Review the income statement for Uden Supply Company and answer the following:

Break down the 20 x 4 expected results more, and display what figures are calculated to arrive at the expected result

a) Describe the purpose of analytical procedures performed in the planning stage of the audit.

b) Uden Supply has projected its 2004 gross profit at 31% of sales despite expectation for some shrinkage in margins. On the basis of Uden's operating performance in years 2001 - 2003 project your best guess for 2004. Project 2004 based on the incremental changes for each line item over the last three years.

c) Uden?s unaudited financial statements for the current year show a 31 percent gross profit rate. Assuming that this represents a misstatement from the amount that you developed as an expectation, calculate the estimated effect of this misstatement on net income before taxes for 20X4.

d) Indicate whether you belive that the difference calculated in part (c) is material. Explain your answer.

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UDEN SUPPLY COMPANY Comparative Income Statement Years Ended December 20X1, 20X2, and 20X3 (Thousands) Sales 20X1 Gross Profit Audited $8,700 Cost of goods sold $6,000 $2,700 20X2 Audited $9,400 $6,500 $2,900 20X3 Audited $10,100 $7000 $3,100 20X4 Expected ($10,100 + $700) $10,800 ($10,800* .6915) $7,468 ($10,800 - $7,468) $3,332 Sales Commissions $610 Advertising Salaries Payroll taxes Rent $175 Depreciation $1,061 Employee benefits $167 $184 $60 $60 $660 $190 $1,082 $192 $174 $61 $63 $710 $202 $1,103 $199 $181 $62 $66 ($10,800 * .07) $756 ($10,800.02) $216 ($1,103 + $21) $1,124 ($199 + $8) $207 ($181 + $7) $188 ($62 +$1) $63 (66 +$3) $69 Supplies Utilities Legal and accounting Miscellaneous Interest expense Total expenses Net income Before taxes $26 $21 $34 $12 $210 $80 $28 $22 $37 $13 $228 $150 $30 $23 $40 $14 $240 $230 ($30 + $2) $32 ($23 +$1) $24 ($40 +$3) $43 ($14 +$1) $15 ($240 + $12) $252 $2,989 $343 Total expenses Net income Before taxes Income taxes Net income $80 $18 $62 $150 $33 $117 $230 $50 $180 $2,989 $343 ($354* .22) $75 $268 UDEN SUPPLY COMPANY Comparative Income Statement Years Ended December 20X1, 20X2, and 20X3 (Thousands) Sales 20X1 Gross Profit Audited $8,700 Cost of goods sold $6,000 $2,700 20X2 Audited $9,400 $6,500 $2,900 20X3 Audited $10,100 $7000 $3,100 20X4 Expected ($10,100 + $700) $10,800 ($10,800* .6915) $7,468 ($10,800 - $7,468) $3,332 Sales Commissions $610 Advertising Salaries Payroll taxes Rent $175 Depreciation $1,061 Employee benefits $167 $184 $60 $60 $660 $190 $1,082 $192 $174 $61 $63 $710 $202 $1,103 $199 $181 $62 $66 ($10,800 * .07) $756 ($10,800.02) $216 ($1,103 + $21) $1,124 ($199 + $8) $207 ($181 + $7) $188 ($62 +$1) $63 (66 +$3) $69 Supplies Utilities Legal and accounting Miscellaneous Interest expense Total expenses Net income Before taxes $26 $21 $34 $12 $210 $80 $28 $22 $37 $13 $228 $150 $30 $23 $40 $14 $240 $230 ($30 + $2) $32 ($23 +$1) $24 ($40 +$3) $43 ($14 +$1) $15 ($240 + $12) $252 $2,989 $343 Total expenses Net income Before taxes Income taxes Net income $80 $18 $62 $150 $33 $117 $230 $50 $180 $2,989 $343 ($354* .22) $75 $268

Answer rating: 100% (QA)

A Analytical procedures performed at the planning stage are designed to help the auditors identify u... View the full answer