Reference no: EM132736963

Question - Marilyn Terrill is the senior auditor for the audit of Uden Supply Company for the year ended December 31, 20X4. In planning the audit, Marilyn is attempting to develop expectations for planning analytical procedures based on the financial information for prior years and her knowledge of the business and the industry, including these:

Based on economic conditions, she believes that the increase in sales for the current year should approximate the historical trend.

Based on her knowledge of industry trends, she believes that the gross profit percentage for 20X4 should be about 2 percent less than the percentage for 20X3.

Based on her knowledge of regulations, she is aware that the effective tax rate for the company for 20X4 has been reduced by 5 percent from that in 20X3.

Based on a review of the general ledger, she determined that average depreciable assets have increased by 10 percent. Purchases of equipment occurred relatively evenly throughout the year.

Based on her knowledge of economic conditions, she is aware that the effective interest rate on the company's line of credit for 20X4 was approximately 12 percent. The average outstanding balance of the line of credit is $3,800,000. This line of credit is the company's only interest-bearing debt.

Based on her discussions with management the advertising and sales commission percentages are expected to stay the same. Based on her knowledge of the industry, she believes that the amount of other expenses should be consistent with the trends from prior years.

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

UDEN SUPPLY COMPANY Comparative Income Statements Years Ended December 20X1, 20X2, and 20X3 (Thousands)

	20X1 Audited	20X2 Audited	20X3 Audited
Expected Sales	13,200	14,300	15,400
Cost of goods sold	9,110	9,880	10,660
Gross profit	4,090	4,420	4,740
Sales commissions	920	1,000	1,080
Advertising	264	290	310
Salaries	1,136	1,172	1,208
Payroll taxes	199	207	215
Employee benefits	182	190	198
Rent	75	76	77
Depreciation	75	76	77
Supplies	41	42	43
Utilities	36	37	38
Legal and accounting	49	50	51
Miscellaneous	27	28	29
Interest expense	390	408	420
Net income before taxes	696	844	994
Income taxes	157	190	224
Net income	539	654	770

Required -

a. Determine the expected amounts for 20X4 for each of the income statement items.

b. Uden's unaudited financial statements for the current year show a 30.78 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.