You have been assigned to the planning phase of the audit of ABC Company. One of the procedures that you have been assigned to perform is to compare a set of projected ratios and balances for \(19 \times 7\) (the year under audit) with a set of ratios and balances computed from the unaudited book values for \(19 \mathrm{X} 7\). The projected ratios and balances were computed by the audit team as summaries of expectations based on results from previous quarters of the current year, past audited results, and industry trends and are considered to be reliable. The ratios and balances are shown below.

Because some of the ratios and balances computed from the unaudited book values differ from what was anticipated, you inquired of management, who suggested that the cause of the discrepancy was a large year-end purchase of inventory at a favorable price.
Required:

a. Analyze the ratios and balances and explain why management's explanation is not sufficient to account for the discrepancies.

b. Assume that only one misstatement caused the discrepancies. State the most likely misstatement and describe how it affected each of the ratios and balances.

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Ratios Current ratio = Current assets Current liabilities Quick ratio = Current assets less 19X7 Projected 19X7 Unaudited Percentage Change 1.50 1.52 +1.3 inventory 1.00 0.98 <2.0> Current liabilities Gross margin % 28.7% 27.8% <3.1> Income before taxes as % of sales 7.5% 10.0% +33.3