Question 5 The following table contains calculations of several key ratios for a fictional company, Indianola Pharmaceut
Posted: Tue Jan 18, 2022 12:57 pm
Question 5 The following table contains calculations of several
key ratios for a fictional company, Indianola Pharmaceutical
Company, a maker of proprietary and prescription drugs. Indianola
Pharmaceutical Company is a small-to medium-sized publicly held
pharmaceutical company. Approximately 80% of its sales has been in
prescription drugs; the remaining 20% is in medical supplies
normally found in a drugstore. The primary purpose of the auditor’s
calculations is to identify potential risk areas for the upcoming
audit. The auditor recognizes that some of the data might signal
the need to gather other industry- or company-specific data. A
number of the company’s drugs are patented. Its bestselling drug,
Anecillin, which will come off patent in two years, has accounted
for approximately 20% of the company’s sales during the past five
years. The auditor’s expectation is that the company’s own trends
from the past few years should be relatively consistent with this
year’s trends, and that the company will not have significant
deviations from industry norms. Indianola Pharmaceutical Ratio
Analysis Ratio Current Year One Year Previous Two Years Previous
Three Years Previous Current Industry Current ratio 1.85 1.89 2.28
2.51 2.13 Quick ratio 0.85 0.93 1.32 1.76 1.40 Times interest
earned 1.30 1.45 5.89 6.3 4.50 Days' sales in receivables 109 96
100 72 69 Inventory turnover 2.40 2.21 3.96 5.31 4.33 Days' sales
in inventory 152 165 92 69 84 Research and development as % of
sales 1.30 1.4 1.94 2.03 4.26 Cost of goods sold as % of sales
38.50 40.2 41.20 43.8 44.50 Debt/equity ratio 4.85 4.88 1.25 1.13
1.25 Earnings per share £1.12 £2.50 £4.32 £4.26 NA Sales/Tangible
assets 0.68 0.64 0.89 0.87 0.99 Sales/Total assets 0.33 0.35 0.89
0.89 0.78 Sales growth over past year 3% 15% 2% 4% 6% Page | 6
Required a. Identify five account balances that have a high risk of
material misstatements. [5 Marks] b. State the potential risks in
each of the account balances identified in (a) above. [5 Marks] c.
Explain how you would address each risk stated in (b) when planning
the audit. [5 Marks] d. State five other critical background
information you will want to obtain when planning the audit. [5
Marks] e. Explain two major actions the company take during the
immediate preceding year. [5 Marks]
key ratios for a fictional company, Indianola Pharmaceutical
Company, a maker of proprietary and prescription drugs. Indianola
Pharmaceutical Company is a small-to medium-sized publicly held
pharmaceutical company. Approximately 80% of its sales has been in
prescription drugs; the remaining 20% is in medical supplies
normally found in a drugstore. The primary purpose of the auditor’s
calculations is to identify potential risk areas for the upcoming
audit. The auditor recognizes that some of the data might signal
the need to gather other industry- or company-specific data. A
number of the company’s drugs are patented. Its bestselling drug,
Anecillin, which will come off patent in two years, has accounted
for approximately 20% of the company’s sales during the past five
years. The auditor’s expectation is that the company’s own trends
from the past few years should be relatively consistent with this
year’s trends, and that the company will not have significant
deviations from industry norms. Indianola Pharmaceutical Ratio
Analysis Ratio Current Year One Year Previous Two Years Previous
Three Years Previous Current Industry Current ratio 1.85 1.89 2.28
2.51 2.13 Quick ratio 0.85 0.93 1.32 1.76 1.40 Times interest
earned 1.30 1.45 5.89 6.3 4.50 Days' sales in receivables 109 96
100 72 69 Inventory turnover 2.40 2.21 3.96 5.31 4.33 Days' sales
in inventory 152 165 92 69 84 Research and development as % of
sales 1.30 1.4 1.94 2.03 4.26 Cost of goods sold as % of sales
38.50 40.2 41.20 43.8 44.50 Debt/equity ratio 4.85 4.88 1.25 1.13
1.25 Earnings per share £1.12 £2.50 £4.32 £4.26 NA Sales/Tangible
assets 0.68 0.64 0.89 0.87 0.99 Sales/Total assets 0.33 0.35 0.89
0.89 0.78 Sales growth over past year 3% 15% 2% 4% 6% Page | 6
Required a. Identify five account balances that have a high risk of
material misstatements. [5 Marks] b. State the potential risks in
each of the account balances identified in (a) above. [5 Marks] c.
Explain how you would address each risk stated in (b) when planning
the audit. [5 Marks] d. State five other critical background
information you will want to obtain when planning the audit. [5
Marks] e. Explain two major actions the company take during the
immediate preceding year. [5 Marks]