Case 2

You are the audit senior on the audit for the year ended 30 June 2019 of Neptune Pty Ltd, a large manufacturer of lighting accessories. This is the first year that your firm has performed Neptune’s audit. As part of the planning work, you have annualised Neptune’s interim financial accounts and performed analytical procedures on the annualised figures and compared the results to industry averages and last year’s audited financial information. The results are given below.

                                                                         Industry Average      Neptune Pty Ltd

            RATIO                                                            2019       2018             2019        2018

Current ratio                                                    2.51         2.72             2.15         2.55

Net profit ratio                                                 0.08        0.07             0.063       0.05

Gross profit ratio                                             0.24        0.29             0.24         0.21

Inventory turnover ratio                                  3.41         3.52             4.24         4.53

Receivables turnover ratio                              6.02         5.81            6.38         7.17

Return on total assets                                     8.4%        6.0%          15.0%      11.0%

Required

Providing a brief explanation of each of the above ratios, outline what conclusions can be drawn about Gleam’s financial position and identify potential audit risks to be investigated further.