Audit Problem 4-58

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Ratio analysis uses a combination of financial or operating data from a company or industry to provide a basis for comparison. Every ratio in the analysis measures a distinctive association that may have an impact on another ration. An auditor use a financial or accounting ratio to evaluate the overall financial condition of a company. Current and prospective stockholders and creditors used ration analysis to gauge viability and future performance of a company. The performance of a company is usually evaluated by comparing its current and past figures with those of the industrial average. A successful auditor used ration analysis to read between the lines of financial statements and make sense of the numbers in the statement. The auditor uses it to compare what they expect from the clients with the actual figure the clients produce. Ratio analysis is a most effective measure because it makes use of economic relationship between two or more accounts. There is a question mark regarding the ratio analysis of Indianola Pharmaceutical Company. Comparing the current year ratio with the previous three years and the current industry ratio does not produce identical figures. There are a lot of inconsistencies between the current year ratios and the current industry ratio. Based on the ratio analysis provided, it is reasonable to conclude that there is a high financial reporting risk in the balance sheet of Indianola Pharmaceutical Company. Current ratio is a liquidity ratio that measures a company’s ability to pay short-term obligations. Current ratio is about a firm’s ability to use its short-term assets to pay back the short-term liabilities. A higher current ratio means the company is more capable in paying its obligations. There are many reasons as to why the company is experiencing a low current ratio. It could be because the company is having trouble getting paid on their receivables or have a long inventory turnover. Another liquidity ratio that needs to be...
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