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Dear tutor,
I’m confused about an audit procedure to the assertion of accurate valuation. Why do we compare the gross profit margin to prior years rather than comparing cost of goods sold? Because I think cost of goods sold seems to be a more direct way of examing the cost valuation of the inventory. Thanks.
You can compare gross profit to either sales (gross margin) or to cost of sales (mark-up). Once one is fixed the other is. So a markup of 25% means that the GP% must be 20
Cost Profit Selling prices
100 + 25 = 125Markup = 25%; Gross margin = 25/125 = 20%.
So it doesn’t matter which you compare profits to. If cxlosing inventory has bee overstated (for example) both margin and gross profit woul increase.
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