Preliminary Analytical Procedures Question a

PreliminaryAnalytical Procedures

Questiona

&nbsp

% Change

% Change

account balance

2012-2013

2011-2012

Net sales

1%

3%

Cost of goods sold

3%

4%

Gross profit

-2%

-1%

Operating expenses

-3%

2%

Net income for the year

16%

-40%

&nbsp

&nbsp

&nbsp

Property plant and equipment

1%

6%

Total current assets

28%

1%

Total assets

12%

4%

Current assets

&nbsp

&nbsp

Current liabilities

41%

14%

Long-term debt

9%

0%

Questiong

Theanalysis of changes in account receivables of the period 2011 to 2012and 2012 to 2013 reveals an increase. The increase for the period2012 to 2013 is 50% while that of 2011- 2012 is 9%. The increase inreceivables shows that pinnacle manufacturing extended the creditfacilities for the customers during the year 2012 to 2013. The keyarea of interest during the audit is the collection efficiency of thefirm. Bad debts are likely to emerge from increased credit facilitiesthat may adversely affect the financial health of PinnacleManufacturing (Saxena &amp Srinivas, 2010).

Furtheranalysis of the inventory of pinnacle manufacturing company indicatesan increase from 1% to 29% for the period 2011 to 2012 and 2012 to2013 respectively. The increase in stock in turn means that thecompany’s cash is held in the warehouse. The key areas of interestin the audit are the rate of consumption of the inventory.Specifically, there is need to evaluate the reasons behind such anincrease. The stocks may cause the company to incur losses when thefuture prices of stocks fall (Saxena &amp Srinivas, 2010).

Theanalysis of the short-term debt indicates an increase from 6% to 49%for the period 2011 to 2012 and 2012 to 2013 respectively. Anincrease in short-term debt requires an audit on the reasons forshort-term borrowing. Short-term financing is expensive since itattracts a higher interest rate compared to the long-term debt. Theaudit aims at creating the viability behind such borrowing.Short-term borrowing is a further indication that the company isrunning short of its cash flows. The audit aims at identifying thevarious reasons behind such as shortage. Besides, it is important tovalidate on the sources of such financing about the options availablefor Pinnacle Manufacturing (Saxena &amp Srinivas, 2010).

Thelong-term debt of the company has increased from 0% in the year 2011to 2012 and by 9% from the year 2012 to 2013. The increase in debtremains higher than the growth in the long-term assets of Pinnaclemanufacturing company. The value of property plant and equipmentremains at double the amount of long-term liabilities. However, thetotal liabilities exceed the property plant and equipment.Consequently, there are high chances for the firm to experiencefinancial hardships in the future (Saxena &amp Srinivas, 2010).

Questionh

Thechances for Pinnacle Manufacturing to fail financially stand at amedium level. The analysis of Pinnacle’s financial statementsreveals a loss of liquidity. First, the increase in currentliabilities stands at 41% in the year 2013. The increase in currentassets stands at 28%. The difference between the increase in assetsand liabilities imply that the company may run out of operationalcash flows. However, the liquidity ratio is at a manageable levelsince current liabilities have not doubled the current assets. Thecurrent ratio of 2:1 is considered as a safe margin. The loss isattributed to the new line of business in the two recently acquireddivisions namely the electro-solar division and the machine tech. Thechances for failure of Pinnacle are medium within the next twelvemonths. However, if the increase in the liabilities continues at thesame rate, the firm may fail financially in the long-term (Saxena &ampSrinivas, 2010).

References

Saxena,R., &amp Srinivas, K., (2010).&nbspAuditing&nbsp(Rev.ed.). Mumbai [India: Himalaya Pub. House.