analytical procedures audit

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:

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

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

3. 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.

4. Based on a review of the general ledger, she determined that average depreciable assets have increased by 10 percent.

5. 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 $2,300,000. This line of credit is the company’s only interest-bearing debt.

6. Based on her discussions with management and 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 accompanying table.

UDEN SUPPLY COMPANY Comparative Income Statements

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

Income taxes 18 33 50 Net income $ 62 $ 117 $ 180