(25 points) You are the auditor of TinyToes Shoes Company. You are assigned the task of performing substantive analytical procedures on the reserve for returns for the year-end audit as of 12/31/2021 based on the information provided below. Perform the following: 1. Explain the purpose of the analytical procedure you have been asked to perform. (What is your objective and what are you looking for?) 2. Perform the substantive analytical procedure In addition to providing your conclusion drawn from the analysis (i.e., whether the test "passes" or "fails"), also include a description of what this result means. If the test "passes," explain what that means for the audit. If the test "fails," explain what that means for the audit and provide input as to what may be causing any discrepancies noted. 7. If an account balance is more than 5% different than the expected balance from using analytical procedures, then the test is considered "failed." If an account balance is less than 5% different than the expected balance from using analytical procedures, then the test is considered "passed." You can assume the information 3 provided as existing assets was audited the prior year. 2 4 5 6 19 At December 31, 2021, TinyToes Shoes has $5,890,000 in a liability account labeled "Reserve for return." The footnotes to the financial statements contain the following policy: "At the time of sale, the company provides a reserve equal to the 17 gross profit on projected merchandise returns, based on prior returns experience." The entity has indicated that returns for 18 sales that are six months old are negligible, and gross profit percentage for the year is 42.5 percent. The entity has also 20 provided the following information for sales for the last six months of the year: 21 22 23 Month Monthly Sales (in millions) Historical Return Rate 73300 0.004 82800 0.006 26 September 93500 0.01 27 October 110200 0.015 28 November 158200 0.025 0 29 December 202500 0.032 30 31 24 July 25 August 0