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Question: marilyn terrill is the senior auditor for the audit of...

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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 10 percent. The average outstanding balance of the line of credit is $2,350,000. 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 $ 8,000 $ 8,900 $ 9,800
  Cost of goods sold 5,200 6,230 6,958
  Gross profit 2,800 2,670 2,842
  Sales commissions 620 445 490
  Advertising 180 89 98
  Salaries 1,066 1,082 1,098
  Payroll taxes 186 190 194
  Employee benefits 170 173 176
  Rent 62 64 66
  Depreciation 63   67 71
  Supplies 28 31 34
  Utilities 23 25 27
  Legal and accounting 37 41 45
  Miscellaneous 13 15 17
  Interest expense 215 233 245
  Net income before taxes 137 215 281
  Income taxes 31 47 61
  Net income $ 106 $ 168 $ 220
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