As a relatively new auditor, you have been assigned the task of performing analytical procedures on the year-end income statement accounts of Caulfield Industries. Caulfield has been a long time client and your firm has always had a good working relationship with the company. However, like many clients, questions always arise about increasing audit fees and whether Caulfield management will look to ?go out for bid? to find less expensive audit services. The engagement partner has clearly indicated to this year?s audit team that they should actively look for ways to demonstrate how the firm?s knowledge of Caulfield?s business translates into valuable business advice. The goal ? circumvent Caulfield?s interest in switching auditors. You have completed the traditional first step for the analytical procedures of income statement accounts as prescribed by the audit program ? Prepare a Horizontal and Vertical analysis of the accounts. A summary of the results are as follows: (in the attachment) Required: 1. What conclusions do you draw from the above analysis, i.e., what story do the numbers tell you? 2. Prepare a 1-page PowerPoint slide that would communicate your findings. 3. Remembering the partner?s directive, what advice would you provide Caulfield based upon the above analysis? 4. Prepare a 1-page PowerPoint slide that would communicate your recommendations.

Income Statement Sales (net) Cost of Sales Gross margin Selling & administrative Operating income Other items Net income 2011 38,000,000 30,200,000 7,800,000 2010 36,300,000 28,650,000 7,650,000 6,250,000 5,820,000 1,550,000 542,500 1,007,500 1,830,000 640,500 1,189,500 Horizontal Analysis 2011-10 2010-09 4.68% 3.71% 5.41% -0.52% 1.96% 23.39% Vertical Analysis 2011 2010 2009 100.00% 100.00% 100.00% 79.47% 78.93% 82.29% 20.53% 21.07% 17.71% 7.39% -15.30% -15.30% -15.30% 16.45% 4.08% 1.43% 2.65% 0.34% 357.50% 357.50% 357.50% 16.03% 5.04% 1.76% 3.28% 16.57% 1.14% 0.40% 0.74%