You are the audit senior on the audit of Fit Pty Limited, a large manufacturer of clothing. Fit Pty Limited’s main market lies with 18 to 24 year olds. This is the first year in which your firm has performed the audit. As part of the planning work, you have performed analytical procedures on an annualised basis and compared the results to industry averages and last year’s audited financial information. The results are given below: Industry average Fit Pty Limited Ratio 2021 2020 2021 2020 1 Current ratio 2.84 3.27 1.89 2.24 2 Receivables turnover ratio 4.9 4.6 6.3 7.0 3 Inventory turnover ratio 3.7 3.8 5.0 5.5 4 Return on total assets 7% 5% 13% 11% 5 Net profit ratio 0.06 0.06 0.04 0.04 6 Gross margin 0.20 0.26 0.20 0.18 Required: Discuss the conclusions that you can draw about Fit’s financial position and identify potential audit risks to be investigated further.
You are the audit senior on the audit of Fit Pty Limited, a large manufacturer of clothing. Fit Pty Limited’s main market lies with 18 to 24 year olds.
This is the first year in which your firm has performed the audit. As part of the planning work, you have performed analytical procedures on an annualised basis and compared the results to industry averages and last year’s audited financial information. The results are given below:
|
|
|
Industry average |
Fit Pty Limited |
||
|
|
Ratio |
2021 |
2020 |
2021 |
2020 |
|
1 |
|
2.84 |
3.27 |
1.89 |
2.24 |
|
2 |
Receivables turnover ratio |
4.9 |
4.6 |
6.3 |
7.0 |
|
3 |
Inventory turnover ratio |
3.7 |
3.8 |
5.0 |
5.5 |
|
4 |
Return on total assets |
7% |
5% |
13% |
11% |
|
5 |
Net profit ratio |
0.06 |
0.06 |
0.04 |
0.04 |
|
6 |
Gross margin |
0.20 |
0.26 |
0.20 |
0.18 |
Required:
Discuss the conclusions that you can draw about Fit’s financial position and identify potential audit risks to be investigated further.
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