Question

Marilyn Terrill is the senior auditor for the audit of Uden Supply Company for the year ended December 31, 20X4. In planning the audit, Marilyn is attempting to develop expectations for planning analytical procedures based on the financial information for prior years and her knowledge of the business and the industry, including these: 1. Based on economic conditions, she believes that the increase in sales for the current year should approximate the historical trend. 2. Based on her knowledge of industry trends, she believes that the gross profit percentage for 20X4 should be about 2 percent less than the percentage for 20X3. 3. Based on her knowledge of regulations, she is aware that the effective tax rate for the company for 20X4 has been reduced by 5 percent from that in 20X3. 4. Based on a review of the general ledger, she determined that average depreciable assets have increased by 10 percent. Purchases of equipment occurred relatively evenly throughout the year. 5. Based on her knowledge of economic conditions, she is aware that the effective interest rate on the company's line of credit for 20X4 was approximately 12 percent. The average outstanding balance of the line of credit is $4,200,000. This line of credit is the company's only interest-bearing debt. 6. Based on her discussions with management the advertising and sales commission percentages are expected to stay the same. Based on her knowledge of the industry, she believes that the amount of other expenses should be consistent with the trends from prior years. Comparative income statement information for Uden Supply Company is presented in the below table. UDEN SUPPLY COMPANY Comparative Income Statements Years Ended December 20x1, 20x2, and 20X3 (Thousands) 20x120x2 20x320X4 Audited Audited Audited Expected Sales 14,400 15,900 17,400 Cost of goods sold 9,940 10,980 12,040 Gross profit 4,460 4,920 5,360 Sales commissions 1,010 1,110 1,220 Advertising 288 320 350 Salaries 1,156 1,196 1,236 Payroll taxes 203 215 Employee benefits 198 210 Rent 84 Depreciation Supplies Utilities Legal and accounting 58 Miscellaneous 36 Interest expense 438 468 Net income before 852 1,068 1,262 taxes Income taxes 192 240 284 Net income 660 828 978 227 79 84 ههه انا لما 456

Answer 1

Uden Supply Company
Comaprative Income Statement
Year ended December 20x4
(Thousands)
Particulars	Expected 20x4	Clarification to the amounts
Sales	19140	110 % of 2013 sales
Cost of Goods Sold	13589.4	Sales-Gross Profit
Gross profit	5550.6	29% of sales - last year GP Ratio - approx - 31%
sales commission	1339.8	7% of sales
Advertising	382.8	2% of sales
Salaries	1276	40000 increase from last year
Payroll taxes	239	12000 increase from last year
Employee benefits	222	12000 increase from last year
Rent	94	5000 increase from last year
Depreciation	103.4	expected + 10 % extra - (89+5)*110%
Supplies	60	5000 increase from last year
Utilities	55	5000 increase from last year
Legal Accounting	68	5000 increase from last year
Miscellaneous	46	5000 increase from last year
Interest expenses	504	(4200000*12%)
Net Income before taxes	1160.6	last year tax rate approx.23,so current year tax taken at 18%
Income taxes	208.908	18% on above(1160.6*18/100)
Net Income	951.692
Expected Mistatement	-344.52
Computation of expected misstatement
Expected gross profit for 20x4	5550.6
Gross profit @ 30.8 % as per uden unaudited financials	5895.12
Deviation	-344.52