Analyzing Financial Statements of Printers by Choice Ltd using Ratio Analysis

This article provides an analysis of the financial statements of Printers by Choice Ltd using ratio analysis. It covers the liquidity, solvency, activity and profitability ratios of the company. It also discusses the inherent and fraud risks found during the audit. The article suggests that the auditor should test the controls over inventory and scrutinize the taken over entries and the taken over agreement.

AUDITING THEORY AND PRACTICE

(1) Analytical Procedures
Being an auditor of Printers by Choice Ltd (PBCL), we have used analytical procedures, that is,
ratio analysis so as to understand whether the financial statements are in consistent with the
auditor's understanding of the entity. We have used different ratios to analyze the performance
from 2015 to 2017. The analysis on the basis of discovered analysis:
1. Liquidity Ratios
1. LIQUIDITY RATIOS
CURRENT RATIO
PARTICULARS 2015 2016 2017
Current Assets 10771876 15018300 19201858
Current Liabilities 7560000 10240500 12795000.00
Current Ratio (Current
Assets/Current Liabilities) 1.42 1.47 1.50
CASH RATIO
PARTICULARS 2015 2016 2017
Cash & Cash Equivalents 1294500 1035576 694240
Accounts Receivables (Net) 4965000 8640000 10146618
Depreciation 498750 548624 945376
Total Cash Assets 6758250 10224200 11786234
Current Liabilities 7560000 10240500 12795000.00
Cash Ratio (Total Cash
Assets/Current Liabilities) 0.89 1.00 0.92

 The current ratio of 2017 is 1.5, of 2016 is 1.47 and of 2015 is 1.42 which signifies a
favourable condition, that is, the short term liquidity of company is strong to generate
almost 1.5 times cash if it has to meet its obligations instantly. This ratio has improved
from previous years due to increase in accounts receivable and decrease in interest
bearing liabilities.
 However, quick ratios and cash ratios are better indicators of liquidity as they exclude
those items which cannot be readily converted into cash. The cash ratio of 2017 is 0.92,
of 2016 is 1 and of 2015 is 0.89. Thus, where we see an improvement in 2016 compared
to 2015, we see degradation in 2017 compared to 2016. We see a drastic decrease in cash
balance approximately by $341,336 compared to 2016 and by $600,260 compared to
2015 (Atkinson, 2012). Since we added depreciation back to cash, we see more total
cash assets in 2017. We also see a drastic increase in the current liabilities by $25,54,500
compared to 2016 and by $52,35,000 compared to 2015.
2. ol enc atioS v y R s
2. SOLVENCY RATIOS
PROPRIETARY RATIO
PARTICULARS 2015 2016 2017
Shareholder's funds 18300000 21567300 24500982
Total Assets 25860000 31807800 52295982
Proprietary Ratio
(Shareholder's Funds/Total
Assets)
0.71 0.68 0.47
DEBT TO EQUITY
RATIO
PARTICULARS 2015 2016 2017

Interest-Bearing Debts 0 0 15000000
Shareholder's Funds 18300000 21567300 24500982
Debt To Equity Ratio
(Total Debt/Shareholder's
Equity)
0.00 0.00 0.61
 Debt Equity Ratio is available only for 2017 which is 0.61. It is always favorable to have
a debt equity ratio less than one. Also, the change in shareholder's funds is due to high
retained earnings in 2017.
 The proprietary is low for 2017, that is, 0.47 compared to 0.68 in 2016 and 0.71 in 2015
which means that the company is making more use of accounts payable or debts to
support its business operations and that the equity funds forms a lesser percentage of total
balance sheet value (Girard, 2014).
3. Acti it atiov y R s
3. ACTIVITY RATIOS
INVENTORY TURNOVER RATIO
PARTICULARS 2015 2016 2017
Cost Of Goods Sold 56415000 63240000 73710000
Average Inventory 4512376 5342724 8361000
Inventory Turnover Ratio (COGS/Average
Inventory) 12.50 11.84 8.82
WORKING CAPITAL TURNOVER RATIO
PARTICULARS 2015 2016 2017

Revenue From Operations 68424000 75399000 86919000
Working Capital [Calculated Using Values in
First Table(Current Assets-Current
Liabilities)]
3211876 4777800 6406858
Working Caapital Turnover Ratio (Revenue
fromOperations/Working Capital) 21.30 15.78 13.57
 The inventory turnover ratio is lower in 2017 compared to 2016 and 2015 which means
that the company has high stock purchases which wasn't able to be sold off and this is
why, the revenue from operations doesn't match the amount of inventory.
 Similarly, the working capital turnover ratio is lower in 2017 compared to 2016 and 2015
which means that the company isn't efficient enough to use its short term liabilities and
assets to have high sales (Mattessich, 2016).
4. Pro ita ilit atiof b y R s
4. PROFITABILITY RATIOS
NET PROFIT MARGIN
PARTICULARS 2015 2016 2017
Net Earnings 4718380 4582724 4376366
Net Revenues 68424000 75399000 86919000
Net Profit Margin [(Net Profit/Net
Revenues)*100] 6.90% 6.08% 5.03%
RETURN ON ASSETS
PARTICULARS 2015 2016 2017

Net Income 4718380 4582724 4376366
Total Assets 25860000 31807800 52295982
Return On Assets (Net Income/Total
Assets)*100 18.25% 14.41% 8.37%
 Comparing the net profits of the three years, we see a decreasing profit rate. We see that
the revenue earned in 2017 isn't what the sales revenue is supposed to earn. This may be
due to lack of efficiency and effectiveness in the business operations.
 It is important for shareholders to know the return on assets which is lower in 2017
compared to 2016 and 2015. This indicates the inefficiency of the company to use its
assets which has increased drastically since past two years. Where the value of assets
were low in 2015, the return was 18.25% meaning the firm is making the most efficient
use of the assets while the percentage in 2017 is just 8.37% with high assets value but
low profits comparatively (McLaney & Adril, 2016).
Ratio analysis is done to understand the consistency in the values by comparing it with previous
years. It helps in understanding the financial position and performance of an enterprise at a given
date. However, the limitation of using such analytical procedures in non consideration of non
financial information.
As an auditor and considering the above analysis, it is required to check the revenue from sales
on a sampling basis because the profits earned as well as the inventory at the year end don’t
match with the revenue generated. Also, a proper checking of agreements are necessary to
underrated the increase in fixed assets. Also, the auditor should plan to check the control over the
asset because the analysis shows efficiency which either can be on the part of the assets or the
company itself. The auditor can make use of a valuation officer to verify the values of fixed
assets. Thus, such factors need extra audit attention (Rayman, 2009).

(2)
(a) Two inherent risks that are found:
 Control over inventory: we see that the books are closed at the year for stock taking
before 2 days from the year end. Thus, this somewhere allows the related employees to
manipulate the books throughout the year such as theft may take place in one month and
the same might be covered up by the next month's inventory and the overall inventory at
the end remains unaffected (Siciliano, 2015). A periodic stock taking at the month end
would have been effective to track the irregularity but the same at the yearend wouldn't
be able to effectively understand the discrepancies and thefts would go unnoticed.
 Reasons of changing the previous auditor: it is important for an auditor to consider the
previous auditor's reports or his opinion or his experience so that it can have a proper
understanding of the entity (Taillard, 2013). The year in which the auditing work is taken
over by the new auditor is an year having excess and unusual transactions as compared to
previous two years.
The auditor is expected to test the controls over the inventory so as to assess the risk of material
misstatements. For planning its audit work, it needs to have a clear understanding of the entity,
the management's attitude, the previous auditor's perception, the control environment of the
business, etc because such information would help him in deciding the audit procedures that
should be undertaken and executed to assess the risk of material misstatements (Warren, 2017).
(b) Two fraud risk factors that are found:
 We see that the company took a loan of $15 million from Corporate Finance Ltd in 2017.
Where the taken over took place in September 2016, the loan was taken in 2017. The
purpose of such high value loan isn't justified to us and as a result, we might consider it
as an fraudulent activity to increase the value of an enterprise through the balance sheet
and make a strong credibility background for itself (Wink, 2011).
 Unusual expenses: We see an unusual increase in expenses in 2017. There is suddenly
alot of activities that has taken place such as heavy loan, taking over of Medical Books
Ltd, writing off inventory obsolescence allowance, etc Because of all such activities,
there is an increase in all the expenses specially depreciation, discount allowed, legal

fees, salaries etc. We can assume it to be intentional because in spite of so many
transactions, the enterprise value or the balance sheet total is $20,488,182 ahead of 2016
and $26,435,982 ahead of 2015. So we can understand how desperately the company
wanted to increase its value and therefore, took over a number of transactions.
The fraudulent risk factors would be kept in mind while conducting the audit work as it is
important to scrutinize the taken over entries and the taken over agreement so that the expenses
could be justified (Wolk, 2013). This is substantive procedures and in a similar way, it needs to
check the loan agreement and the purpose of such a loan whether it is justifiable or not. Also,
since there is a high risk of e-books going unviable due to validation of a new theory, it is a
matter of concern that why did the company not make any provisions for such losses that might
occur.

Bibliography
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