Question 1-Analytical Procedures You have been asked to review the gross margins for Mega Books Ltd for the years 2014 through 2017. You find there's been a significant decline during this time. Here are the numbers: 2017 2016 2015 2014 Sales ($1000) 47,175 44,039 37,073 35,035 Cost of Goods Sold ($'000) 30,314 27,998 23,431 22,072 Gross margin Percent 16,861 16,041 13,642 12,963 35.7% 36.4% 36.8% 37.0% Your discussion with Erick O'Neil, the financial controller, brings to light two possible explanations. He informs you that the industry gross profit percent in the retail book industry declined fairly steady for 3 years as more people purchase books online, which accounts for part of the decline. He also believes that online shopping and discount bookstores prevent the company from rapidly expanding its non-book items, such as magazines, candy, music, DVDs, and many other items sold. O'Neil feels strongly that these two factors are the cause of the decline. The following additional information is obtained from independent sources and the client's records as a means of investigating the controller's explanations: Book Sales Mega Books ($'000) Non-book Industry Gross Profit Percent for Retailers of Books and Related Products Sales Book Cost of Goods Sold Non-Book Cost of Goods Sold 2017 $21,500 $25,675 $13,169 17,145 39.8 2016 20,472 23,567 12,197 15,801 39.9 2015 17,851 19,222 10,543 12,888 40.0 2014 16,995 18,040 9,961 12,111 40.4 Required a) Evaluate the explanation provided by O'Neil. Show calculations to support your conclusions. (16 marks) b) Which specific aspects of the client's financial statements require intensive investigation in this audit? (4 marks) 1