In the audit of the Worldwide Wholesale Company, you did extensive ratio and trend analysis. No material exceptions were discovered except for the following:
1. Commission expense as a percent of sales has stayed constant for several years but has increased significantly in the current year. Commission rates have not changed.
2. The rate of inventory turnover has steadily decreased for 4 years.
3. Inventory as a percent of current assets has steadily increased for 4 years.
4. The number of days' sales in accounts receivable has steadily increased for 3 years.
5. Allowance for uncollectible accounts as a percent of accounts receivable has steadily decreased for 3 years.
6. The absolute amounts of depreciation expense and depreciation expense as a percent of gross fixed assets are significantly smaller than in the preceding year.
a. Evaluate the potential significance of each of the exceptions just listed for the fair presentation of financial statements.
b. State the follow-up procedures you would use to determine the possibility of material misstatements.