Question
Isaac, CPA, is auditing Fun Fitness Inc., a calendar-year corporation. He is performing analytical procedures relative to the sales account for Year 2. He also
Isaac, CPA, is auditing Fun Fitness Inc., a calendar-year corporation. He is performing analytical procedures relative to the sales account for Year 2. He also audited the consolidated financial statements for Fun Fitness in Year 1 and issued an unmodified opinion. Isaac has set materiality at $40,000, or 4 percent change for year-over-year comparisons. For each type of analytical procedure, consider the information in the exhibits and:
| Enter the auditor's calculation/expectation for Year 2. Round all dollar amounts to the nearest dollar and all percentages to the nearest tenth of a percent. | |
| Evaluate the reliability of data from which the expectation is developed. Select from the choices available. Selections may be used once, more than once, or not at all. | |
| Evaluate the significance of the difference for each analytical procedure. Select from the choices available. Selections may be used once, more than once, or not at all. | |
| The information in the Analytics Definitions exhibit must be used for all financial ratio calculations. |
| A | B | C | D | |
|---|---|---|---|---|
| 1 |
| Year 2 | Year 1 | Year-Over-Year Percentage Change |
| 2 | Gross margin percentage: | |||
| 3 | Reliability of data: |
|
| |
| 4 | Evaluate the significance of difference: |
| ||
| A | B | C | D | |
|---|---|---|---|---|
| 1 |
| Year 2 Sales Expected | Year 2 Sales Actual | Dollar Difference |
| 2 | Expectation based on square footage and external industry data: | $1,506,900 | ||
| 3 | Reliability of data: |
|
| |
| 4 | Evaluate the significance of difference: |
| ||
| A | B | C | D | |
|---|---|---|---|---|
| 1 |
| Year 2 Sales Expected | Year 2 Sales Actual | Dollar Difference |
| 2 | Expectation based on relationship between sales and commission: | $1,506,900 | ||
| 3 | Reliability of data: |
|
| |
| 4 Evaluate the significance of difference | ||||
|
| ||||
Income statement
| Fun Fitness Inc. | ||
| Income Statement | ||
| For the Years Ended December 31, Year 2, and December 31, Year 1 | ||
| Year 2 | Year 1 | |
| Sales | $1,506,900 | $1,411,500 |
| Cost of sales | 875,000 | 850,000 |
| Commission expense | 78,900 | 54,000 |
| General and administrative expenses | 55,000 | 40,000 |
| Income (loss) from operations | 498,000 | 467,500 |
| Other revenues and gains: | ||
| Interest revenue | 4,000 | 3,000 |
| Other revenue | 500 | 250 |
| Other expenses and losses: | ||
| Interest expense | 10,000 | 8,500 |
| Income before income tax | 492,500 | 462,250 |
| Income tax expense | 98,500 | 87,800 |
| Net income | $394,000 | $374,450 |
Disaggregate Sales Information
| Fitness Center | Prior Year Sales (audited) | Current Year Sales | Dollar Change | Current Percent Change (%) | Square Feet (audited) |
| 1 | 275,000 | 292,700 | 17,700 | 6.4% | 2,800 |
| 2 | 305,500 | 333,700 | 28,200 | 9.2% | 2,900 |
| 3 | 325,000 | 341,600 | 16,600 | 5.1% | 3,150 |
| 4 | 240,800 | 253,800 | 13,000 | 5.4% | 2,900 |
| 5 | 265,200 | 285,100 | 19,900 | 7.5% | 2,800 |
| Total | 1,411,500 | 1,506,900 | 95,400 | 6.8% | 14,550 |
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Introduction to Managerial Accounting
Authors: Peter Brewer, Ray Garrison, Eric Noreen
7th edition
978-0078025792
