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audit risk..sales revenue has increased by 28% in the year while the COS has only increased by 10 % the increse in sales may be due to bonus schemes and advertising campaigns however this does not explain the increase in gross margin there is risk that sales may be overstated
i understand the point that if sales is increasing cos should increase consistently but how increase in sales is linked to gross profit margin what impact it will have on it and how there is a risk that sales may be overstated
audit risk ..a generous sales related bonus scheme has been introduced in the year this may lead to sales cut off errors with employees aiming to maximize current year bonus ……..how cut off error arise here…..please explain
If sales and costs are ‘normal’ sales and CoS should increase at the same rate. If sales increase much faster than CoS the suspicion is that sales are overstated and/or CoS understated. If the sales increase were purely caused by advertising more, the CoS should stay constant.
Of course, one way to increase sales is to drop prices/give discounts, but then you would expevt the gross margin to fall.
If there is a generous sales related bonus, employees will have incentive to maximise sales. They might therefore include January sales in December’s to boost sales and this would be a cut-off error. The CoS would remain low because the goods would still be in inventory at year end (though treated as having been sold).
how the cost of sales could be low if the goods are still in inventory please explain
RegardsCost of sales = opening stock + purchases – closing stock.
Therefore, the higher closing stock, the lower the cost of sales.
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