMS AND THEIR RELATED BALANCES Average Accounts Receivable Average Inventory Average Total Assets Total Assets Cost of Goods Sold Current Assets Current Liabilities Total Liabilities Interest Expense Income Tax Expense Net Sales Net Income (Loss) 5,600,000 6,100,000 110,600,000 115,000,000 19,700,000 50,800,000 9,500,000 72,500,000 2,200,000 1,300,000 25,900,000 900,000

Answer 1

1)

formula/explanation sales/average accounts receivables cost of goods sold/average inventory net income/ invested assets 100 total sales/average assets ratio calculation interpretation the auditor will know the opening and closing receivables the auditor will track the invetory opening and closing inventory the auditor will identify the opening and closing assets and accumulated depreciation the auditor will know the credit sales and cash accounts receivable turnover ratio 25900000/5600000-4.63 2 inventory turnover ratio 19700000/6100000-3,23 3 ROA 900000/110600000-0,814% 4 assets turnover rat 25900000/110600000-0.23 times sales the auditor will get the current year rrent assets /current liabilities50800000/19500000-2.61obligations and neest payable etc net profit/sales 1 gross profit /sales *100 5 current ratio the auditor will track the exact net operating |profit and operating expenses the auditor will track the manufacturing and factory cost the auditor will get the interest payment history and ability of a company to pay bank nterest 6 net profit ratio 100 900000/25900000*100-3.47% 7 gross profit ratio 6200000/25900000-23.94% 8 interest coverage ratio EBIT/interest expense 4400000/2200000 2 times

2)the auditor will require the following accounts for additional audit by him as follows

trial balance: it will provide arithmetical accuracy of financial transactions

income statement: it will helps to find out expenditures and various income sources

balance sheet:it will support for tracking all the assets and liabilities

statement of retain earnings :it will also useful to track the dividends paid and declared

all the above statements will support to the auditor for additional audit work.