You are auditing, Bunny’s Ltd, a large manufacturing concern operating in Australasia. As part of the
planning work, you have performed analytical procedures on an annualised basis and compared the
results to industry averages and last year’s audited financial information. The results are given below:
Industry average Bunny’s Limited
Ratio 2019 2018 2019 2018
a) Days in receivables 29 27 52 48
b) Days in inventory 90 88 75 74
c) Gross margin 0.30 0.26 0.17 0.18
While familiarising yourself with the company and its environment, you learn that:
i. Bunny’s management remuneration is mostly incentive-based (reliant on meeting optimistic sales
targets) and inability to meet sales targets results in reduced sales commissions in the next period.
ii. The human resources department of Bunny’s has been short-staffed and unable to provide training
to newly hired staff responsible for warehouse administration and financial processing functions.
iii. One of the products manufactured by Bunny’s is a titanium bolt, which is small but very valuable
and in high demand in the market.
iv. There is no aging review of accounts receivable and an increasing percentage of total receivables
are falling into the 90 days+ category.
Briefly explain the audit implications of the above ratios and additional information, as well as the
effect they will have on your audit plan for: (a) Accounts receivable, (b) Inventory, (c) Gross margin
and related accounts, (d) General/ pervasive to all accounts