Question

1. You are completing analytical procedures (ratios) for the audit of sales and accounts receivable. Identify 3 ratios and their trend (increased/decreased) which may indicate that net sales and/or net accounts receivable may be overstated. Explain.

Item	Ratio	Increased/decreased - Explain
1
2
3

2. What are the effects of overstating ending inventory on Cost of Sales, and Profit (understate/overstate)? Explain.

Effect on Cost of Sales
Effect on Profit

Answer 1

1.

Item	Ratio	Increase/Decrease
1. SALES	Gross Margin	Since the sales have overstated, gross margin is INCREASED	INCREASE
2. Accounts Receivables	Days sales outstanding	Since overstated accounts Receivables being in the numerator, causes the DSO ratio to INCREASE	INCREASE
3. Sales	Trend Analysis	Comparing the rise in sales over a period considering all possibilities with that of the industries indicate a sudden INCREASE may be overstatement of Sales	INCREASE

2. If ending inventory is Overstated, Cost of Goods Sold is Understated and Profit is Overstated.