Reference no: EM133007619

Question - Ganga Smith 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).

The data for the gross profit and profit margins ratios are as follows:

Account	2018	2017	2016
Gross Profit Margin	0.40	0.30	0.35
Profit Margin	0.09	0.15	0.18

Ganga Smith 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 2018 than in the previous two years.

Required -

(a) Explain the difference between (i) Gross Profit and Profit Margin.

(b) Make a list of possible explanations for the pattern observed in the gross profit and profit margins.

(c) Which of your explanations suggest additional audit work should be planned? For each, explain the accounts and/or transactions that would need special attention in the audit.