554.-Marilyn Terrill is the senior auditor for the audit of Uden Supply Company for the year ended December 31, 20X4. In planning the audit, Marilyn is attempting to develop expectations for planning analytical procedures based on the financial information for prior years and her knowledge of the business and the industry, including: 1. Based on economic conditions, she believes that the increase in sales for the current year should approximate the historical trend. 2. Based on her knowledge of industry trends, she believes that the gross profit for 20X4 should be about 2 percent less than the percentage for 20X3. 3. Based on her knowledge of regulations, she is aware that the effective tax rate for the company for 20X4 has been reduced by 5 percent from that in 20X3. 4. Based on a review of the general ledger, she determined that average depreciable assets have increased by 10 percent. 5. Based on her knowledge of economic conditions, she is aware that the effective interest rate on the company's line of credit for 20X4 was approximately 12 percent. The average outstanding balance of the line of credit is $2,300,000. This line of credit is the company's only interest-bearing debt. 6. Based on her discussions with management and her knowledge of the industry, she believes that the amount of other expenses should be consistent with the trends from prior years. Comparative income statement information for Uden Supply Company is presented in the accompanying table. Required: Describe the purpose of analytical procedures performed in the risk assessment stage of the audit. a. Develop the expected amounts for 20X4 for each of the income statement items. c. Uden's unaudited financial statements for the current year show a 31 percent gross profit rate. Assuming that this represents a misstatement from the amount that you developed as an expectation, calculate the estimated effect of this misstatement on net income before taxes for 20X4. d. Indicate whether you believe that the difference calculated in part (c) is material. Explain your answer. UDEN SUPPLY COMPANY Comparative Income Statements Years Ended December 20X1, 20X2, and 20X3 (Thousands) 20X1 Audited 20X2 Audited 20X3 Audited 20X4 Expected Sales 8,700 9,400 10,100 _________ Cost of goods sold 6,000 6,500 7,000 _________ Gross profit 2,700 2,900 3,100 _________ Sales commissions 610 660 710 _________ Advertising 175 190 202 _________ Salaries 1,061 1,082 1,103 _________ Payroll taxes 184 192 199 _________ Employee benefits 167 174 181 _________ Rent 60 61 62 _________ Depreciation 60 63 66 _________ Supplies 26 28 30 _________ Utilities 21 22 23 _________ Legal and accounting 34 37 40 _________ Miscellaneous 12 13 14 _________ Interest expense 210 228 240 _________ Net income before taxes 80 150 230 _________ Income taxes 18 33 50 _________ Net income 62 117 180 _________