In the audit of the Worldwide Wholesale Company, you did extensive ratio and trend analysis as part of preliminary audit planning. Your analytical procedures identified the following:
1. Commission expense as a percent of sales was constant for several years but has increased significantly in the current year. Commission rates have not changed.
2. The rate of inventory turnover has steadily decreased for three years. 3. Inventory as a percent of current assets has steadily increased for four years.
4. The number of days’ sales in accounts receivable has steadily increased for three years.
5. Allowance for uncollectible accounts as a percent of accounts receivable has steadily decreased for three years.
6. The absolute amounts of depreciation expense and depreciation expense as a percent of gross fixed assets are significantly smaller than in the preceding year.
Required:
a. Evaluate the potential significance of each of the changes in ratios or trends identified in your analysis on the fair presentation of financial statements.
b. State the follow-up procedures you would perform for each fluctuation to determine whether a material misstatement exists.
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