Question

Please identify five other areas that may require additional audit scrutiny and explain why.

Seuthwest Appliances, Inc. Balance Sheets (Amountain Dollar) 19X0 19X1 19X0 % of Assets 19X1 % of Assets % Change Assets Current Assets Cash and cash equivalents Money market funds Accounts recevable Allowance for doubtful accounts Inventory Total Current Assets 22,845 S 31,510 301,713 (31,916) 307,701 631,053 10,867 16,000 395,755 (33,779) 503,091 891,934 (50.71) (49.22) 31.17 (5.84) (3.16) 30.49 6254 40.79 (9.09) Property and Equipment Plant 500,000 Accumulated depreciation - plant (220,000) Equipment 120,000 Accumulated depreciation - equipme (72,000) Land 50,000 Net Property and Equipment 378,000 Total Assets $ 1,009,053 500,000 (240,000) 120,000 (96,000) 50,000 334,000 $ 1,225,934 49.55 (21.80) 11.89 (7.14) 4.96 37.46 100.00 (33.33) (11.64) 27.24 100.00 21.49 Liabilities and Stockholders' Equity 387,757 31.63 17,436 Current Liabilities Accounts payable Payroll taxes payable Income taxes payable Dividends payable Total Current Liabilities 4.37 0.84 1.42 145,031 8,524 30,235 14,197 197,987 4,125 107236 104.55 (86.36 (77.44 108.36 3.203 412,521 Notes payable Total Long-term Liabilities 90,000 90,000 60,000 60,000 (33.33) (33.33) Stockholders' Equity Capital stock Paid-in capital Retained earnings Toral Stockholders' Equity Total Liabilities and Equity 29.73 9.91 300,000 100,000 321,066 721,066 $ 1,009.053 300,000 100,000 35313 71.46 100.00 51.225.03 100.00

Answer 1

Major 5 highlighted Points “ preliminary Analytical procedure “ – Southwest Appliance Inc”

From PNL side , one of the point to highlight is Growth of revenue by 19% . Still Gross Margin is slightly low on current year (18%) as compared to last year ( 19%) . Another point to note that instead of 19% revenue growth , Total Operating Margin current year almost in line with last year, This represents that company has to establish major control on “ Total operating Expenses “ As compared to last year , all category of Operating expenses has been increased .

From Financing point of view – high increase in Interest cost ( almost by 32% ) . Company needs to reduced additional debt burden to manage debt cost

From Current Asset position is very much alarming because major blockage of liquid fund from Account receivable . Account receivable balance has been increased by 31% . another working capita blockage in Inventory . Inventory balance increased by 63% . This will definitely impact revenue and disturb solvency ratio and increase DSO days .

Companies overall cash balance has decreased this is mainly due to reduced long term loan burden. Due to not having sufficient cash balance and not moving Account receivable balance also , company not in a position to repay creditors balance . Account payable balance increased by 167% . Which is really alarming . Companies in the current year badly impacted by Cash position which disturb cash outflow