The accounts receivable were $658 in 2014, $674 in 2015, and $795 in 2016. The company had a day’s outstanding ratio of 32.05 days in 2014, 31.9 days in 2015, and 37.44 days in 2016. The five days increase in 2016 is significant. Therefore, there is the need to conduct further analysis on the company’s credit policy to check if it has been adjusted.The main accounting issue with this adjustment is the provision of a wrong provision since an increase in the level of accounts receivable exposes the business to greater risks of bad debts. In 2016 audit, special attention should be given to the analysis of bad debts, provision for bad debts, as well as minutes of meeting, and contracts to find if there has been an agreement to change the company’s credit policy.
The cost of goods sold is reported in the balance sheet as $5545 in 2016 and $5381 in 2015. The inventory levels are $2353 and $2,213 for 2016 and 2015 respectively. The calculated inventory turnover during this period is 2.4288 in 2016 and 2.525 in 2014. Simply, this figure confirms that the rate of sale was higher in 2015 than in 2016. The profits margins are 0.2295 and 0.2603 for 2016 and 2015 respectively. These fluctuations are okay since a reduction in the rate of sales is followed by a reduction in profits and an increase in stock levels. Generally, this problem is due to a slowdown in the business. In 2016, the business was not able to sell as many units as it did in 2016. In the 2016 audit, there should be special attention on the inventories and accounts payables. A thorough check of the inventories will show if the business has been able to increase its sales turnover. An analysis of the accounts payable will show if the business is repaying its debts even with the slowdown in business.
The interest expense declined from $135 in 2014 to $127 in 2015, and finally to $110 in 2016. Similarly, the company’s portion of long-term debt decreased from $1500 in 2014 to $1400 in 2015, and finally to $1300 in 2016. The interests to debt ratio during these periods were 9% in 2014, 9.07% in 2015, and 0.846% in 2016. The rate of the fall interest expense was consistent with the decline in the company’s debt. In addition, the interest rate expense was consistent at around 9%. Therefore, these expenses are okay. However, due to the variations in the debt ratio, an investigation of the debt contract would be essential in order to identify the possible cause of the fluctuations. In the 2016 audit, the company should check if the fall in interest rates is consistent with the fall in the company’s debt.
The legal expenses were $12,000 in 2014, $14,000 in 2015, and $43,000 in 2016. The rise in legal expense by 207% from 2015 to 2016 is alarming. Therefore, there is need to evaluate the legal contract to find the reason for this increase and whether it was approved by the company’s board of directors or shareholders. In the 2016 audit, there should be an examination of whether the terms of the legal contract were fulfilled, and if the contract had been authorized.