Академический Документы
Профессиональный Документы
Культура Документы
Answer :
Required :
a. Using the information given, develop an expectation for the reserve for
returns account. Because the rate of return varies based on the time that
has passed since the date of sale, do not use an average historical return
rate.
b. Determine a tolerable difference for your analytical procedure.
c. Compare your expectation to the book value and determine if it greater
than tolerable difference.
d. Independent of your answer to part C, what procedures should the
auditor perform if the difference between the expectation and the book
value is greater than tolarable difference?
Month Monthly Historical Estimated
Sales Return Rate Returns
(€000s)
$€
July 73,300,000 0.004 293,200
August 82,200,000 0.005 496,800
September 93,500,000 0.010 935,000
October 110,200,000 0.015 1653,000
November 158,200,000 0.025 3,955,000
December 202,500,000 0.032 6,480,000
13,813,000
Gross x 0.425
Margin %
Auditor $€5,870,525
expectation
B. We can establish a tolerable difference by applying a
percentage (50-75%) to the planning materiality set for
EarthWear of €1,769,000. This results in a tolerable difference
of €885,000.
C. The expectation of €5,870,525 is approximately €20,000 less
the book value of €5,890,000. Since this amount is less than the
tolerable difference of €885,000, the analytical procedure
supports the fair presentation of the reserve for returns
account.
D. If the difference between the auditor’s expectation and the
book value is greater than the tolerable misstatement, the
auditor should consider performing the following audit
procedures:
• Review the general journal and general ledger for any
unusual entries.
• Re-evaluate the historical return rates.
• Re-evaluate the gross profit margin.
• Ask the client to adjust the books.
Arthur, independet auditor, is auditing The Home
Improvement Store as of of 31 December 2010. as with
all audit engagements, Arthur’s initial procedures are
to analyse the client’s financial data by reviewing
trends in significant ratios and comparing the
company’s performance with the industry so that he
better understands the business and can determine
where to concentrate his audit efforts. As part of
Arthur’s audit of The Home Improvement Store, he
performed analytical procedures by calculating the
following ratios and obtaining related industry data.
The Home Improvement Store Industry
2006 2007 2008 2009 2010 2006 2007 2008 2009 2010
Quick 0.67 0.73 1.38 0.45 0.29 0.79 0.81 0.87 0.91 1.08
Ratio
Days of 62.73 75.15 82.40 84.02 80.52 82.26 79.89 86.86 84.13 75.04
Inventory
on Hand
Inventory/ 53.48% 45.51% 48.42 62.28 80.81 58.04% 56.44% 60.19% 60.92% 50.33%
current % % %
asset
Return on 16.10% 9.75% 5.70% 2.16% 6.05% 6.98% 8.87% 7.05% 5.06% 11.73%
asset
Debt to 0.02 0.07 0.47 2.36 0.72 0.44 0.31 0.56 0.53 0.57
Equity
Require :
Comapre The Home Improvement Store’s ratios with those of its
industry. You may want to reference Advanced Module 1 in this
chapter for more information regarding the ratios used in the
analytical procedure. For each ratio provided in the table above :
a. Indicate the potential risks the ratio and/or historical patterns
may present
b. Indicate one or two plausible explanations for why The Home
Improvement Store’s ratios historical patterns differ from those
of the industry.
Total The Home Industry
Improvement Store
Quick ratio 3.52 4.46
Days of Inventory on 384.82 408.18
Hand
Inventory/current asset 290.5 285.92
Return on asset 39.76 39.69
Debt to Equity 3.64 2.41
a. Quick ratio = home improvement store has higher risk than the
industry
days of inventory on hand = the industry has higher risk than
home improvement store
inventory/current asset = the home improvement store have
higher current asset than industry
return on asset = profitability in home improvement store is
higher than industry.
Debt Ratio = home improvement store have higher risk,
because they have higher debt pressure than industry.
Reasons :
Industry have higher quantity of liquid
asset
Industry have high production amount
Home improvement store need more loan
than industry, because industry can fulfill
their funding from investor.