Audit Planning: Ratio Analysis Li Chen has calculated profitability ratios using
ID: 2568930 • Letter: A
Question
Audit Planning: Ratio Analysis
Li Chen has calculated profitability ratios using data extracted from his client's pre-audit trial balance. He also has the values for the same ratios for the preceding two years (using audited figures).
Ratio
2016
2015
2014
Gross profit margin
0.45
0.35
0.40
Profit margin
0.09
0.15
0.20
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 2016 than in the previous two years.
Required
What are some possible explanations for the patterns observed in the gross profit and profit margins over the past three years?
Based on these possible explanations, which accounts may require special attention in this year’s audit? Explain.
Ratio
2016
2015
2014
Gross profit margin
0.45
0.35
0.40
Profit margin
0.09
0.15
0.20
Explanation / Answer
Answer =1)
There are variaous reason for the decline in the profit margin ratio.
Answer = 2)
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.