AICPA members providing audit or other attestation services for banking, insurance, and other regulated industries would be discrediting the profession if they used restricted clauses in engagement letters.
1. Compute key ratios and other financial measures for Crazy Eddie during the period 1984-1987. Identify and briefly explain the red flags in Crazy Eddie 's financial statements that suggested the firm posted a higher-than-normal level of audit risk.
Current Ratio (1987-84): 2.41, 1.40, 1.56, 0.93
Quick Ratio (1987-84): 1.40 , 0.60, 0.77, 0.15
Inventory Turnover (1987-84): 3.23, 4.38, 5.13, 5.88
Inventory Turnover ratio shows how often goods are bought and sold per year. Higher numbers indicate that the funds tied up in inventory are being used more efficiently. Examining Crazy Eddie 's Inventory Turnover ratio it is obvious that the ratio is decreasing. This means that the inventory is sitting on the shelve longer. In the period of the explosive growth of the industry and accelerating sales numbers decreasing inventory turnover is unexpected and should have raised a red flag during the audit process.
2. Identify specific audit procedures that might have led to the detection of the following accounting irregularities