Analytical Procedures in Planning Homework

Comparing financial ratios between years can be a form of analytical procedures.

Li Chen, a CPA, has calculated profitability ratios using data extracted from his client's pre$-$audit

trial balance. He also has the values for the same ratios for the preceding two years:

Li is a little confused because the profit margin shows declining profitability, but the gross profit

margin has improved in the current year and is higher in $2023$ than in the previous two years.

Create a list $($bullet points are fine$)$ of possible explanation for the pattern observed in

the gross profit and profit margins

Which of your explanations suggest additional audit work should be planned. For each,

discuss the accounts and$/$or transactions that would need special attention in the audit. Please give as much detail as possible.