Li Chen has calculated profitability ratios using data extracted from his clients pre-audit trial balance. He also
Question:
Li Chen has calculated profitability ratios using data extracted from his client’s pre-audit trial balance. He also has the values for the same ratios for the preceding two years (using audited figures). The data for the gross profit and profit margins are as follows:
Li is a little confused because the profit margin shows declining profitability but the gross profit margin has improved in the current year and is higher in 2018 than in the previous two years.
Required
(a) Make a list of possible explanations for the pattern observed in the gross profit and profit margins.
(b) Which of your explanations suggest additional audit work should be planned? For each, explain the accounts and/or transactions that would need special attention in the audit.
Step by Step Answer:
a Possible explanations for the pattern observed in the gross profit and profit margins Increased selling and administrative expenses If the companys selling and administrative expenses have increased ...View the full answer
Auditing A Practical Approach
ISBN: 9780730364573
3rd Edition
Authors: Robyn Moroney, Fiona Campbell, Jane Hamilton
