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A manufacturing company’s financial analyst is working on the analysis of financial statements for the last three years

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A manufacturing company’s financial analyst is working on the analysis of financial statements for the last three years. However, the financial analyst cannot decide on what approach and which financial ratios would provide possible fraud indicators. You, being an auditor and fraud examiner was approached by him and asked for an expert advise.

Required:

a) What type of analysis would you recommend to the financial analyst? Explain your answer.

b) Assuming the following are the resulting ratios/conditions as computed and noted by the financial analyst, would you consider it as a fraud symptom? Why or why not?

a.1 Current ratio of 3.5:1.0 and acid-test ratio of 2:1; both increased from that of previous years

a.2 Finished goods inventory significantly increased as compared with previous years’ stocks

a.3 Percentage of uncollectible accounts to total credit sales showed minimal increase although sales registered a material increase

a.4 Cost of rework on items sold, sales discounts and returns reduced significantly although with increase in sales volumes