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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