Final Analytical Procedures and Disclosures When auditing Global Alliance Industries, Inc, the auditor performed extensive analytical procedures and found the following: (a) The commission expenses as a percentage of sales has stayed constant for
several years, but has increased significantly in the current year. However, commission rates have not changed. (b) The rate of inventory turnover has steadily decreased for the past four years. (c) The inventory as a percentage of current assets has steadily increased for the past four years. (d) The number of days' sales in accounts receivable has steadily increased for three years. (e) The allowance for uncollectible accounts as a percentage of accounts receivable has steadily decreased for three years. (f) The absolute amounts of depreciation expense and depreciation expense as a percentage of gross fixed assets are significantly smaller than in the preceding year. REQUIRED: (1) Evaluate the significance of not disclosing or adjusting these items, if material, in the fair presentation of financial statements. (2) When assessing disclosures, what criteria do auditors use?
(1)
a . The commission expense could be overstated during the current year or could have been understated during each of the past several years. It is also possible that sales may have been understated during the current year or could have been overstated in each of the past several years.
b. It is very possible that obsolete or unsalable inventory may be present and may require markdown to the lower of cost or market.
c. When this item is combined with the potential high likelihood that obsolete or unsalable inventory may be present, as mentioned previously, it make sense that inventory may have been maintained at a higher level than is necessary for the company.
d. The collection of accounts receivable appears to be a problem. It is very possible that an adjustment provision for uncollectible accounts may be necessary.
e. When combined with (d) above, the allowance for uncollectible accounts may be understated.
f. It is very likely that depreciation expenses may be understated for the year.
(2) When assessing disclosures, the auditor should have reasonable assurance that:
• Disclosed events and transactions have occurred and pertain to the entity
• All disclosures that should have been included are included
• The disclosures are understandable to users
• The information is disclosed accurately and at appropriate amounts
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