While performing analytical procedures as part of her audit of
While performing analytical procedures as part of her audit of the revenue and expense accounts at Galloway Inc., PA notes that Galloway’s sales revenues in the current year have increased by 20% over the prior year. Galloway manufactures and sells business forms and has seen declining sales over the past few years as its customers have been changing to paperless, online process methods. In fact, in the prior year’s audit there was concern about Galloway’s ability to meet its long-term debt covenants which require at least a 2:1 current ratio and pre-tax earnings that are at least 10 times long-term debt interest charges. To meet these debt covenant restrictions, no bonuses were paid to management in the prior year. When PA discussed the current year sales figures with the sales manager, he informed her that Galloway had increased its prices by 50% in the third quarter of the current year, to offset the lower sales volumes. Management had determined that Galloway’s remaining customers were restricted to using paper-based documentation for various business reasons and thus would accept higher prices. During this interview, the chief accountant was passing by and, overhearing the topic, made the following comments: “Note that accounts receivable balance is also much higher than last year, which is totally consistent with the higher sales. This should tie together your analysis, so your audit work on sales and AR must now be complete. We are looking forward to having our boardroom back when you auditors finally finish the job and leave!”

Discuss the nature and the persuasiveness of the audit evidence PA is gathering in the above scenario. What additional evidence would you recommend she obtain to support her conclusion on the sales revenue figure? How would you recommend this audit work be documented in the audit files?

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