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Hi guy!!
I have done the Sample question Dec 2017 for F8. One of the answers for the subtantive procedures is:
“Calculate the operating profit and gross profit margins and compare them to last year and budget and investigate any significant differences.”
– Can you explain to me how we use these 2 ratios to analyze, the relation between the ratios and purchases?
– It will acertain for the completeness assertion, right?Thanks so much!!
Not just completeness but also accuracy and allocation (classification) – if GP% is quite predictable/stable in an industry, that it doesn’t fluctuate would give some comfort that it is accurate. If GP% is up and OP% is down (or vice versa), part of the investigation would be to consider whether there has been a change of classification of a cost (e.g. between cost of sales and distribution) or material misposting(s).
When comparing GP% remember that cost of sales is opening inventory + purchases – closing inventory. So a fall in GP% shouldn’t be attributed to an increase in purchases if the goods haven’t yet been sold but are sitting in inventory (you would expect a corresponding increase in inventory days).
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