AP 4.6 ssessment Part Il You have access to the following information for the cl

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AP 4.6

ssessment Part Il You have access to the following information for the client: a. prior period financial statements b. anticipated results for the current year c. industry averages Required Discuss how you would use the information to understand your new client. AP4.6 (LO 2,3) has calculated profitability ratios using data extracted from his client's pre-audit trial balance. He also has Moderate Planning analytical procedures using profitability ratios Li Chen the values for the same ratios for the preceding two years (using audited figures). The data for the gross profit and profit margins are: Gross profit margin Profit margin 2022 45% 9% 2021 35% 15% 2020 40% 20% 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 2022 than in the previous two years. Required a. Create a list of possible explanations for the pattern observed in the gross profit and profit margins. b. 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. Bright Challenging Analytical procedures for liquidity and solvency issues AP4.7 (LO 2, 3) Spark Fashion has retail outlets in six large regional cities in the eastern United States. The shops are run by local managers but purchasing decisions for all stores are handled by Ray Bright, the owner of the business. Fashion is an extremely competitive business. Bright Spark Fashion sells only for cash and generates sales through a reputation of low prices for quality goods. The winter clothing moves quite slowly, but summer fashion sells very well, providing a disproportionate amount of the business's sale and profits. Ray is constantly monitoring cash flow and negotiating with suppliers about payment term Jenna Kowalski has the tasks of assessing the liquidity and solvency of Bright Spark Fashion a the audit risks arising from this aspect of the business. She discovers a major long-term debt months after the close of the financial year, but Ray is having difficulty obtaini and with banks about interest rates and extensions of credit. identifying

Explanation / Answer

(Accounting problem 4.6 )

Answer 1 :- list of possible explanation for increasing gross profit margin and declining profit margin :- a :- cost of goods sold is the main reason for the difference reason gross profit margin. Ratio.if the cost of goods sold is classified against the revenue expenses in the place cost of goods sold. b :- if there is any high expenses in advertising expenses then also difference is same. c :- Factory expenses are treated as operating expenses. d :- if the closing inventory is overstated then the difference is same. e :- if there is high financial cost and purchase cost is understated then also the difference is same.   

Answer 2 :- Additional audit work needs special audit. a :- Auditor should verify classification of expenses direct expenses and indirect expenses. b :- verify creditors with payment invoice, verify inventory movement. c :- Auditors should verify any excess amount of depreciation charged in the current year and is that consistent with the past years or not. d :- proper valuation of closing stock should be done.identify and valuing obsolete and damaged closing inventory. e :- correct cost of goods sold on sales invoices through to cost of goods sold account. verify supplier invoices to purchases account.

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