One of the firm's largest clients, Ropper Company, makes gas grills, gas stoves, and gas dryers. Its financial position has deteriorated, but its management is confident that the worst has passed. Management points to new home starts associated with the current drop in interest rates and notes that it has implemented total quality management in operations and has cut down the number of defects in products. However, the auditor remembers reading in Con- sumer Reports that Ropper has had a much higher than average incidence of re- pairs in recent years. The relevant financial information for the past four years is as follows (dollars stated in millions; 2006 is unaudited):

Required

a. Suggest reasons for the different level of sales returns in 2006. Prioritize the list based on the information given. 

b. Indicate the inquiries and follow-up audit procedures that might be performed before developing specific audit procedures to test the most likely hypotheses.

Transcribed Image Text:

Sales Sales returns and allowances Returns as a percentage of sales Net income 2006 2005 2004 2003 $178.4. $162.0 $160.2 $154.3 2.1 8.3 7.4 6.8 1.17% 5.12% 4.62% 4.40% 8.3 2.1 2.8 3.1