Audit Strategy Memorandum3.0 Ratio Analysis · What analysis was conducted i.e. summarise the nature...

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Audit Strategy Memorandum3.0 Ratio Analysis · What analysis was conducted i.e. summarise the nature and type of Ratio analysis conducted.· What were your key findings from the ratio analysis· What are the auditing implications from the ratio analysis· Are there any other implications· One main point or key idea per paragraphRATIO ANALYSISThe following ratio analytics were utilised on the ABC Learning Centres Ltd.’s comparative financial statements over seven periods from 2001 to 2007.· DuPont Analysis was used to decompose the different drivers of ABC’s Return on Equity (ROE) that will allow investors to emphasise on the key metrics of financial performance individually to detect strengths and weaknesses.· Asset Turnover Ratios Analysis was used to measure the value of ABC’s operating revenue in relation to its assets. It was utilised to gauge the efficiency with which ABC is using its assets to generate these revenues.· Earnings Management Analysis was conducted to identify if there are any manipulation to ABC’s financial records to improve the appearance of its financial position.· Beneish M-Score Analysis was utilised to identify any fraud and detect areas of likely manipulation on ABC’s financial statements.Dupont Analysis and Asset Turnover Ratios      The Return on Equity of ABC had an initial jump by 11% from 2001 to 2002. However, from then on, it promptly diminished from year to year ending with only just 8% by 2007. The same trend applied to the company’s Return on Asset, Financial Leverage and Return on Sales.While it is true that ABC’s reported income increase from year to year, the company’s inability to deploy its increasing equity, ending with $1.75 Billion in Share Capital and $172.5 Million Retained Earnings by 2007, resulted to a falling Return on Equity. The same goes with ABC’s Return on Assets, where there was a drastic increase on ABC’s total assets over the 7-year period as a result of centres and licenses acquisition.           4.0 Risk Assessment and Areas of Audit Focus· This section summarises your risk assessment for each area of audit focus by identifying the account / area that is at risk, your assessment as to why it is at risk (your perspective based on the literature reviewed and ratio analysis conducted) and the audit work that is planned.It emphasises your JUDGEMENT.· This section can be provided in tabular form as suggested below:    Areas of audit Focus (Account / Area)    Your Perspective (Why)     Audit Work to be performed (Approach)            Ratio Analytics 06/01 06/02 06/03 06/04 06/05 06/06 06/07Dupont AnalysisReturn on Equity XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX              Return on Assets XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX              Financial Leverage XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX              Return on Sales XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX              Asset Turnover RatiosAsset Turnover XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX              Accounts Receivables Turnover XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX            Inventory Turnover XXXXXXXXXX XXXXXXXXXX.50)        Accounts Payable Turnover ( XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX)            Fixed Asset Turnover XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX              Ratio Analytics 06/0106/0206/0306/0406/0506/0606/07Dupont AnalysisReturn on Equity XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX08              Return on Assets XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX04              Financial Leverage XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX71              Return on Sales XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX09              Asset Turnover RatiosAsset Turnover XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX53              Accounts Receivables Turnover XXXXXXXXXX XXXXXXXXXX

Preeta · Accepted Answer

3.0 RATIO ANALYSIS:
NATURE AND TYPE OF RATIO ANALYSIS CONDUCTED:-
Five types of ratio analysis have been conducted in the given data which are as follows:
· DuPoint Analysis – This analysis mainly helps the investors to understand Return on Equity’s (ROE) different drivers (Bauman 2014). The main focus is on the fincial metrics to understand the strengths and weaknesses of the company. 
In the given ratio analysis, under dupoint analysis, return on equity, return on assets, financial leverage and return on sales have been calculated. 
· Asset Turnover Ratios Analysis – This analysis reveals the revenue generated by the company with reference to the asset owned. This analysis reveals the capacity of the company to utilize its assets at the optimum level (Gibson 2012).  
In the given ratio analysis, under asset turnover analysis, asset turnover, accounts receivable turnover, accounts payable turnover, inventory turnover and fixed assets turnover have been calculated. 
· Earnings Management Analysis – This analysis present an overall view of the fincial position of the company along with its business activities. Often the management of a company bases their decisions on this analysis (Lin and Hwang 2010). 
In the given ratio analysis, under earnings management analysis, year over year revenue growth and ear over year growth in accounts receivables have been calculated. 
· Fraud Prediction Analysis – Under this analysis, both fraud data as well as predictive data is analyzed together to discover any fraudulent or suspicious activities going on in the business (Schrand and Zechman 2010). In fact such analysis also helps to determine the future behavior for fraudulent activities in the company.  
In the given ratio analysis, under fraud prediction analysis, days sales receivable index, gross margin index, asset quality index, sales growth index, depreciation index, SG&A index have been calculated. 
· M Score Analysis – This analysis reveals if the company has manipulated the earnings shown in the financial statement (Herawati 2015). It is type of mathematical model which uses eight ratios. -2.22 is the limit M score and score greater than that reveals manipulation. 
Key Findings from the ratio analysis:-
Return on equity ratio had a sharp rise in the year 2002 compared to 2001 but after that there was a constant fall in the ratio from 2003 to 2006. It again rose in 2007 slightly. Return on asset ratio had a rise in the year 2002 compared to 2001 but after that there was a constant fall in the ratio from 2003 to 2007. Financial leverage ratio had a significant rise in the year 2002 compared to 2001 but after that there was a continuous fall in the ratio from 2003 to 2006. It again rose in 2007. Return on sales ratio had a rise in the year 2002 compared to 2001, then it fell in 2003 but again had a slight rise in 2004. But after that throughout 2005 to 2007 there was high fall in the ratio.  
Asset turnover ratio highly fluctuated with rise and fall but the changes were very slight. Accounts receivable turnover ratio increased from 2001 to 2005 but then there were significant fall in 2006 and 2007 in the ratio. The inventory turnover ratio was negative throughout. Accounts payable ratio was also negative throughout with slight changes. Fixed asset turnover ratio decreased till 2004, then rose in 2005, again fell in 2006 and then rose in 2007.

Audit Strategy Memorandum 3.0 Ratio Analysis · What analysis was conducted i.e. summarise the nature and type of Ratio analysis conducted. · What were your key findings from the ratio analysis · What...

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