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19-28 (Objective 19-5 ) You are the manager in the audit of Vernal Manufacturing Company and are turning your attention to the income statement accounts. The in-charge auditor assessed control risk for all cycles as low, supported by tests of controls. There are no major inherent risks affecting income and expense accounts. Accordingly, you decide that the major emphasis in auditing the income statement accounts will be to use substantive analytical procedures. The client prepared a schedule of the key income statement accounts that compares the prior-year totals with the current year totals. The in-charge auditor completed the last column of the audit schedule, which includes explanations of variances obtained from discussions with client personnel. The audit schedule is included.

Required

a.Examine the schedule prepared by the client and your staff and write a memorandum to the in-charge that includes criticisms and concerns about the audit procedures performed and questions for the in-charge auditor to resolve.

b.Evaluate the explanations for variances provided by client personnel. List any alternative explanation to those given.

c.Indicate which variances are of special significance to the audit and how you believe they should be responded to in terms of additional audit procedures.

* There isn't any more info provided in the textbook this is the entire question.

Home Insert Page Layout Formulas Data ReviewView General Formatting as Table Styles ) Format Sort & Find & Filter Select Styles Vernal Manufacturing Co. Income Statement Accounts 12/31/16 Change Account 2/31/1 2/31/16 AmountPercent Explanations by Client $9.845.231 $1.377.919 16.3 Sales increase due to two new customers who (243.561 ) ( 178.666) 275.3 account for 20% of volume. Larger returns 43,200 (186.422) 431.3 d to need to cement relations with these $8.467.312 (64.895) 43,222 Sales returns and allowances Gain on sale of assets Interest income Miscellaneous income customers 6,365 8.452,247 300.3 1031,924 2.2 19.113 Trade-in of several sales cars that needed replacement. Cost of goods sold: Beginning inventory 1,389,034 3.430,865 65,782 (57.643) ,145.467 201.343 490.765 (98.632 6.6 866.41433.8 20.450 . 8,667-24.5 158,712 6. 1,487,666 2,564.45I 45.332 Increase in these accounts due to increased volume th new customers as indicated above. ases Purchase returns 986,755 97,652 478.659 es 2.106 ation Ending inventory 55.2 Inventory being held for new customers. 2.156.003) 4.639.2834824.169 (766.969) 84.880 ( 1.389.034) Selling, general, and administrative: 103 2,167 4.2 Normal salary increases. 167,459 32,32 95.675 9,888 56,845 30.878 34,880 38,221 4,657 36.55 3.644 15.607 Executive salaries Executive benefits Office salaries 74,562 98,540 1,890 18,738 25,802 9.7 an attempt to obtain new major customers. ts 75,583 156.680 42,334 21,554 8.756 67,822 4,522 15.607 33.0 Sales and promotional expenses increased in Travel and entertainment Advertising Other sales expense Sta 7.454 24 Two obtained and (16,667) -43.6 Probably a misclassification; will investigate. tionery and supplies 4.099 28.0 Normal increase. 31,27 85.6 Normal increase. Dues and memberships Rent 878 24.1 Normal increase. l fees 21306 50.5 Timing of billing for fees. 6,700 1,950 7 Normal increase. Accounting Depreciation, S Bad debt expense Insurance 69,500 143.871 45.702 (3.950 (22.583 5.4 Normal change. -13.6 Haven't reviewed yet for the current year 44,32 20.432 1,381 3. Normal change. 137,922 17,4904.5 Normal change. Other expense 28.762 23.307 427.3 Amount not material. ,087,592 5,726,875 2.725,372 .212.093 6.036.256011.4 3.447.915 1,020.600 309,381 722.543 26.5 Income before taxes Income taxes Net income 926,626 1.798,746 0. Increase due to increased income before tax. 2,427,3157.3740 628,569 34.9