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 3 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 4 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 $2,800,000. 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 below table. UDEN SUPPLY COMPANY Comparative Income Statements Years Ended December 20X1, 20X2, and 20X3 (Thousands) 20X1 Audited 20X2 Audited 20X3 Audited 20X4 Expected Sales $ 8,900 $ 9,800 $ 10,700 Cost of goods sold 5,785 6,860 7,597 Gross profit 3,115 2,940 3,103 Sales commissions 710 392 428 Advertising 225 98 107 Salaries 1,111 1,136 1,161 Payroll taxes 204 210 216 Employee benefits 197 202 207 Rent 80 82 84 Depreciation 90 94 98 Supplies 46 49 52 Utilities 41 43 45 Legal and accounting 64 68 72 Miscellaneous 22 24 26 Interest expense 260 278 290 Net income before taxes 65 264 317 Income taxes 15 58 69 Net income $ 50 $ 206 $ 248 Required: b. Determine the expected amounts for 20X4 for each of the income statement items. (Round gross profit ratio and income taxes ratio to nearest four decimal places. Round other ratios to nearest two decimal places. Round all other intermediate computations to the nearest whole value. Enter your answers in thousands.) c. Uden’s unaudited financial statements for the current year show a 34 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. (Round gross profit ratio and income taxes ratio to nearest four decimal places. Round other ratios to nearest two decimal places. Round all other intermediate computations to the nearest whole value. Enter your answers in thousands.)
20X1
Audited20X2 Audited20X3 Audited20X4
Expected Sales$ 8,900 $ 9,800 $ 10,700
Cost of goods sold5,785 6,860 7,597
Gross profit3,115 2,940 3,103
Sales commissions710 392 428
Advertising225 98 107
Salaries1,111 1,136 1,161
Payroll taxes204 210 216
Employee benefits197 202 207
Rent80 82 84
Depreciation90 94 98
Supplies46 49 52
Utilities41 43 45
Legal and accounting64 68 72
Miscellaneous22 24 26 I
nterest expense260 278 290
Net income before taxes65 264 317
Income taxes15 58 69
Net income$ 50 $ 206 $ 248