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 Based on economic conditions, she believes that the increase in sales for the current year should approximate the historical trend 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 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 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 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 $3,800,000 This line of credit is the company's only interest bearing debt 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 Audited 20X2 Audited 20X3 Audited 20X4 Expected Sales 13,200 14,300 15,400 Cost of goods sold 9,110 9,880 10,660 Gross profit 4,090 4,420 4,740 Sales commissions 920 1,000 1,080 Advertising 264 290 310 Salaries 1,136 1,172 1,208 Payroll taxes 199 207 215 Employee benefits 182 190 198 Rent 75 76 77 Depreciation 75 76 77 Supplies 41 42 43 Utilities 36 37 38 Legal and accounting 49 50 51 Miscellaneous 27 28 29 Interest expense 390 408 420 Net income before taxes 696 844 994 Income taxes 157 190 224 Net income 539 654 770 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 ) c Uden's unaudited financial statements for the current year show a 30 78 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 )

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Jun 22, 2024

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

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:

Based on economic conditions, she believes that the increase in sales for the current year should approximate the historical trend.
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.
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.
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.
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 $3,800,000. This line of credit is the company's only interest-bearing debt.
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 Audited 20X2 Audited 20X3 Audited 20X4 Expected Sales 13,200 14,300 15,400

Cost of goods sold 9,110 9,880 10,660

Gross profit 4,090 4,420 4,740

Sales commissions 920 1,000 1,080

Advertising 264 290 310

Salaries 1,136 1,172 1,208

Payroll taxes 199 207 215

Employee benefits 182 190 198

Rent 75 76 77

Depreciation 75 76 77

Supplies 41 42 43

Utilities 36 37 38

Legal and accounting 49 50 51

Miscellaneous 27 28 29

Interest expense 390 408 420

Net income before taxes 696 844 994

Income taxes 157 190 224

Net income 539 654 770

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.)

c.Uden's unaudited financial statements for the current year show a 30.78 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.)