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:
- Describe the purpose of analytical procedures performed in the planning stage of the audit.
- 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.
- 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.
- Indicate whether you belive 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.
|
UDEN SUPPLY COMPANY
|
|
Comparative Income Statement
|
|
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
|
|
|
Incomes taxes
|
18
|
33
|
50
|
|
|
Net income
|
62
|
117
|
180
|
|