Reference no: EM131337550

Analytical Procedures

 

In a 2-3 page paper, complete the case below and submit to instructor. Review the income statement for Uden Supply Company and answer the following:

 

1. Describe the purpose of analytical procedures performed in the planning stage of the audit.

 

2. Uden Supply has projected its 2004 gross profit at 31% of sales despite expectation for some shrinkage in margins. On the basis of Uden's operating performance in years 2001 - 2003 project your best guess for 2004. Project 2004 based on the incremental changes for each line item over the last three years.

 

3. Uden's unaudited financial statements for the current year show a 31 percent gross profit rate. Assuming that this represents a misstatement from the amount that you developed as an expectation, calculate the estimated effect of this misstatement on net income before taxes for 20X4.

 

4. Indicate whether you believe that the difference calculated in part (c) is material. Explain your answer. (50-100 words).

 

Comparative income statement information for Uden Supply Company is presented in the accompanying table.

 

DEN SUPPLY COMPANY Comparative Income Statement Years Ended December 20X1, 20X2, and 20X3 (Thousands)
		20X1 Audited	20X2 Audited	20X3 Audited	20X4 Expected
Sales		8,700	9,400	10,100
Cost of goods sold		6,000	6,500	7,000
Gross profit		2,700	2,900	3,100
Sales Commissions		610	660	710
Advertising		175	190	202
Salaries		1,061	1,082	1,103
Payroll taxes		184	192	199
Employee benefits		167	174	181
Rent		60	61	62
Depreciation		60	63	66
Supplies		26	28	30
Utilities		21	22	23
Legal and accounting		34	37	40
Miscellaneous		12	13	14
Interest expense		210	228	240
Net income before taxes		80	150	230
Incomes taxes		18	33	50
Net income		62	117	180