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:

Options for Reliable Data: Reliable or Not reliable

Options for Evaluate the Significance of Difference:

1. Difference is materialfurther investigation necessary

2. Difference is materialno further investigation necessary

3. Difference is immaterialfurther investigation necessary

4. Difference is immaterialno further investigation necessary

5. Method unreliableperform alternative procedures

Internal Memo

National Fitness Association

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

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

Control Summary Sheet

Summary Worksheet of Control Assessment

Cycle	Control Risk
Revenue Cycle	Low
Expenditure Cycle	Medium
Payroll Cycle	High
Fixed Assets	Medium

Analytics Definitions

Accounts receivable turnover	Sales (net) Average accounts receivable (net)
Asset turnover	Sales (net) Average total assets
Basic earnings per share	Income available to common shareholders Weighted average common shares outstanding
Cash conversion cycle	Days sales in accounts receivable + Days in inventory Days of payables outstanding
Current ratio	Current assets Current liabilities
Days in inventory	Ending inventory Cost of goods sold / 365
Days of payables outstanding	Ending accounts payable Cost of goods sold / 365
Days sales in accounts receivable	Ending accounts receivable (net) Sales (net) / 365
Debt to equity	Total liabilities Total equity
Dividend payout	Cash dividends Net income
Equity multiplier	Total assets Total equity
Gross margin (Gross profit margin)	Sales (net) Cost of goods sold Sales (net)
Inventory turnover	Cost of goods sold Average inventory
Operating cash flow ratio	Cash flow from operations Ending current liabilities
Price earnings ratio	Price per share Basic earnings per share
Profit margin	Net income Sales (net)
Quick ratio	Cash and cash equivalents + Short-term marketable securities + Receivables (net) Current liabilities
Return on assets	Net income Average total assets
Return on equity	Net income Average total equity
Return on sales	Income before interest income, interest expense, and taxes Sales (net)
Times interest earned	Income before interest expense and taxes Interest expense OR Earnings before interest and taxes Interest expense
Total debt ratio	Total liabilities Total assets

To: Employees of Fun Fitness Inc. From: HR Date: December 26, Year 1 Happy Holidays! We are excited to announce that in Year 2 we are increasing the commission percentage from 4% to 5% for all sales. Keep up the great work-you are making a "world" of difference! National Fitness Association Year 2 Results We have completed our survey of National Fitness stores for Year 2. Our survey in Year 2 included analysis of more than 20,000 health clubs. This annual survey includes information such as the amount of revenue per square foot, the average depreciation life for equipment, the average equipment machines per member, the average personal trainer salary, the average membership fee, the average number of parking spaces per member, the average percentage of members who utilize group exercise, and the average number of lockers per member. Below are some of these highlighted numbers: National Averages for Fitness Facilities: Revenue per square foot Average member fee Average equipment machines per member $ 105.60 $ 35.25 0.25 To: Employees of Fun Fitness Inc. From: HR Date: December 26, Year 1 Happy Holidays! We are excited to announce that in Year 2 we are increasing the commission percentage from 4% to 5% for all sales. Keep up the great work-you are making a "world" of difference! National Fitness Association Year 2 Results We have completed our survey of National Fitness stores for Year 2. Our survey in Year 2 included analysis of more than 20,000 health clubs. This annual survey includes information such as the amount of revenue per square foot, the average depreciation life for equipment, the average equipment machines per member, the average personal trainer salary, the average membership fee, the average number of parking spaces per member, the average percentage of members who utilize group exercise, and the average number of lockers per member. Below are some of these highlighted numbers: National Averages for Fitness Facilities: Revenue per square foot Average member fee Average equipment machines per member $ 105.60 $ 35.25 0.25