The table below shows sales, cost of sales, and inventory data for Aladdin Products Supply Inc., a wholesale distributor of cleaning supplies. Dollar amounts are in millions.

Required

a. Calculate the following ratios:
(1) Gross margin as a percentage of sales (2) Inventory turnover

b. List several logical causes of the changes in the two ratios.

c. Assume that $500,000 is considered material for audit planning purposes for 2002. Could any of the fluctuations in the computed ratios indicate a possible material misstatement? Demonstrate this by performing a sensitivity analysis.

d. What should the auditor do to determine the actual cause of the changes?

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2002 2001 2000 1999 Sales $23.2 $21.7 $19.6 $17.4 Cost of sales 17.1 16.8 15.2 13.5 Beginning inventory 2.3 2.1 1.9 1.5 Ending inventory 2.9 2:3 2.1 1.9