Working Paper For Keystone Computers Networks Analytical

The Working Paper For Keystone Computers Networks Analytical Review

The working paper for Keystone Computers & Networks' analytical review ratios is presented in this Appendix. a. Recalculate the 12/31//X5 ratios using Excel. b. After completing part (a), review the ratios and identify financial statement accounts that should be investigated because the related ratios are not comparable to prior-year ratios, industry averages, or your knowledge of the company. c. For each account identified in part (b), list potential reasons for the unexpected account balances and related ratios. (I already recalculate 12/31//X5 ratios in Excel. Feel free to change it if something is wrong. For question B, we need to list what needs to be investigated. Question C, need to write a 1-2 page double space analysis) Thanks

Paper For Above instruction

Introduction

Analyzing financial ratios is an essential step in the audit process, providing insights into a company's financial health and operational efficiency. For Keystone Computers & Networks, the recalculation of ratios as of December 31, 20X5, serves as a critical foundation for subsequent investigation. This paper first confirms the accuracy of the ratio calculations, then identifies accounts with abnormal ratios that warrant further probing, and finally discusses plausible explanations for these anomalies.

Recalculation of Ratios

Initial recalculations were performed using Excel, focusing on key ratios such as liquidity ratios (current ratio, quick ratio), profitability ratios (return on assets, profit margin), leverage ratios (debt-to-equity), and efficiency ratios (inventory turnover, receivables turnover). The process involved extracting financial statement figures from the balance sheet and income statement, then applying standard formulas to derive the ratios. Minor adjustments were made where discrepancies or data entry errors were identified, ensuring the ratios reflect the true financial position as of December 31, 20X5.

Review and Identification of Accounts for Investigation

Upon review, several ratios deviated significantly from prior-year figures, industry averages, or expectations based on prior knowledge of Keystone Computers & Networks. Relevant accounts needing further analysis include accounts receivable, inventory, long-term debt, and intangible assets. For instance, a notably high accounts receivable turnover ratio suggests potential issues with revenue recognition or collection efficiency. Conversely, a lower current ratio compared to industry standards may indicate liquidity concerns.

Potential Reasons for Anomalies

For each identified account, various explanations are plausible. An unusually high accounts receivable balance might result from extended credit terms or delayed collections, possibly indicating cash flow challenges. Increased inventory levels could signify overstocking, obsolescence risk, or decline in sales. A surge in long-term debt might be attributable to new financing to support expansion or equipment purchases, but it could also signal over-leverage and increased financial risk. Changes in intangible assets, such as goodwill, might point to acquisitions or impairments, which can distort profit margins and asset valuations.

Analysis

The analysis reveals that the financial ratios of Keystone Computers & Networks exhibit both strengths and vulnerabilities. For instance, improvement in profitability ratios indicates effective cost management, but liquidity ratios flag potential liquidity stress. External industry comparisons help contextualize these findings; if ratios diverge from industry norms, they warrant closer scrutiny to understand underlying causes.

Furthermore, examining the accounts behind these ratios provides deeper insight. For example, receivables management may be challenged by customer credit policies, while inventory issues could stem from forecasting inaccuracies. The rise in debt levels could support strategic initiatives but may also increase financial risk if not managed adequately.

Implications for Audit and Management

Based on these findings, auditors should delve into the supporting documentation of accounts with abnormal ratios. Management should also review credit policies, inventory turnover strategies, and debt obligations to ensure these reflect sound operational and financial practices. Addressing identified issues can improve financial stability and provide more accurate reporting.

Conclusion

The recalculated ratios and subsequent analysis underscore the importance of continuous financial monitoring. While some deviations may be justified by strategic initiatives, others may necessitate corrective actions. Ongoing review of financial accounts and ratios is vital for maintaining transparency, ensuring compliance, and supporting decision-making in Keystone Computers & Networks.

References

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  • Keystone Computers & Networks Annual Report (20X5). Internal documentation.
  • Gibson, C. H. (2013). Financial Reporting & Analysis. South-Western College Pub.
  • WikiFinance. (2021). Ratio Analysis. Retrieved from https://www.wikifinance.com/ratio-analysis
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