Share
Explore BrainMass

When auditing a medium-sized manufacturing corporation with

See attached file.

When auditing a medium-sized manufacturing corporation with two or three divisions, and using ratios to assess going concern, which of many different ratios would be the most useful ones to use?

How do you determine which ratios are the ones that should be used? Calculate at least 5 ratios to assess going concern. My question is how

The following ratios are available:

current ratio
acid test ratio
gross profit ratio
operating margin ratio
net income ratio
return on total assets ratio
return on equity ratio

Or another approach is which of the following four categories of ratios is appropriate?

Liquidity
Profitability
Leverage
Activity

Attachments

Solution Preview

As an auditor, your primary focus will be on the ratios that show the company as a going concern. The liquidity ratios are your first priority for analysis. The reason is because if the company's financial statements are released and they show that the company cannot be considered as a going concern, it means big trouble for the company. Investors will start pulling their money out like wildfire. A going concern is a good thing in accounting. It means that the company has enough cash and revenue at the present time to continue running and supporting their operations in the near future. Companies both want and need to remain as a going concern to be profitable. When we look at the auditing profession, the main reason overall for auditors is due to fraud - bottom line. If a company runs into financial trouble, they may be tempted to compile financial statements off of fraudulent accounting entries, and other fraudulent data.

Now, the primary concern of investors, who are the main stakeholders for the company, is going to be twofold: 1) if the company can be a going concern (which is in the liquidity ratios), and 2) if the company does by chance fold for any number of reasons, would there be enough money ...

Solution Summary

When auditing a medium-sized manufacturing corporation with two or three divisions, and using ratios to assess going concern, which of many different ratios would be the most useful ones to use?

How do you determine which ratios are the ones that should be used? Calculate at least 5 ratios to assess going concern. My question is how

The following ratios are available:

current ratio
acid test ratio
gross profit ratio
operating margin ratio
net income ratio
return on total assets ratio
return on equity ratio

Or another approach is which of the following four categories of ratios is appropriate?

Liquidity
Profitability
Leverage
Activity

$2.19