Your comparison of the gross margin percentage for Jones Drugs Ltd for the years 20X1 to 20X4 indicates a significant decline. This is shown by the following information:

A discussion with Marilyn Adams, the financial controller, brings to light two possible explanations. 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. 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 chemists prevents it from expanding as fast as non-drug items such as magazines, candy, and many other items sold. Adams feels strongly that these two factors are the cause of the decline.
The following additional information is obtained from independent sources and the client's records as a means of investigating the financial controller's explanations:

REQUIRED
a. Evaluate the explanation provided by Adams. Show calculations to support your conclusions.
b. Which specific aspects of the client's financial statements require intensive investigation in this audit?

Sales (thousands) CGS (thousands) Gross margin Percentage 20X4 $14 211 9 223 $4 988 35.1 20X3 $12 916 8 266 $4 650 36.0 20X2 $11 462 7313 $4 149 36.2 20X1 $10 351 6 573 S3 778 36.5 Industry gross profit percentage for retailers of drugs and related products Non-drug Drug sales Non-drug sales Drug cost of cost of goods sold goods sold 20X4 20X3 20X2 20X1 $5126 5051 4821 4619 $9085 7865 6641 5732 $3045 2919 2791 2665 $6178 5347 4522 3908 32.7 32.9 33.0 33.2