Lesley Stopps, a public accountant, is the auditor for Great Western Lumber Company Ltd., a wholesale wood milling company. Lesley calculated the gross margin for three product lines and compared it to industry information (summarized in the table below)! 

In discussing the results, the controller told Lesley that Great Western has always had a higher gross margin on hardwood products than the industry because it focuses on the markets where it is able to sell at higher prices instead of emphasizing volume. The opposite is true of plywood where it has a reasonably small number of customers, each of which demands lower prices because of high volume. The controller also told Lesley that competitive forces have caused reductions in plywood gross margin for both the industry and Great Western in 2018 and 2017. Great Western has traditionally had a somewhat lower gross margin for softwood than the industry until 2017, when the gross margin went up significantly due to aggressive selling.

Lesley had researched the industry and found that hardwood gross margin was stable and approximately 3.5–4 percent lower than Great Western’s every year. Industry gross margin for plywood has declined annually but is about 10 percentage points higher than Great Western’s. Industry gross margin for softwood has been stable for the three years, but Great Western’s has increased by a fairly large amount.

REQUIRED

a)Based upon the changes in gross margins, which product sales could be potentially misstated? What calculation helps to quantify the risk of material misstatement? 

b)Identify the potential causes of the change in gross margin.

c)How would potential over- or understatements discussed in part (b) affect the audit process?

d)What additional steps or procedures should Lesley perform to corroborate what the controller has told her (aside from researching the industry)?

Transcribed Image Text:

Great Western and Industry Gross Margins 2018 Gross Margin % 2017 Gross Margin % 2016 Gross Margin % Great Western Industry Great Western Industry Great Western Industry Hardwood 36.3 32.4 36.4 32.5 36.0 32.3 Softwood 23.9 22.0 20.3 22.1 20.5 22.3 Plywood 40.3 50.1 44.2 54.3 45.4 55.6 Great Western and Industry Gross Margins 2018 Gross Margin % 2017 Gross Margin % 2016 Gross Margin % Great Western Industry Great Western Industry Great Western Industry Hardwood 36.3 32.4 36.4 32.5 36.0 32.3 Softwood 23.9 22.0 20.3 22.1 20.5 22.3 Plywood 40.3 50.1 44.2 54.3 45.4 55.6

Answer rating: 100% (QA)

a The difference between the industry and Great Western gross margin for softwood is inconsistent compared to Plywood and Hardwood This indicates misstatements as the demand for softwood in the indust... View the full answer