Auditing: Pinnacle Manufacturing Company
Year-to-Year Change Trend Analysis
Debt to Equity, Net Income Before Tax/Sales, Gross Margin Percentage, and
Inventory Turnover Calculations
Observations About Pinnacle’s Business
There was growth in both net sales and cost of sales in 2012 and 2013. Further, the increase in cost of sales is higher than that of sales. This explains the decline in gross profit margin. There was also a drop in operating expenses by 2.51% in 2013. This led to growth in income from operations by 1.87% in 2013. The ratio of net income before tax to sales indicates that the company is profitable.
The current ratio decreased. It shows a decline in liquidity. The values of the ratio are high and the decline is not a cause of concern. Net receivables and inventory grew by a large percentage in 2013. An increase in receivables shows that the company is experiencing a problem in collecting debts. Increase in inventory may cause an increase in handling costs and obsolescence. It also causes a drop in inventory turnover ratio. The debt to equity ratio grew and it is not a cause of concern.
Common Size Income Statement
Accounts With Concern About Material Misstatements
Conclusion
The information in part d and e is appropriate for investigating the potential misstatements in all accounts except direct expenses. For the direct expenses, it is suitable to use the accounting information for each division.
There is a low probability that the company will fail financially in the next twelve months. The company has been profitable and there are no indications of financial difficulties. Some ratios such as debt to equity and current ratios were declining but they are not a cause of concern.