You are the manager in the audit of Vernal Manufacturing Company and are turning your attention to the income statement accounts. The in-charge auditor assessed control risk for all cycles as low, supported by tests of controls. There are no major inherent risks affecting income and expense accounts. Accordingly, you decide that the major emphasis in auditing the income statement accounts will be to use analytical procedures. The client prepared a schedule of the key income statement accounts that compares the prior-year totals with the current year totals.
The in-charge auditor completed the last column of the audit schedule, which includes explanations of variances obtained from discussions with client personnel. The audit schedule is included below.

REQUIRED
a. Examine the schedule prepared by the client and your staff and write a memorandum to the in-charge that includes criticisms and concerns about the audit procedures performed and questions for the in-charge auditor to resolve.
b. Evaluate the explanations for variances provided by client personnel. List any alternative explanation to those given.
c. Indicate which variances are of special significance to the audit and how you believe they should be responded to in terms of additional audit procedures.

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Income Statement Accounts 12/31/15 Per G/L 12/31/15 Per G/L 12/31/14 Amount Percent s by Client S8 467 312 S9845 231S1 377 919 16.3 Sales increase due to two new customers who Sales returns and allowances Gain on sale of assets Interest income (243 561) (178 666) 275.3 account for 20% of volume. Larger retums 143 200) (186 422) -431.3 due to need to cement relations with these ( 43 222 19113 300.3 Trade-in of several sales cars that needed T452247- · 434 17T TUET 924-12.2 replacement. Cost of goods sold: Beginning inventory 1 487 666 1 p8632) 389 034 3430 865 65 782 57 643) 2 564 451 45 332 866 414 33.8 Increase in theee accounts due to increased 20 450 45.1 18 667 -24.5 volume with new customers as indicated above. Purchase retums Factory wages Factory benefits Factory overhead Factory depreciation Ending inventory 986 755 5 14467 158712 16.1 197 652 478 659 344 112 201 343 490 765 314 553 12 106 1 30 2892154 403 TBA 95U540Inventory being held for new Selling, general, and administrative: Executive salaries Executive benefits Office salaries Office benefits Travel and entertainment 167 459 174 562 34 488 98 540 7 103 4.2 Nomal salary increases. 95 675 19 888 56 845 130 878 34 880 2865 3.0 75 583 156 680 42 334 21 554 18 756 67 822 18 738 25 802 33.0 19.7 Sales and promotional expenses increased in an attempt to obtain new major customers. Other sales expense 7454 21.4 Two obtained and program will continue. (16 667)-43.6 Probably a misclassification; will investigate. 14 657 36 551 4 099 28.0 Normal increase. 31 271 85.6 Normal increase. Dues and memberships Legal fees Depreciation, SG&A 878 24.1 Normal increase. 15 607 14154 16 700 73 450 166 454 15 607 35 460 18 650 69 500 21 306 150.5 Timing of billing for fees 1 950 11.7 Normal increase. 3 950) -54 Normal change. Bad debt expense (22 583-13.6 Haven't reviewed yet for the current year 45 702 137 922 Interest expense 120 432 7 490 14.5 Normal change. 23 307 427.3 Amount not material. 124 50111.4 309 381 Other expense 2725 372 15 722 543 26.5 Income before taxes Income taxes Net income 1 020 600 427 315 93 974 10.1 Increase due to increased income before tax. $1 798 74 628 569 34.9