Question

As an appointed Auditor, the company has provided you with following financial ratios for the year.

Mobile X Ltd. Financial ratios
Ratio	Actual	Budget (expected)
Gross profit percentage	40%	45%
Net profit percentage	25%	40%
Trade payables ratio	70 days	30 days
Current ratio	1.35:1	1.40:1
Acid test ratio	0.85:1	0.80:1

The company’s year end is the 31^st March 2020.

The auditor compared the planned and actual ratios for the company. Complete the table to indicate which ratios should be accepted and which should be investigated further. Provide a reason for your answer.

Mobile X Ltd. Financial ratios
Ratio	Actual	Budget (expected)	Accept	Investigate further
Gross profit percentage	40%	45%
Net profit percentage	25%	40%
Trade payables ratio	70 days	30 days
Current ratio	1.35:1	1.40:1
Acid test ratio	0.85:1	0.80:1

Answer 1

Ratio	Actual	Budget (Expected)	Accept	Investigate further
Gross Profit percentage	40%	45%	Accept, the variation is only 5%	NA
Net Profit percentage	25%	40%	No	Difference is 15%, the administration/selling expenses would have increased drastically
Trade payables ratio	70 days	30 days	No	Eventhough, the ratio is in favour of the Company, but the inability to pay the Trade payables could be concern.
Current ratio	1.35:1	1.40:1	No	The current ratio has reduced which is in line with the increase trade payables. Since the acid test ratio is favourable and Current ratio is unfavourable, the difference will help in identifying the difference
Acid test ratio	0.85:1	0.80:1	Accept, variation is in favour of company and difference is very less	NA