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#18 Question for the day (Auditing-Inter)
Auditing
ABC Limited is engaged in the business of manufacture of Bags and Belts. CA Dinesh is appointed as an auditor of ABC Limited for the year 20X1-X2. CFO of ABC Limited approached CA Dinesh with following details while finalizing the books of account of the Company as on 31st March, 20X2: Rate of Gross profit on sales - 20% FY 20X1-X2 and 8% for FY 20X0-X1. Describe any four steps that CA Dinesh should carry out to satisfy himself on the sharp increase in rate of gross profit on sales as compared to the previous year.
Answers (6)
By making analysis on 1.closing stock of p.y and c .y 2.purchases of raw material 3.sales invoices 4.cash flow statement
Lakki Kamu
By making analysis on 1.closing stock of p.y and c .y 2.purchases of raw material 3.sales invoices 4.cash flow statement
Please elaborate. Write answer in a sheet as you would write in exam and send photo
Correct Answer given below. Please refer and evaluate. Causes for Increase in the Rate of Gross Profit on Sales There are several possible causes of the sharp increase in the rate of gross profit on sales as compared with that of the previous year. CA. Dinesh, the auditor of ABC Limited should carry out following steps to satisfy himself on the sharp increase in rate of gross profit on sales as compared to the previous year. (i) Increase in Sales Prices: The selling price of the finished products may have been increased. Enquiries should be made as to whether there have been general or specific price increase and the reasons for the same. The auditor should obtain copies of the company price lists prevailing at different point of time and make the relevant comparison (ii) Reduction in Cost of manufacturing: The cost of manufacturing may have reduced substantially. The auditor should examine the inventory and purchases records in respect of large purchases of raw materials, comparing current costs with those in the previous year and detailed information like change in contracts, suppliers, etc supporting the possibility should be sought from the company. (iii) Alteration in Sales-mix: The mix of sales may have been altered, resulting in the sales of more profitable items. Detailed sales analysis should be made for the period in order to ascertain whether the more profitable lines constituted a large proportion of the total sales. (iv) Impact of Automation: The mechanization or automation of certain manufacturing processes may have resulted in considerable saving in labour cost and this possibility could be easily verified by comparisons of wages records. (v) Adherence to Cut-off Procedures: The company cut-off procedures as regards closing inventory and work-in-progress should be investigated, as any change in the procedure as compared with the previous year would cause a difference in the gross profit ratio. It should also be seen that the procedure laid down has been observed by the concerned personnel and rightly adhered to. The auditor should test relevant transaction and ensure that everything is incorporated in the financial statement. (vi) Manipulating Sales: The possibility of items which have been sent to customers on "sale or return" basis being included in sales should be investigated, as this would give effect for increase in the rate of gross profit.
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