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.
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DEN SUPPLY COMPANY
Comparative Income Statement
Years Ended December 20X1, 20X2, and 20X3
(Thousands)
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|
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20X1 Audited
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20X2 Audited
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20X3 Audited
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20X4 Expected
|
|
Sales
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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
|
|
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Interest expense
|
210
|
228
|
240
|
|
|
Net income before taxes
|
80
|
150
|
230
|
|
|
Incomes taxes
|
18
|
33
|
50
|
|
|
Net income
|
62
|
117
|
180
|
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