Question: Early in your first audit of Star Corporation you notice

Early in your first audit of Star Corporation, you notice that sales and year-end inventory are almost unchanged from the prior year. However, cost of goods sold is less than in the preceding year, and accounts payable also are down substantially. Gross profit has increased, but this increase has not carried through to net income because of increased executive salaries. Management informs you that sales prices and purchase prices have not changed significantly during the past year, and there have been no changes in the product line. Star Corporation relies on the periodic inventory system. Your initial impression of internal control is that several weaknesses may exist.
Suggest a possible explanation for the trends described, especially the decrease in accounts payable while sales and inventory were constant and gross profit increased. Explain fully the relationships involved.

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  • CreatedOctober 27, 2014
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