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.

Required:

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?

Transcribed Image Text:

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 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