Q2
Required

a. Based on the information provided, do you expect the gross margin as a percent of sales and inventory turnover to remain consistent with prior years, to increase, or to decrease? Explain your reasoning. (2 marks)

The gross margin is expected to stay in consistence with prior years despite the declining demanddue to incresed gasoline price and decreased cost of air travel. The managements decission to introduce 1000 dollar cash rebate may have caused an increase in sales. The company seems to operate better that average in the industry. The inventory turnover is below the industry average and this indicates that there is room to increase. The 2013 inventory ratio is lowest in comparison with prior years and needs to be ivestigated.It can be a result of inventory o verstatment. There is an unusually high inventory level with relatively the same level of sales and COGS.

b. Calculate the following ratios for each year and for the industry average, and indicate whether the results are consistent with your expectation. (5 marks)

i. Gross margin as a percentage of sales 2009- 30.5% , 2010- 30.4%, 2011- 30.5%, 2012- 30.7%, 2013- 0.32% Industry everage for 2012- 28.5%, Industry average for 2013- 24.9%

ii. Inventory turnover 2009- 9.1, 2010- 9.3, 2011- 9.3, 2012- 9.1, 2013- 6 Industry average for 2012- 8.04, Industry average for 2013- 7.28 The results of calculations are cosistent with my expectation.

c. Suggest two possible reasons for any unexpected results. (1 mark). One reason of low inventory turover for 2013 ( 6 times)is overstated inventory account. Second reason may be increased price of the parts and material used in production.

d.Provide two examples of inquiries or substantive audit procedures that could be performed in response to the results of the analytical procedures performed. (2 marks)

1.Trace inventory purchase costs