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8-32 ( Objective8-4 ) In the audit of the Worldwide Wholesale Company, you did extensive ratio and trend analysis as part of preliminary audit planning.
8-32(Objective8-4) In the audit of the Worldwide Wholesale Company, you did extensive ratio and trend analysis as part of preliminary audit planning. Your analytical procedures identified the following:
- Commission expense as a percent of sales was constant for several years but has increased significantly in the current year. Commission rates have not changed.
- The rate of inventory turnover has steadily decreased for three years.
- Inventory as a percent of current assets has steadily increased for four years.
- The number of days' sales in accounts receivable has steadily increased for three years.
- Allowance for uncollectible accounts as a percent of accounts receivable has steadily decreased for three years.
- The absolute amounts of depreciation expense and depreciation expense as a percent of gross fixed assets are significantly smaller than in the preceding year.
Required
- Evaluate the potential significance of each of the changes in ratios or trends identified in your analysis on the fair presentation of financial statements.
- State the follow-up procedures you would perform for each fluctuation to determine whether a material misstatement exists.
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