You are performing an audit of the financial statements of the Josh Music Co. as of December 31, Year 1. Given your experience auditing this company in previous years, you have developed an expectation relative to each financial statement account for current-year activity. Based upon your review of preliminary financial statements, the actual results differ from your expectation for certain accounts and the CFO has provided an explanation for the difference. For the expectations, results, and subsequent client explanations in the table below, click on the cell in column D and select from the option list provided the appropriate audit response for each situation. An option may be used once, more than once, or not at all. Auditor expectation 1. Gross profit was 2% in the prior year; similar profit expected in Year 1. 2. Increase in interest expense due to increase in debt. 3. Property, plant, and equipment acquisitions generally do not fluctuate from year to year. 4. Shipping January orders in December is a common industry practice. 5. The industry historically has few losses on retired assets. Actual result Client explanation Audit response Sold more expensive E Gross profit was 12% products with a in Year 1. Interest expense stayed the same. Property, plant, and equipment acquisitions decreased higher gross margin during the year. Debt was refinanced during the year. No changes were made to property, plant, and equipment significantly from the acquisition practices. previous year. Sales have grown in each of the last 3 years. Increased marketing efforts have positively influenced sales. There have been excessive recurring losses on assets retired. Losses were due to increased asset usage. Review repairs and maintenance accounts for proper classifications. Review sales returns subsequent to year end. Review depreciation policies. III Select an option below Account for all inventory tags and count sheets. Calculate inventory turnover rates. Discuss the adequacy of the allowance for credit losses with management. Examine cash receipts subsequent to year end. Examine new debt agreement. Select an option below Obtain current interest rates from independent pricing source. Obtain new debt agreement. Review bank confirmations. Review depreciation policies. Review insurance coverage on assets. Review loan agreements for liens and restrictions on property, plant, and equipment. Review repairs and maintenance accounts for proper classifications. Review sales and related product cost data. Review sales returns subsequent to year end. Review the cutoff of receivables around year end. Select an option below Review sales and related product cost data. Review sales returns subsequent to year end. Review the cutoff of receivables around year end. Select items of equipment from the accounting records and then locate them during the plant tour. Test the pricing of inventory.