For the current year audit, Blue Cows draft Trading Account shows the following figures:

Sales $100,000

Cost of Sales 69,000

Gross Profit $31,000

Basic analytical procedures therefore show a GP% of 31% this year which is higher than the normal range of 24% - 26%. You intend to enquire of management as to the reasons for the current year increase, before undertaking further audit work to investigate potential misstatements.

Required:

a) Identify one possible explanation that you would accept from management that would satisfy you that the above GP% increase was not due to potential misstatements.

b) Assume that management has no satisfactory explanations and that further audit investigation reveals Cost of Sales is misstated due to potential misstatements in the closing inventory figure:

i) Calculate by how much closing inventory may be overstated.

ii) State and explain whether you consider this to be a material misstatement.

iii) Identify which two audit assertions you would focus on and explain how these relate to investigating the suspected overstatement of closing inventory.