Audit Case

Topics: Balance sheet, Inventory, Investment Pages: 3 (817 words) Published: March 17, 2013
Crazy Eddie
1. | Current ratio| Quick ratio| Debt to assets| Inventory turnover| 1984| 0.93| 0.12| 0.83| |
1985| 1.56| 0.77| 0.64| 4.20|
1986| 1.40| 0.60| 0.66| 4.50|
1987| 2.41| 1.40| 0.68| 3.22|
| Age of Inventory| Return on Equity| Return on total assets| Profit margin| 1984| | 0.10| 0.10| 0.03|
1985| 86.9| 0.09| 0.09| 0.04|
1986| 81.1| 0.10| 0.10| 0.05|
1987| 113.2| 0.04| 0.04| 0.03|

As a retail store, inventory should have the biggest amount in current assets category. There would be no sales and no income if there was not inventory. In 1987, inventory was only the second largest asset of the company, while the short-term investment was the largest. Also, Crazy Eddie's inventory increased dramatically over the 1985-1987 period from 26 million to 109 million. Most of ratios had big change from 1986 to 1987. The return on equity ratio stated the rate of return on the ownership interest of the common stock owners. It decreased 60% in one year. Also, the age of inventory had 40% increase, which means the inventories were taking longer to be sold. At the same time, with the increasing amount of total assets and inventory, the net income didn't go up much. Therefore, the return on total assets also decreased 60%. As an electronics retail store, inventory turnover and age of inventory ratios are fairly important. In 1987, inventory turnover dropped around 28%, while the age of inventory increased 39.6%. The increase and decrease of ratios definitely raised red flags about company’s inventory or anything related to their inventory sales. At the same time, as a retail store, its short-term investment to total assets ratio increased dramatically in 1987 from 21% to 41%. This increase should draw auditors’ attention on the short-investment business. 2. a)

* Copy the worksheet of completion of physical check of inventory. * Record the sequence number on the tags during the physical...
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