In a 2-3 page paper, complete the case below and submit to instructor. Review th

Question

In a 2-3 page paper, complete the case below and submit to instructor. Review the income statement for Uden Supply Company and answer the following:

Describe the purpose of analytical procedures performed in the planning stage of the audit.

Uden Supply has projected its 2004 gross profit at 31% of sales despite expectation for some shrinkage in margins. On the basis of Uden's operating performance in years 2001 - 2003 project your best guess for 2004. Project 2004 based on the incremental changes for each line item over the last three years.

Uden’s unaudited financial statements for the current year show a 31 percent gross profit rate. Assuming that this represents a misstatement from the amount that you developed as an expectation, calculate the estimated effect of this misstatement on net income before taxes for 20X4.

Indicate whether you belive that the difference calculated in part (c) is material. Explain your answer. (50-100 words).

Can you please break down the 20x4 expected results more, and display what figures are calculated to arive at the expected result

Thank You!

Explanation / Answer

A.

Analytical procedures performed at the planning stage are designed to help the auditors identify unusual transactions, events, or amounts that might affect the fairness of the financial statements. They are also used to help the auditors increase their understanding of the clients business.

B.

Comparative income statement information for Uden Supply Company is presented in the accompanying table

UDEN SUPPLY COMPANY

Comparative Income Statement

Years Ended December 20X1, 20X2, and 20X3

(Thousands)

20X1

Audited

20X2

Audited

20X3

Audited

20X4

Expected

Sales

$8,700

$9,400

$10,100

($10,100 + $700)

$10,800

Cost of goods sold

$6,000

$6,500

$7000

($10,800 * .6915)

$7,468

     Gross Profit

$2,700

$2,900

$3,100

($10,800 - $7,468)

$3,332

Sales Commissions

$610

$660

$710

($10,800 * .07)

$756

Advertising

$175

$190

$202

($10,800 * .02)

$216

Salaries

$1,061

$1,082

$1,103

($1,103 + $21)

$1,124

Payroll taxes

$184

$192

$199

($199 + $8)

$207

Employee benefits

$167

$174

$181

($181 + $7)

$188

Rent

$60

$61

$62

($62 + $1)

$63

Depreciation

$60

$63

$66

(66 + $3)

$69

Supplies

$26

$28

$30

($30 + $2)

$32

Utilities

$21

$22

$23

($23 + $1)

$24

Legal and accounting

$34

$37

$40

($40 + $3)

$43

Miscellaneous

$12

$13

$14

($14 + $1)

$15

Interest expense

$210

$228

$240

($240 + $12)

$252

     Total expenses

$2,989

     Net income

Before taxes

$80

$150

$230

$343

Income taxes

$18

$33

$50

($354 * .22)

$75

     Net income

$62

$117

$180

$268

C.

$10,800 * .31 = $3,348 gross profit

$3,348 - $3,332 (expected gross profit) = $16 expected misstatement

D.

Many would consider the amount as immaterial as a $16,000 misstatement of a net income before taxes of $343,000 is less that 5% of income. A difference such as this makes clear the difficult task of determining what is actually a material misstatement.

Reference:

Whittington, R.O. & Pany, K. (2012). Principles of auditing & other assurance services.

New York: The McGraw-Hill Companies, Inc.

UDEN SUPPLY COMPANY

Comparative Income Statement

Years Ended December 20X1, 20X2, and 20X3

(Thousands)

20X1

Audited

20X2

Audited

20X3

Audited

20X4

Expected

Sales

$8,700

$9,400

$10,100

($10,100 + $700)

$10,800

Cost of goods sold

$6,000

$6,500

$7000

($10,800 * .6915)

$7,468

     Gross Profit

$2,700

$2,900

$3,100

($10,800 - $7,468)

$3,332

Sales Commissions

$610

$660

$710

($10,800 * .07)

$756

Advertising

$175

$190

$202

($10,800 * .02)

$216

Salaries

$1,061

$1,082

$1,103

($1,103 + $21)

$1,124

Payroll taxes

$184

$192

$199

($199 + $8)

$207

Employee benefits

$167

$174

$181

($181 + $7)

$188

Rent

$60

$61

$62

($62 + $1)

$63

Depreciation

$60

$63

$66

(66 + $3)

$69

Supplies

$26

$28

$30

($30 + $2)

$32

Utilities

$21

$22

$23

($23 + $1)

$24

Legal and accounting

$34

$37

$40

($40 + $3)

$43

Miscellaneous

$12

$13

$14

($14 + $1)

$15

Interest expense

$210

$228

$240

($240 + $12)

$252

     Total expenses

$2,989

     Net income

Before taxes

$80

$150

$230

$343

Income taxes

$18

$33

$50

($354 * .22)

$75

     Net income

$62

$117

$180

$268

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