Li was assigned to work on the audit of A1 Clothing Ltd., because she has been auditing similar companies for three years and is considered to be knowledgeable about the clothing retailing industry in Canada. Her employer, Bing PAs, audited A1 in 20X5 for the first time and had difficulty verifying the opening inventory number. This year, in 20X6, Li has the audited ending balance from 20X5, so she does not expect any problems with the inventory account. However, while doing the preliminary work for the audit, she calculated the gross profit margin and was surprised by her findings. Li thinks the gross margin may indicate that the ending inventory for 20X0 may be incorrect.

Required
Explain whether you agree with Li. Support your answer with at least three points.

Transcribed Image Text:

Sales of clothing Cost of goods sold Inventory 20x5 $10,000,000 7,000,000 1,800,000 20X6 $9,000,000 5,500,000 6,200,000