While Auditing a Client's Inventory Processes, an Auditor Computes the Gross

question 14

Multiple Choice

While auditing a client's inventory processes, an auditor computes the gross profit margin ratio and compares it to prior years and budgeted amounts. If the result indicates that the gross profit margin has increased since the prior year and exceeds the budget, it is likely that:

• A) ending inventory is overstated and cost of goods sold is understated.
• B) both inventory and cost of goods sold is overstated.
• C) both inventory and cost of goods sold is understated.
• D) ending inventory is understated and cost of goods sold is overstated.

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Definitions:

Securities Broker

A professional intermediary who facilitates the purchase and sale of securities on behalf of clients.

Rule 504

A provision of Regulation D of the U.S. Securities and Exchange Commission that allows companies to freely sell up to $5 million of securities in a 12-month period without extensive registration.

General Solicitations

Activities by companies to advertise or solicit a wider range of investors or the public at large, typically related to the offering of securities.

Nonpublic Issuer

An entity that does not offer its securities for sale to the general public, often subject to less stringent reporting requirements.