Select the preliminary analytical procedure that would be most effective in iden

Question

Select the preliminary analytical procedure that would be most effective in identifying potential misstatements for a multi-location retail client. a. Inventory per square foot of retail space (for retail clients; and comparisons should be made across locations in stores of comparable size and product mix to test for unexpected differences) b. Number of days’ sales in inventory (365/inventory turnover) c. Gross margin analysis d. Shrinkage ratio (inventory write-down/ending inventory) e. Inventory turnover (cost of goods sold/ending inventory)

Explanation / Answer

Ans (a) Analytical procedure for more effective in identifying potential misstatement for multi location retail client is a) Inventory per square foot of retail space. Inventory per square foot is same as sales per square foot ,its helps to identifying how much inventory in dollars is allocated to the gross or net selling footage within a store. b) Number of days sales in inventory helps to identify number of days sales that was held in inventory. c ) Gross margin is a profitability ratio helps to identify percentage markup on merchandise from its cost. d) Shrinkage ratio helps to identify inventory that is lost or stolen during an accounting period.It represent the difference between book value of inventory and actual physical inventory. e) Inventory Turnover ratio is an activity ratio helps to identify the liquidity of company's inventory.

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