When Auditing Global Alliance Industries, Inc

question 87

Essay

When auditing Global Alliance Industries, Inc., the auditor performed extensive analytical procedures and found
the following:
(a) The commission expenses as a percentage of sales has stayed constant for several years, but it has increased
significantly in the current year. However, commission rates have not changed.
(b) The rate of inventory turnover has steadily decreased for the past four years.
(c) The inventory as a percentage of current assets has steadily increased for the past four years.
(d) The number of days’ sales in accounts receivable has steadily increased for three years.
(e) The allowance for uncollectible accounts as a percentage of accounts receivable has steadily decreased for
three years.
(f) The absolute amounts of depreciation expense and depreciation expense as a percentage of gross fixed assets
are significantly smaller than in the preceding year.
REQUIRED:
(1) Evaluate the significance of not disclosing or adjusting these items, if material, in the fair presentation of
financial statements.
(2) When assessing disclosures, what criteria do auditors use?

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Definitions:

Assets

Resources owned by a business or individual that have economic value and can provide future benefits.

Supplies

Items used in the operation of a business or part of inventory not yet sold.

Equipment

Tangible property owned by a business used in its operations over an extended period.

Service Company

Business that provides a service.