Question

One type of Analytical Review involves comparing unaudited numbers and ratios based on What is the purpose of Analytical Review in the Preliminary Phase of an audit? numbens 2. In class we talked about two situations, related to auditor expectations, which the auditor would possibly investigate. Briefly present each situation. 3. Consider the following case. Assume that sales are made evenly through the year; accounts receivable are collected one month after sale. Gross profit to sales has been .40. Sales in year 1 are $1,200,000; actual sales increase 10% from year 1 to year 2. Accounts receivable turnover for year 1 was 12.0. Relationships between accounts for year 2 are expected to be similar to those of year 1. A comparison between year 1 and unaudited year 2 data is as follows: Year 1 Year 2 (unaudited) Sales Cost of Goods Sold $1,200,000 720,000 Accounts Receivable (end of year) 100,000 Can be determined 792,000 (amount seems all right) Can be determined Note: At the beginning of year 1, accounts receivable were $100,000. Unaudited data for year 2 indicate the following: Accounts receivable turnover is 8.166666 Gross profit to sales is 4612244 Determine if there seems to be a discrepancy for unaudited Sales for year 2 and Accounts Receivable at the end of year 2. If so, indicate whether it seems a possible overstatement or understatement, and estimate an amount. BRIEFLY DISCUSS AND SHOW CALCULATIONS Estimate of Year 2 Recorded Sales, (unaudited] (Discuss briefly) Estimate of year 2 Actual Sales [Based on your "audit"] Expected discrepancy Discuss briefly) Recorded sales-Actual sales

Answer 1

Please find the detailed answer as follows:

Step-by-step explanation:

1. Preliminary analytical review is performed to gain the understanding of business and enviornment. Purpose of analytical review in preliminary phase of audit is that if auditor finds a huge difference with previous year figure, then auditor examine deeply. If amounts/ratios are similar to previous year then auditor can check randomly.

2. There are two possible situations. One is analytical test and another is substantive test. Examine with ratos and accounting tools is analytical test and detail study is called substantive test. In substantive test auditor collect the detail evidences.

3. Estimated sales of year 2 is $1.200.000+10%= $1.320.000 (Increase 10% from previous year sales) .

Actual sales = COGS*100/53.87756

792.000*100/53.87756= $1470000

Expected discrepency = recorded sales- actual sales

1.320.000-1.470.000= -$150.000

Account recievable turnover ratio = Credit sales/Average recievable

8.16666=1.470.000/Average receivable

Average recievable = $180.000

Average recievable = opening recivable + closing recievable/2

180.000 = 100.000+ closing receivable/2

closing receivable = $260.000

Unaudited account recievable = 1.320.000/12= $110.000

Discrepency in account recievable = 110.000-260.000= $150.000

There is under statement because acyual sales is greater than estimated sales.