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 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.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter3: Cost Behavior

Section: Chapter Questions

Problem 22E: Ginnian and Fitch, a regional accounting firm, performs yearly audits on a number of different...

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Ginnian and Fitch, a regional accounting firm, performs yearly audits on a number of different for-profit and not-for-profit entities. Two years ago, Luisa Mellina, Ginnians partner in charge of operations, became concerned about the amount of audit time required by not-for-profit entities. As a result, she instituted a series of training programs focusing on the auditing of not-forprofit entities. Now, she would like to see if the training seemed to work. So, she ran a multiple regression on 22 months of data for Ginnian for three variables: the total monthly cost of audit professional time, the number of not-for-profit audits, and the hours of training in the audit of not-for-profit entities. The following printout was obtained: Required: 1. Write out the cost equation for Ginnians audit professional time. 2. If Ginnian expects to have 9 audits of not-for-profits next month and expects that audit professionals will have a total of 130 hours of not-for-profit training, what is the anticipated cost of professional time? 3. Are the hours spent auditing not-for-profit entities positively or negatively correlated with audit professional costs? Is percentage of experienced team members positively or negatively correlated with audit professional cost? 4. What does R2 mean in this equation? Overall, what is your evaluation of the cost equation that was developed for the cost of audit professionals?
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		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