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Kaleigh Rapp ACCT 4420 Take-Two Interactive Software, Inc. 1. Analyze Take-Two’s 1998-2000 financial data included in Exhibit 1. Compute the following financial ratios for each of those years: age of accounts receivable, age of inventory, gross profit percentage, profit margin percentage, return on assets, return on equity, current ratio, debt-to-equity ratio, and the quality-of-earnings ratio. What major ‘red flags’, if any, were present in take-two’s financial statements given these ratios? Explain. Age of Accounts Receivable: 1998 – ($49,139 x 365) ÷ $194,052 = 92.4 Days or 92 Days 1999 – ($107,799 x 365) ÷ $305,932 = 128.6 Days or 129 Days 2000 – ($134,877 x 365) ÷ $387,006 = 127.2 Days or 127 Days Age of Inventory: 1998 – (365 ÷ 7.43) = 49.1 Days or 49 Days 1999 – (365 ÷ 7.40) = 49.3 Days or 49 Days 2000 – (365 ÷ 8.61) = 42.4 Days or 42 Days Gross Profit Percentage: 1998 – ($46,496 ÷ $194,052) x 100 = 23.96% 1999 – ($90,810÷ $305,932) x 100 = 29.68% 2000 – ($139,210 ÷ $387,006) x 100 = 35.97% Profit Margin Percentage: 1998 – ($7,181 ÷ $194,052) x 100 = 3.7% 1999 – ($16,332 ÷ $305,932) x 100 = 5.33% 2000 – ($24,963 ÷ $387,006) x 100 = 6.45% Return on Assets: 1998 – ($7,181 ÷ $109,385) = .065 1999 – ($16,332 ÷ $231,712) =.071 2000 – ($24,963 ÷ $351,641) =.071 Return on Equity: 1998 – ($7,181 ÷ $11,935) = .60 1999 – ($16,332 ÷ $11,935) = 1.37 2000 – ($24,963 ÷ $11,935) = 2.09 Current Ratio: 1998 – ($95,302 ÷ $73,505) = 1.29 1999 – ($187,970 ÷ $146,531) = 1.28 2000 – ($214,908 ÷ $152,023) = 1.41 Debt-to-Equity Ratio: 1998 – ($73,820 ÷ $11,925) = 6.19 1999 – ($146,609 ÷ $11,925) = 12.29 2000 – ($164,639 ÷ $11,925) = 13.80 Quality-of-Earnings ratio: 1998 – ($8,022 ÷ $7,181) = 1.11 1999 – ($16,748 ÷ $16,332) = 1.03 2000 – ($55,259 ÷ $24,963) = 2.21 The term ‘red flags’ then refers to any indicators throughout the financial statements that would be detected. Within Take-Two’s financial statements there are many red flags that could be pointed out, including; - The negative cash flow from operations - Significant rise in accounts receivable in terms of sales - Rising debt, told by the increasing debt-to-equity ratio 2. Identify the primary audit objectives that auditors hope to accomplish by confirming a client’s yearend accounts receivable. Explain the difference between ‘positive’ and ‘negative’ confirmation requests and discuss the quality of audit evidence yielded by each. a. The first of the objectives that the auditors are trying to confirm is both the existence and completeness of the balance. Existence is simply confirming the balance of the debtor’s is accurately represented in the total on the financial statements. While completeness is confirming the transactions accuracy and the recording of the transaction. b. A second objective of the audit is to perform the year-end revenue cutoff test by addressing; time of occurrence and completeness. Time of occurrence consists of tracing and vouching the transactions and events that have recorded throughout the entity for the current fiscal year in question. Completeness in this case is showing that all the transactions were recorded in the proper accounting period. Positive vs negative confirmation: A positive confirmation is when the audit team sends a letter to the company in question and requests a bank document in return. This bank document will need to either confirm the amount in question or dispute the amount in question and why. This also involves more cost during the audit in the long run. A negative confirmation is also a document sent out by the audit team to the company in question to confirm or dispute the amount in question. Unlike the positive confirmation, no response is needed if there are no discrepancies with the amount. If there is an amount that is when a response is needed. This confirmation is generally used when the company being audited has strong internal controls. In the long run negative confirmation, although less costly and less involved, is always considered to be sub-par to positive confirmation. This is because there is always the non-respondent who fails to dispute an incorrect balance, therefore making more work in the long run. Positive confirmation is generally favored by the audit team because it gets as much evidence collected as possible and give them the best picture of the company. 3. Identify audit tests that may be used as alternative audit procedures when a response is not received for positive confirmation request. Compare and contrast the quality of audit evidence yielded by these procedures with that produced by audit confirmation procedures. Generally when a response is not received for positive confirmation the auditors need to take alternate routes to obtain the information and reduce audit risk as much as possible. These alternative procedures may vary in accordance with the type of accounts in question. In the above listed scenario of accounts receivable, another audit procedure could be proving out cash receipts. Which includes matching revenues and expenses within the periods, shipment documents and client documentation. In the opposite, account payable, evaluation may include evaluation of cash disbursements or other similar documentation. As far as quality of audit evidence goes, any evidence that is received as part of the confirmation process can be considered higher in quality as it is from an external source. In general positive confirmation provides a more reliable and accurate data pool. 5. Is it appropriate for audit forms to sharply discount their professional fees for developmental stage companies? Why or why not? What problems, if any, may this practice pose for audit firms? During the beginning stages of a company, most of all their resources are committed to keep the company afloat. In order to keep up with the competition audit firms will offer their services at substantial discounts to help them from going under. Although this process may be considered inappropriate, it also has been shown that lower audit fees means lower quality of audit services. These discounting techniques can result in many problems, such as; price wars, inferior service, and more complex regulatory authorities. 6. Do you believe that the relationship between Robert Fish and Ryan Brant was inappropriate? Explain. Yes, I believe this relationship could be considered inappropriate because of the previous ties they had to one another. Robert Fish, the partner with PWC, has previously served as Bryant’s business advisor since the start of the company. In addition, Fish claims a father-son relationship with Bryant and had routinely supervised the company audits. This situation would cause a great bias in financial statement reporting because the main business advisor is also supervising the audit process within the company. In the end this relationship should be considered both unethical and unlawful in auditing procedures.
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Explanation & Answer

Attached.

Surname 1

Name
Professor
Course
Date
Take-Two Interactive Software
1. Analyze Take-Two’s 1998-2000 financial data included in Exhibit 1. Compute the following
financial ratios for each of those years: age of accounts receivable, age of inventory, gross profit
percentage, profit margin percentage, return on assets, return on equity, current ratio, debt-toequity ratio, and the quality-of-earnings ratio. What major ‘red flags’, if any, were present in
take-two’s financial statements given these ratios? Explain.
Age of Accounts Receivable:
Year
1998

Age of Accounts Receivable

1999

($107,799 × 365) ÷ $305,932 = 128.6 Days ≃
129 Days

2000

($134,877 × 365) ÷ $387,006 = 127.2 Days ≃
127 Days

($49,139 ×365) ÷ $194,052 = 92.4 Days ≃ 92
Days

Age of Inventory:
Year

Age of Inventory:

1998

(365 ÷ 7.43) = 49.1 Days ≃ 49 Days

1999

(365 ÷ 7.40) = 49.3 Days ≃ 49 Days

2000

(365 ÷ 8.61) = 42.4 Days ≃42 Days

Surname 2
Gross Profit Percentage:
Year

Gross Profit Percentage

1998

($46,496 ÷ $194,052) x 100 = 23.96%

1999

($90,810÷ $305,932) x 100 = 29.68%

2000

($139,210 ÷ $387,006) x 100 = 35.97%

Profit Margin Percentage:
Year
1998
1999
2000

Profit Margin Percentage:
($7,181 ÷ $194,052) x 100 = 3.7%
($16,332 ÷ $305,932) x 100 = 5.33%
($24,963 ÷ $387,006) x 100 = 6.45%

Return on Assets:
Year
1998
1999
2000

Return on Assets:
($7,181 ÷ $109,385) = .065
($7,181 ÷ $109,385) = .065
($24,963 ÷ $351,641) =.071

Return on Equity:
Year
1998
1999
2000
...


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