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Ratio Analysis

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Part 2 (60 marks) You are the audit senior on the audit of 21st Century Accessories Pty Ltd, a large distributor of technology accessories, whose main market lies in the 18-24 age group. This is the first year your audit firm has performed the audit. As part of the planning work, you have performed analytical procedures on an annualised basis and compared the results to industry averages and lasts year’s audited financial information. The results are given below: Industry Average 21st Century Accessories Pty Ltd _________________________________________________ Ratio 2014 2013 2014 2013 1. Current ratio 2.84 3.27 1.89 2.24 2. Accounts Receivables turnover 4.9 4.6 6.3 7.0 3. Inventory turnover ratio 3.7 3.8 5.0 5.5 4. Return on assets 7% 5% 13% 11% 5. Profit margin 0.06 0.06 0.04 0.04 6. Gross profit per cent 20% 26% 20% 18% Required: Based on the information given: (i) explain the general meaning of each of the above ratios; (ii) discuss the conclusions that you can draw about 21st Century Accessories Pty Ltd financial position; and (iii) identify potential audit risks to be investigated further.