Andy Watson, CPA, is a senior auditor on the audit of Carlson, Inc. Andy is reviewing the results of analytical procedures related to inventory. For results (a), (b), and (c), select the explanation that is most likely to be consistent with the change described. Explanations may Be used once, more than once, or not at all.
(1) Inventory increased as of year-end.
(2) Debt outstanding increased.
(3) A larger percentage of sales occurred during the last month of 20X8, as compared to
20X7.
(4) Interest expense increased during 20X8 due to the acquisition of new debt.
(5) The percentage tax included in the provision for income taxes for 20X8 is less than the percentage used in 20X7.
(6) Increases in costs of purchases were not completely passed on to customers through higher selling prices.
(7) Owners’ equity increased due to retention of profits.
(8) Interest expense increased during 20X8.
(9) A significant amount of long-term debt became current at the end of 20X8.
a. Inventory turnover (as measured by cost of goods sold/ending inventory) went from 7.95 in 20X7 to 10.52 in 20X8. Which of the explanations is consistent with the change in inventory turnover?
b. Net income increased in 20X8. Which of the explanations is most consistent with the changes in net income?
c. The gross profit percentage (gross profit/revenue) changed from .166 in 20X7 to .154 in 20X8. Which of the explanations is consistent with the change in gross profit percentage? Note: Section (d) is possible to work in a meaningful way only if you have the AICPA professional standards available—preferably in electronic form.
d. Auditors ordinarily should observe the counting of inventories that are on hand. Use the professional standards to find this requirement and the related guidance. Provide the AICPA AU section that includes the guidance.