Case 2 You are comparing the gross margin percent for Jones Drugs Inc. for the years 2015-2018. The comparison indicates a significant decline as shown by the following information: Jones Drugs Inc. 2018 2017 2016 2015 Sales (thousands) $ 14,211 $ 12,916 $ 11,462 $ 10,351 CGS (thousands) $ 9,223 $ 8,266 $ 7,313 $ 6,573 Gross Margin Percent $ 4,988 $ 4,650 $ 4,149 $ 3,778 35.1% 36.0% 36.2% 36.5% A discussion with Nandini Sharma, the controller, brings to light two possible explanations: a. She informs you that the industry gross profit percentage in the retail drug industry declined fairly steadily for three years, which accounts for part of the decline. b. A second factor was the declining percentage of the total volume resulting from the pharmacy part of the business. The pharmacy sales represent the most profitable portion of the business, yet the competition from discount drugstores prevents it from expanding as fast as the nondrug items such as magazines, candy, and many other items. Sharma feels strongly that these two factors are the causes of the decline. The following additional information is obtained from independent sources and the client's records as a means of investigating the controller's explanation: Industry Gross Profit Percent for Retailers of Drugs Drug Cost of 2018 Drug Sales $ Nondrug Sales Goods Sold Nondrug Cost of and Related Goods Sold Products 5,126 $ 9,085 $ 3,045 $ 6,178 32.70% 2017 5,051 7,865 2,919 5,347 32.90% 2016 4,821 6,641 2,791 4,522 33.00% 2015 4,619 5,732 1,665 3,908 33.20% Required: a. Evaluate the explanation provided by Sharma. Show calculations to support your conclusions. b. Which specific aspects of the client's financial statements require intensive investigation in the audit?