Lone Star Western Apparel Co PL/1

Percentage Analysis – Planning

December 31, 2017

Income Statement

2017 2016

Sales, Net 100% 100%

Cost of Sales 72 75

Gross Margin 28% 25%

Selling, General & Administrative Expense 20 17

Income before Income Taxes 8% 8%

Income taxes 2 3

Net Income 6% 5%

Balance Sheet Dec. 31, Dec. 31,

Current assets 2017 2016

Cash 12% 20%

Accounts Receivable 36 34

Inventories 14 7

Other Current Assets 5 10

Total Current Assets 67% 71%

Equipment and Leasehold improvements

Machinery and equipment 50% 47%

Motor Vehicles 1 1

Office Equipment 1 1

Leasehold Improvements 4 5

56% 54%

Less: Accumulated depreciation and amortization (25) (27)

Net Value 31% 27%

Other Assets 2% 2%

Total Assets 100% 100%

Current Liabilities:

Accounts Payable 26% 6%

Accrued Salaries and Wages 23 30

Other Current Liabilities 1 3

Total Current Liabilities 50% 39%

Stockholder’s Equity

Common Stock 7% 11%

Retained Earnings 43 50

Total Equity 50% 61%

Total Liabilities and Equity 100% 100%

 Lone Star Western Apparel Co PL/2

Ratio Analysis – Planning

December 31, 2017

Industry
Average 2017 2016
2017
1. Current Assets to Current Debt (times) 1.9 1.33 1.8
2. Net Profits on Net Sales (percent) 7.2% 6.09% 4.9%
3. Net Profits on Tangible Net Worth (percent) 22.3% 20.8% 20.1%
4. Net Profits on Net Working Capital (percent) 45.1% 63.3% 38.0%
5. Net Sales to Tangible Net Worth (times) 6.5 3.42 4.1
6. Net Sales to Net Working Capital (times) 9.8 10.38 7.8
7. Collection Period (days) 42.5 61.8 49.3
8. Net Sales to Inventory (times) 15.8 12.15 36.1
9. Fixed Assets to Tangible Net Worth (percent) 75.0% 62.7% 44.4%
10. Current Debt to Tangible Net Worth (percent)
55.0% 100.65% 63.3%
11. Total Debt to Tangible Net Worth (percent)
80.0% 100.65% 63.3%
12. Inventory to Net Working Capital (percent)
60.0% 85.50% 21.5%
13. Current Debt to Inventory (percent)
450.0% 357.61% 556.8%
14. Funded Debt to Net Working Capital (percent)
30.0% -0- -0-
 Lone Star Western Apparel Co PL/3

Analytical Review– Planning

December 31, 2017

Audit Conclusions

Analytical reviews are used in planning to understand the client’s business industry and
throughout the audit identify possible misstatements, reduce detailed tests, and to assess
going-concern issues. The use of analytical procedures has increased because of their
effectiveness at identifying possible misstatement at a low cost, and they are required in the
planning and completion phases of the audit.

Financial Ratios:
1. Current Assets to Current Debt - current ratio decreased compared to last year's ratio. This is
because of the large increase in the accounts payable which affects the liquidity of the
company. Suppliers may be discouraged in providing them inventories due to the fact of the
company's decreasing current ratio which is far under the average of the industry.

2. Net Profits on Net Sales - the ratio increased and is near the average of the industry. This
means that the company is competing in the industry standard.

3. Net Profits on Tangible Net Worth - net profits increased but tangible net worth increased
more making the ratio increase only a little bit, thus, only nearing to the industry’s average.

4. Net Profits on Net Working Capital - there is a large increase in the ratio which may indicate
that there is a large increase in the profit but through further analysis, the large increase was
because of the decrease in the net working capital brought by the increase in current liabilities.

5. Net Sales to Tangible Net Worth - it decreased because the increase in tangible net worth is
higher than the increase in net sales.

6. Net Sales to Net Working Capital - there is an increase above the average of the industry
because net working capital decreased.

7. Collection Period - collection period increased, therefore, accounts receivable are not
converted into cash for reinvestment. The company should decrease their collection period.
8. Net Sales to Inventory - decreased due to the sudden increase in inventory.

9. Fixed Assets to Tangible Net Worth - it increased but still far from the average.

10. Current Debt to Tangible Net Worth - increased due to the increase in current liabilities.

11. Total Debt to Tangible Net Worth - same with the previous ratio, since there is no non-
current liabilities.

12. Inventory to Net Working Capital - it increased because the inventory increased and the net
working capital decreased.

13. Current Debt to Inventory - though both account increased, the current debt’s increase is
higher than that of the inventory resulting to a higher ratio.

14. Funded Debt to Net Working Capital - there is no ratio for this since there is no long-term
obligation.

HARER & JONES, CPA PL/4

First-Level Planning Memorandum

Client Name Lone Star Western Apparel Co.

Completed by Review by
AUDIT RISK AREAS

1. Key indicators (financial, managerial, industry, etc.)

● Accounting Policies – In Lone Star Western Apparel Co.’s financial statements, bad
debts are recognized using direct write-off method, which is not in compliance with
generally accepted accounting policies (GAAP). Accounts Receivable is overstated as
uncollectible amounts are only written-off when there is certainty that the account will not
be collected.
● Internal Control – The purchasing agent performs both the purchase and receive
functions which should be separate duties. The purchasing agent could say that he/she
purchase a merchandise and say that he/she received it when in fact he/she didn’t orde
anything.
● Industry -

2. Preliminary internal control evaluation

3. Potential accounting and reporting problems (including related party transactions)

The use of direct write-off method in recognizing bad debts posed a potential accounting and
reporting problems.
PRELIMINARY MATERIALITY CONSIDERATIONS (Address overall materiality level for client
based upon prior year financial statements and discussions with management)

The concept of materiality is applied both in planning and in evaluating the effect of identified
misstatements on the audit and uncorrected misstatements, if any, on the financial statements.
In general, misstatements, including omissions, are considered to be material if, individually or
in the aggregate, they could reasonably be expected to influence the economic decisions of
users taken on the basis of the financial statements .In making materiality judgments, both
probability and magnitude call for the application of thresholds.

Determining a percentage to be applied to a chosen benchmark involves the exercise of

professional judgment. There is a relationship between the percentage and the chosen
benchmark, such that a percentage applied to profit before tax from continuing operations will
normally be higher than a percentage applied to total revenue. For example, the auditor may
consider five percent of profit before tax from continuing operations to be appropriate for a
profit-oriented entity in a manufacturing industry, while the auditor may consider one percent of
total revenue or total expenses to be appropriate for a not-for-profit entity. Higher or lower
percentages, however, may be deemed appropriate in the circumstances.

PSA 320 par 2 par 4 par 5 & A3 & A7

PSA 200 par 6