Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Marilyn Terrill is the senior auditor for the audit of Uden Supply Company for the year ended December 31, 20X4. In planning the audit, Marilyn

image text in transcribedimage text in transcribedimage text in transcribedimage text in transcribed

Marilyn Terrill is the senior auditor for the audit of Uden Supply Company for the year ended December 31, 20X4. In planning the audit, Marilyn is attempting to develop expectations for planning analytical procedures based on the financial information for prior years and her knowledge of the business and the industry, including these: 1. Based on economic conditions, she believes that the increase in sales for the current year should approximate the historical trend. 2. Based on her knowledge of industry trends, she believes that the gross profit percentage for 20X4 should be about 2 percent less than the percentage for 20X3. 3. Based on her knowledge of regulations, she is aware that the effective tax rate for the company for 20X4 has been reduced by 5 percent from that in 20X3. 4. Based on a review of the general ledger, she determined that average depreciable assets have increased by 10 percent. Purchases of equipment occurred relatively evenly throughout the year. 5. Based on her knowledge of economic conditions, she is aware that the effective interest rate on the company's line of credit for 20X4 was approximately 12 percent. The average outstanding balance of the line of credit is $2,800,000. This line of credit is the company's only interest-bearing debt. 6. Based on her discussions with management the advertising and sales commission percentages are expected to stay the same. Based on her knowledge of the industry, she believes that the amount of other expenses should be consistent with the trends from prior years Comparative income statement information for Uden Supply Company is presented in the below table. UDEN SUPPLY COMPANY Comparative Income Statements Years Ended December 20x1, 20X2, and 20X3 (Thousands) 20X1 20X2 20X3 20X4 Audited Audited Audited Expected Sales 12,600 10,200 7,040 11,400 7,880 Cost of goods sold Gross profit 8,720 3,880 3,160 3,520 Sales commissions 710 800 880 Advertising Salaries 204 230 250 1,086 1,112 1,138 Payroll taxes Employee benefits 189 198 207 172 180 188 Rent 65 66 67 Depreciation Supplies 65 66 67 31 32 33 Utilities 26 27 28 Legal and accounting Miscellaneous 39 40 41 17 18 19 Interest expense 270 288 300 Net income before taxes 286 463 662 Income taxes 64 104 149 222 Net income 359 513 Required b. Determine the expected amounts for 20X4 for each of the income statement items. (Round gross profit ratio and income taxes ratio to nearest four decimal places. Round other ratios to nearest two decimal places. Round all other intermediate computations to the nearest whole value. Enter your answers in thousands.) UDEN SUPPLY COMPANY Comparative Income Statements Years Ended December 20X4 (Thousands) Sales 13,800 Cost of goods sold 9,560 Gross profit 4,240 Sales commissions Advertising Salaries Payroll taxes Employee benefits Rent Depreciation Supplies Utilities Legal and accounting Miscellaneous Interest expense Net income before taxes Income taxes Net income 0 c. Uden's unaudited financial statements for the current year show a 30.79 percent gross profit rate. Assuming that this represents a misstatement from the amount that you developed as an expectation, calculate the estimated effect of this misstatement on net income before taxes for 20X4. (Enter your answers in thousands.) Expected misstatement

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Organisation Shadow Side Audit

Authors: W Tate

1st Edition

1902433971, 978-1902433974

More Books

Students also viewed these Accounting questions