During analytical procedures it was observed that several of operating cycle ratios had changed materially since last
Question:
During analytical procedures it was observed that several of operating cycle ratios had changed materially since last year’s audit as follows:
2020 2021
Current ratio 1.3:1 1.9:1
Liquid ratio 0.8:1 0.6:1
Days
Debtors outstanding 52 days 69 days
Inventory turnover 79 days 123 days
Besides, it was found that the company had doubled their overdraft limit to provide working capital and that this limit had been exceeded twice during the year, just before the company had paid an interim dividend and just before a final dividend of 5% because the company is short of cash. The company’s gearing ratio had significantly increased as a result of a £3 million long-term loan from their bankers to finance a major capital project. The project was partly financed from internal sources, but the issued capital of the company remained unchanged at two million £1 shares, fully paid.
Required:
Assess the level of audit risk associated with this situation.
Vector Mechanics for Engineers Statics and Dynamics
ISBN: 978-0073212227
8th Edition
Authors: Ferdinand Beer, E. Russell Johnston, Jr., Elliot Eisenberg, William Clausen, David Mazurek, Phillip Cornwell