Evaluation of Deviations from 'Expectations' for 2016

Below is a common-size worksheet that facilitates the auditor evaluation of differences [fluctuations, deviations] between the 2016 unaudited financial statement values and the 'auditor expectations'. These expectations have been generated using the forecast function in Excel (using 2012 through 2015 audited data for each line item).

1.The column labels below 2016 say: Expected; Actual; and Difference.

A. From a auditor perspective, whyis 'Actual' a poor label ?

B. What is the algebraic formula used to calculate the two difference columns?

2.Assume planning materiality is $ 3.1 million.List all of the income statement items [add rows to table as needed ] where the differences between auditors expectations and the 'actual' should be a red flag to the auditor and indicate a specific misstate that would be ofaudit concern:

a. Accountswith differencesthatshould be a red flag to the auditor

b. Specific misstate that would be ofaudit concern

3.Perhaps the 'expectation generating method' is not satisfactory to you.Suggest an alternative:

EARTHWEAR CLOTHIERS 5-5 Common - size Statements of Operations* SALA ( in thousand's; except per share data) 1 13 /2017 For the period ended December 31 2016 2014 2015 Expected " Actual Difference Dollar Value 96 of Sales Dollar Value* 96 of Sales Dollar Value 96 of Sales Dollar Value* 96 of Sales Dollar Value* $6 of Sales Not Sales 857, 885 10.0.0.0 96 950, 48.1 100.010 % 1. 043. 018} 10.0. 019 6 1. 019, 890 100.009 5 23, 193) 0.0096 Cost of sales 172, 7:39 55. 1 1 96 548, 203 57.49 96 6:20,046 59.4:496 572,153 56. 10 % (47, 893) 3.3496 Gross Profit 385, 146 14.89 96 404, 091 42.5196 $23,037 10.56:46) $47 , 7:37 13.90% 24, 700 3:3496 Selling, general and administrative expenses 3:34. 994 39.05 96 36 4, 012 38. 30 96 3.93,031 37.6896 37 4, 180 36.69%6 ( 18, 8.51) -0 99 96 Non - recurring charge ( credit) ( 1 , 153 - 0. 1396 0. 0096 0.0096 0. 00% 0.0 096 Income from operations 51, 305 5.9896 40. 729 4.2996 46.050 4.4196 73.557 7.21% 27. 506 2.8096 0. 0096 0.00* 0.0096 O Other income (expense ! 0.0.096 0.0096 Interest expense ( 1 , 229) - 0. 1496 (1983) - 0 . 10% (7371 - 0. 0796 ( 878 ) - 0. 09% (140 ) - 0.0296 Interest income 57:3 0.07 96 1. 450 0 . 15% 1. 017 0. 1096 989 0 . 10% ( 28 ) 0.09 96 Gain on sale of subsidiary 0.00 96 0.0.096 0.0 046 0. 00% O 0.09 96 Other ( 1. 091 ) 0. 13%6 | 4. 7:08) 0. 5,0`` 12.047) 0 2896 13.514) 0. 34% 1567 ) 0.0696 Total other income ( expense ) . net 1 1. 747) 0. 20%6 14, 322 -0. 4596 13. 01.37 -0 29 96 13, 403 - 0 . 33% ( 365) 0. 0496 Income before income taxes 19.550 5.7896 35, 7:57 3.7696 42,6:30 4.09 96 70. 154 6.88% 27 , 460 2.79.96 Income tax provision 18, 3:37 214%6 13, 2:30 1.39 96 15, 794 15196 26, 658 26196 10, 36.4 1. 1096 Net income 31, 222 3.6496 22.527 2.3796 26, 8.94 2.5096 43.495 4.26% 16, 502 1.6596