Question

Auditors sometimes use ratios as audit evidence. For example, an unexplained increase in the ratio of gross profit to sales may suggest which of the following possibilities?

A) Fictitious purchases.
B) Fictitious sales.
C) Selling and general expenses erroneously being recorded as merchandise purchases.
D) Unrecorded sales.

Answer 1

An unexplained increase in the gross profit to sales ratio may suggest fictitious sales, as it implies sales figures have increased disproportionately compared to the cost of goods sold.

Answer is b. Fictitious sales.

Step-by-step explanation:

When auditors use ratios as audit evidence, an unexplained increase in the ratio of gross profit to sales could indicate several possibilities. A plausible one is fictitious sales.

If sales are recorded without actual delivery of goods or services, the sales figure would be inflated, which in turn would increase the gross profit, assuming that cost of goods sold remains constant or does not increase proportionately. Therefore, this could lead to an abnormally high gross profit to sales ratio.

Correct answer is b. Fictitious sales.