You have recently joined the accounting firm of Dewey, Cheetum and Howe, CPAs.
The firm has been approached by the CEO of Thermo Electronics for an audit of its financial statements in connection with its application for a $500,000 loan from Freeport National Bank.
The company’s financial statements for the two most recent years follow:
During the past year, the company introduced several new product lines and raised the selling prices on a number of old product lines to improve its profit margin. The company also hired a new sales manager, who has expanded sales into several new territories. Sales terms are 2/10, n/30. All sales are on account.
As part of its consideration whether to accept Thermo Electronics as a client, your audit senior has asked you to conduct some analytical procedures using Thermo’s financial statements. Specifically, you have been asked to compute the following ratios for both this year and last year.
Also, for both this year and last year:
You also find the following financial data and ratios that are typical of companies in Thermo’s industry:
Your analysis should also include for both this year and last year, computations for:
- Earnings per share. There has been no change in common stock over the last two years.
- The dividend yield ratio. The company’s stock is currently selling for $40 per share. Last year it sold for $36 per share.
- The dividend payout ratio.
- The price earnings ratio. The industry norm for this ratio is 12.
- Book value per share of common tock
You should also compute the following for both this year and last year:
Based on what you learned in your auditing course, you know that what you should be looking for are signals or “red flags” of risks that could affect the audit. Thus, you diligently proceed to analyze the data available and prepare a memo with appropriate attachments to send to your audit senior for review.
Key points of your memo should include:
A. What you found from your ratio analysis of Thermo Electronics.
B. Along with the ratios in part A, what you found from common –size balance sheets and Income statements as part of your analysis.
C. Your conclusions regarding the engagement risk, if any, based on your analysis. (Engagement risk is discussed on page 213 of the text and your memo should take note of factors affecting engagement risk.) Your conclusions should state whether you recommend the firm accept the audit engagement.
Your memo with the results of your analysis as attachments should be sent to Julius Snape, Audit Senior not later than 11:59 pm eastern time, April 24st. Please upload your memo and supporting documentation to Canvas