ACCT 422 Solutions Auditing Theory and Practice Homework 6

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ACCT 422 6381 Auditing Theory and Practice (2158)

Homework # 6
Post homework assignment in HW#6 folder.

1. Distinguish between Cash and Cash Equivalents
2.
Cash is total amount of paper, coin money, checks , money orders etc which are available on demand while Cash Equivalents are highly liquid assets or investments which matures after 3 months.

3. The following are sales, cost of sales, and inventory data for a company, a wholesale distributor of car accessories. Dollar amounts are in millions.

Computation of Gross margin as a percentage of sales and Inventory turnover 2014 2013 2012 2011
Sales 102.8 92.8 88.4 79.6
Cost of sales 82.8 77.2 70.8 64.0
Beginning inventory 10.0 8.4 8.6 7.2
Ending inventory 12.6 10.2 9.4 8.6
Gross margin as a percentage of sales 19.46% 16.81% 19.91% 19.60%
Inventory turnover 1.832 2.075 1.967 2.025
.

Gross Margin (%) = Revenue – Cost of Goods Sold Revenue

Inventory turnover = Cost of goods sold Average inventory

a. List several logical causes of the changes in the two ratios.

Logical causes for changes in inventory turnover:-

• Low sales
• Overstocking
• Outdated merchandise
• Demand
• Poor sales methods

Logical causes for Gross Margin:-

• Production costs
• Selling price
• Cost of sales
• Expenses
• Inflation
• Quality improvements or reduction
b. Assume that $2,500,000 is considered material for audit planning purposes for 2014. Do any of the fluctuations in the computed ratios indicate a possible material misstatement? Use a spreadsheet to show how you reach your conclusion.

Classification Amount Rate Material amount
Revenue 102,800,000 1% 102,800,000 $2,500,000
Profit before tax 200,000,000