- This topic has 1 reply, 2 voices, and was last updated 1 year ago by
.
- Posts
In the Magpie company CRQ, one of the audit risks is “profit margins.”
It reads:
The company’s operating profit margin has reduced from 4.6 % to 1.8 % and gross profit margin has increased from 44 % to 50 %.
There is a classification risk that costs may have been omitted from costs of sales or some direct costs have been included in overhead expenses incorrectly, meaning cost of sales is understated and operating costs overstated.
Figures given:
20X4 20X5
Sales 26m 22 m
cost of sales (14.5 m ) (10.9m)
gross profit 11.5 m 11.1 m
gross profit margin 44% 50%
operating expenses 10.3 m 10.7 m
operating profit 1.2m 0.4 m
operating profit margin 4.6% 1.8%
My question is this: Could it not be that the company simply incurred more operating expenses in 20X5 than it did in 20X4. Maybe because of hyperinflation or expansion or other reason….
How can we look at profit margins in this CRQ and arrive at the conclusion that there could be an ausit risk here… I dont understand.
When quoting a company name can you please also mention the exam session – so I don’t have to hunt around for it. e.g. here “(S/D22)” added to the subject line would be perfect.
OK … so analytical procedures (including ratio calculations) are required as a risk assessment procedure (see s.3.2 in Ch8 of our notes c. page 52/53). Yes there should be “valid” reasons for changes, but the auditor’s “clean” opinion will be that the FS are free from material misstatement (whether due to fraud or error).
The auditor must therefore be able to identify where there is RoMM – and then respond to that risk (with “further audit procedures”) in order to conclude that, actually, there is no misstatement (e.g. anomalies have valid reasons).
Your suggestion for the increase in operating expenses could be valid – however, it does not explain why the GROSS profit % has increased.
You may also find this post useful https://opentuition.com/topic/completeness-test-of-inventory
- You must be logged in to reply to this topic.