The following are sales, cost of sales, and inventory data for Aladdin Products Supply Company, a wholesale distributor of cleaning supplies. Dollar amounts are in millions.
In-class
Discussion
Required
Required
726Part 4 / APPLICATION OF THE AUDIT PROCESS TO OTHER CYCLES
2019 2018 2017 2016
Sales $92.8 $86.8 $78.4 $69.6
Cost of sales 68.9 67.2 60.8 54.0
Beginning inventory 9.2 8.4 7.6 6.0
Ending inventory 11.2 9.2 8.4 7.6
a. Use a spreadsheet to calculate the following ratios:
(1) Gross margin as a percentage of sales
(2) Inventory turnover
b. List several logical causes of the changes in the two ratios.
c. Assume that $1,800,000 is considered material for audit planning purposes for
2019. Do any of the fluctuations in the computed ratios indicate a possible material
misstatement? Demonstrate this by using the spreadsheet program to perform a
sensitivity analysis.
d. What should the auditor do to determine the actual cause of the changes?