Problem 11. (25 points total). Please download "Stooge Industries F22" file found in the "Mid-Term Exam" section in the "Modules" portion of course on Canvas. The file has one tab for the Income Statement and another for the Balance Sheet for Stooge Industries.

Your audit firm has recently been engaged as the new auditor for Stooge Industries (hereafter, the "Company"), effective for the audit of the financial statements for the year ended December 31, 2021. The Company is a medium-sized privately held corporation with its headquarters located in St. Louis, MO. The Company has been in existence for 35 years and creates small engines for lawn equipment. Recently, Company management has been under intense pressure to increase profitability and improve operational efficiency. The Board has made no secret of its hope that management can deliver $18 million of profit for the year, an amount that would allow the company to attract the interest of the investment community and gain support for "going public."

You have just joined the audit team and are asked to conduct a thorough analytical review of the company, including an analysis of year-over-year changes, common-size statements, and key financial performance ratios. Here are some important notes from other audit team members:

• Other audit team members have evaluated the depreciation schedules and have concluded that the accounting for depreciation is consistent with GAAP.
• According to inquiries, no changes have occurred in Sales Commission rates in 2021. Sales people are "independent contractors" for whom no payroll taxes are withheld. Sales commissions were paid on December 31.
• To cut costs, the company reduced its salaried staff by about 10% in 2021.
• Company has a new policy with vendors. Company will pay them in 90 days rather than 30.
• The Company has made no changes in the Sales process. All customers are checked for proper credit before sale is recorded.
• Company bought land for expansion of factory at cost of $3.4 million. The bulk of the purchase price was financed with long-term debt, with other funds coming from working capital. All documentation related to this purchase has been audited.

To help with the task of evaluating Stooge Industries, your engagement partner has passed along some "industry benchmark" data for manufacturers. The information is as follows:

	Benchmark Industry Ratio
Current ratio	2.5
Inventory turnover	5.0
Days sales in inventory	60
Accounts Receivable turnover	13
Days to collect Accounts Receivable	30
Days payable outstanding	30
Times interest earned ratio	6.0

Please use this data and the Company data in the Excel file to answer Requirement 1-4 below.

Requirement 1.

Please report the key findings from your analytical review process based on analyses of the income statement and balance sheet accounts. Please report any large, unusual, unexpected changes in balance sheet and income statement numbers that represent a significant audit concern. Further, why the change is an audit concern requiring special consideration in the audit plan, and (b) estimate what the Account Balance should have been based on an assumption that account relationship in the year 2021 should not be significantly different than in 2020. (13 out of 25 points for problem)

Account Balance	Explain why the reported balance should be of concern to auditor and how it should change the audit plan	Assuming that 2021 figures should follow the pattern of 2020, estimate what the account balance should be (show calculations and briefly discuss reasoning)

Requirement 2. Calculate the common ratios for Stooge Industries. (5 out of 25 points for problem)

	2021	2020
Current ratio
Inventory turnover
Days to collect Accounts Receivable
Days Payable outstanding
Times interest earned ratio

Requirement 3. Identify and comment on the figure (ratio or number) of greatest audit concern from those shown in Requirement 2 after comparison with benchmark data points (page 6). Explain why this figure is of greatest concern to you as an auditor. (2 out of 25 points for problem)

Ratio	Why Ratio is of Greater Concern to Auditor

Requirement 4. Summarize your risk assessment of the Stooge Industries audit (based on your analytical review work) in the following manner. (2 out of 25 points for problem)

1. Which area of the audit, if any, is a fraud concern? Explain why.
2. Provide your estimate of the "true" Stooge Industries income after all expected adjustments are made. (2 out of 25 points for problem).