Analytical Procedures
5.58. Marilyn Terrill is the senior auditor for the audit of Uden Supply Company for the year ended December 31, 2004. 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:
1. Based on economic conditions, she believes that the increase in sales for the current year should approximate the historical trend.
2. Based on her knowledge of industry trends, she believes that the gross profit for 20X4 should be about 2 percent less than the percentage for 20X3.
3. 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.
4. Based on a review of the general ledger, she determined that average depreciable assets have increased by 10 percent.
5. Based on her knowledge of economic conditions, she is aware that the effective interest rate On the company’s line of credit for20X4wasapproximately12percent. The average outstanding balance of the line of credit is $2,300,000. This line of credit is the company’s only interest-bearing debt.
6. Based on her discussions with management and her knowledge of the industry, she believes that the amount of other expenses should
. Review the income statement for Uden Supply Company and answer the following:
• Describe the purpose of analytical procedures performed in the planning stage of the audit.
• Uden Supply has projected its 2004 gross profit at 31% of sales despite expectation for some shrinkage in margins. On the basis of Uden's operating performance in years 2001 - 2003 project your best guess for 2004. Project 2004 based on the incremental changes for each line item over the last three years.
• Uden’s unaudited financial statements for the current year show a 31 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.
• Indicate whether you belive that the difference calculated in part (c) is material. Explain your answer.
Click here for the solution: Marilyn Terrill is the senior auditor for the audit of Uden Supply Company for the year ended December 31, 2004
