Assume that $2,500,000 is considered material for audit planning purposes for 20

ID: 2425516 • Letter: A

Question

Assume that $2,500,000 is considered material for audit planning purposes for 2014. Do any of the fluctuations in the computed ratios indicate a possible material misstatement? Use a spreadsheet to show how you reach your conclusion

2014

2013

2012

2011

Sales

102.8

92.8

88.4

79.6

Cost of sales

82.8

77.2

70.8

64.0

Beginning inventory

10.0

8.4

8.6

7.2

Ending inventory

12.6

10.2

9.4

8.6

2014

2013

2012

2011

Sales

102.8

92.8

88.4

79.6

Cost of sales

82.8

77.2

70.8

64.0

Beginning inventory

10.0

8.4

8.6

7.2

Ending inventory

12.6

10.2

9.4

8.6

Explanation / Answer

Gross margin as a percentage of sales=

(Net sales - Cost of goods sold) / Net sales

(102.8-82.8)/102.8

=0.1945 or 19.45%

(92.8-77.2)/92.8

=0.1681 or 16.81%

(88.4-70.8)/88.4

=0.1990 or 19.90%

(79.6-64.0)/79.6

=0.1959 or 19.59%

Inventory turnover =

Cost of Goods Sold ÷ Average Inventory

82.8/ ((10.0+12.6)/2)

=7.32 Times

8.4+10.2) / 2)

=8.30 Times

70.8 / ((8.6+9.4) /2)

=7.86 Times

64.0 / ((7.2+8.6)/2)

= 8.10 Times

19.45% - 16.81% = 2.64% increase in gross margin %

2.64% * sales of $102.8 million =$2,713,920 potential misstatement

$82.8million / 8.30 inventory turnover = 9.97 Million

$12.6 - $9.97 million = 2,630,000 Potential misstatement

Both calculations indicate a potential misstatement exceeding $2,500,000

Formula 2014 2013 2012 2011