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You are the auditor in auditing firm, and during performing analytical procedures you have discovered that the long-term debt to capital equity ratio is very high compared to industrial average, in the same time you have found that ROA ratio ( return on assets) is very low compared to industrial average or previous years. Therefore, as an experienced auditor what is the indication of these two findings? And advise whether audit report will be affected or not?
In this case, it appears that the company had taken huge loans to finance their project, however the return seems to be low. I think in such case, we need to critically review the end to end process of Investments, which would mean whether the investments were approved, properly, whether return on investment was evaluated, what is the post evaluation results on ROI and if there is a big difference then why, whether sensitivity analysis was performed during pre-evaluation of the projects, whether the project was within the approved budget and if not then to what extent it was overshot.
Also, to evaluate low returns, critically analyze all cost element in that business with assumptions that were made before project was executed and see any anomalies.
