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Hi Sir,
I read that for the assertion of completeness about year-end inventory one of the tests is to ‘compare the gross profit % to the previous year or industry data.’
I don’t understand how this test relates to completeness, can you please clarify?Gross profit = sales – cost of sales
Cost of sales = Opening inventory + Purchases – Closing inventory
So if closing inventory were not complete (understated) cost of sales would be too high and gross profit too low.
A reduction in the GP% might therefore indicate that closing inventory was not complete. Conversely, an increase in GP% might indicate that closing inventory was overstated.
Analytical procedures can give very powerful clues about material misstatements.
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