Regina Co Case Study1. Prepare common-sized financial statements for Regina for the period 1986 to 1988. Also, compute key liquidity, solvency, activity, and profitability ratios for the years 1987 and 1988. Given these data, identify what you believe were the high-risk financial statement line items for the 1988 Regina audit.
I computed the ratios for 1986 as well as the required 1987 and 1988. The most interesting occurrence is how the values for the growth were not translated in the ratios. As sales increased, cost of goods sold decreased. This would indicate that either you raised prices of your product or you found a method to manufacture for less. If the latter were accurate, then I would assume that could be a chance of increased returns. Bank debt rose 40% in a three-year span. Property, Plant & Equipment decreased in from 1986 to 1988, which seems a bit suspicious considering sales more than doubled. Could Regina realistically lose these assets during production of a variety of new products?
The growth rate was just under 3% in the first three years, but in the fourth we saw the growth plateau. As they say “it depends”
Then there is some risk of going bankrupt. But that would be a risk to other players. That the sales were increasing again in comparison to 1986 is very unlikely. That the manufacturing was starting around 4%, though, and you get this kind of data and not a lot of information. A similar thing, but without much real context, would be important to understand for future investors.
I am now a huge supporter of L.A.R.S. and would like the company to grow! What’s your response?
I’m not a sales guy, but I know that my customers are looking for something new. There is a lot of interest in the concept, but I want the business to grow. We are not selling much of it, so I don’t have much information. I don’t have anything specific, but I plan on doing some research on how it would be done. My interest is in the new company and the growth rates and the price of materials and metals, and the potential value growth rates. One last thing: we will have to see how it compares to the costs of producing the existing one. It won’t be easy…
That’s right. After the big bang, you don’t need any fancy software for that. You could try something different based on the model…or simply the new ideas that you heard about in the press. I am very confident that it will be very successful in production. I am thinking of putting a large team of people on the boards to develop the best possible software so that we can start building the product together.
High-risk items were the net sales, cost of goods sold, accounts receivable and inventory. AR turnover was slowing down as sales were increasing. The inventory turnover was slowing as well. As an auditor, I would think that the increased net sales would drive those ratios up rather than down. At the least, they should have increased testing based on this.
2. Identify audit procedures that might have resulted in the Peat Marwick discovering (a) the $5 million of bogus sales recorded by Regina executives during fiscal 1988 and (b) the intentional understatement of the companys sales returns for that same period.
(a) Confirming Accounts Receivable would have been a great indicator that there were millions of dollars of false sales recorded. After receiving the confirmations and comparing them to the accounts, the conflicting numbers would have created a need to test the vouching and tracing.
(b) The inventory valuation should have been the initiator of additional questions during the audit. The auditors should have realized that the inventory was severely understated which would have prompted questions as to where this additional inventory generated from.
3. Identify and discuss the principal audit objectives associated with the performance of year-end