From the case study, analyze the financial data as presented. Next, choose at least one (1) pattern within the data that appears to be inconsistent, and propose one (1) strategy that one could use to audit this pattern. Provide a rationale to support your response.

The following facts represent the audited financial statements of a public company for 2011 and 2010, along with managements representation regarding the unaudited amounts (i.e., the Unaudited column) and the auditors' projected amounts for 2012 (i.e., the PROJECTED column, which represents their expectations based on industry trends and information that they know about this company's likely financial performance). In addition, financial ratios are presented that summarize the relationships among the various financial statement line items reported in the balance sheet and income statements.

The company is in the telecommunications industry, has been in existence for ten years, and has had unqualified audit opinions throughout that time. The company has generally been successful in maintaining a competitive advantage in the industry, but there is always intense competition and maintaining that advantage (and associated profitability, etc.) continues to be a significant challenge. Assume that you are the audit senior who is considering the planning for this year's audit engagement.

Balance Sheet (in thousands)

	Projected 12/31/12	Unaudited 12/31/12	12/31/11	12/31/10
ASSETS
Cash	1,046	1,146	1,956	1,339
Receivables	4,200	4,147	3,053	2,154
Less: Allowances	241	240	213	211
Net Receivables	3,959	3,907	2,840	1,943
Inventories	2,787	3,065	2,592	2,657
Other Current Assets	656	635	826	801
Total Current Assets	8,448	8,753	8,214	6,740
PP&E (Net)	27,116	26,869	25,877	23,850
Other Assets	2,400	2,413	2,690	2,556
Total Assets	37,964	38,035	36,781	33,146

Liabilities and Owner's Equity

Accounts Payable	3,710	3,750	4,093	2,882
Cmt Portion L.T. Debt	1,637	1,624	1,534	1,355
Income Taxes	277	383	296	300
Tot. Cmt Liabilities	5,624	5,757	5,923	4,537
Long-term Debt	17,773	17,773	16,817	15,080
Total Liabilities	23,397	23,530	22,740	19,617
Common Stock	1,624	1,624	1,624	1,624
Retained Earnings	12,943	12,881	12,417	11,905
Total Liability & stakeholders equity	37,964	38,035	36,781	33,146

Income Statement (in thousands)

	Projected 12/31/12	Unaudited 12/31/12	12/31/11	12/31/10
Net Sales	9,643	9,644	9,630	9,649
Cost of goods sold	6,875	6,963	6,828	6,851
Gross Profit	2,768	2,681	2,802	2,798
R & D Expenditures	212	163	150	128
S G & A	904	624	882	862
Profit from operations	1,652	1,894	1,770	1,808
Other Income	6	6	5	5
Interest Expense	925	925	916	913
Other Expenses	9	9	11	8
Income before inc taxes	724	966	848	892
Provision for inc taxes	289	386	382	384
Net Income	435	580	466	508

Selected Financial Ratios

	Projected 12/31/12	Unaudited 12/31/12	12/31/11	12/31/10
Current Ratio (current assets/ current liab)	1.50	1.52	1.39	1.48
Quick Ratio (c. Assets less inventory/current liab)	1.01	.99	.95	.90
Gross Margin %	.287	.278	.291	.290
Income before taxes as a % of sales	.075	.100	.088	.092
Net income as a % of sales	.045	.060	.048	.052
Inventory Turnover COGS/end inventory	2.47	2.27	2.63	2.58
Receivable turnover sales/net receivables	2.44	2.47	3.39	4.96

Answer rating: 100% (QA)

Inconsistent Pattern Sales figure is rising in 123112 unaudited in comparison to 123111 data but SG A expenses are declining in 123112 unaudited in co... View the full answer