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Auditing - Essay Example

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Auditing

A high net profit margin indicates that a company converts its sales into profits fast. The net profit margin also considers costs associated with the sale of products. There are several factors which triggered a decrease in the net profit margins. They include: a. Inventories Even though, a company treats inventories as an asset in the balance sheet, the cost of sales are not reported until a sale is actually made. Therefore, it is possible to calculate the cost of sales in inventories. However, market fluctuations can reduce the value of inventories which in turn lead to devaluation of net profit margins. An economic slowdown leads to slow moving inventories and decreases company sales and causes a negative impact on net profit margins. b. Price changes Changes in price affect the number of units sold which in turn influences the profits. It is challenging to price items correctly especially in a perfect market. Therefore, the price point of a product is a primary factor responsible for decreasing net profit margin. A decrease in price may in turn cause a decrease in net profit margins. c. ...
Examples include rent, salaries and depreciation expenses. Even though, these costs do not change based on the volume or production and sales, they still influence the net profit margin. The gross profit margin is calculated as gross profit as a percentage of sales. According to Pamela and Frank (2010), an increase in gross profit margin from one period to another can be caused by one of the following factors: a) Increase in sales volume which in turn affect sales and the cost of sales b) Increase in sales price which affect sales revenue c) Reduction in the cost of production which affects cost of goods sold. Q2- Transactions or accounts that require additional audit effort The following are the transactions or accounts which require additional audit effort based on question one above: Revenues Operating expenses Inventories Cost of goods sold Q3- Additional Audit work In some situations, an auditor may perform additional procedures in order to determine the reliability of the underlying data (Spencer 2010). The auditor should get evidence from multiple sources depending on the risk of material misstatement and the quality and quantity of audit evidence required. Obtaining evidence from different sources or types increases the level of assurance. The additional audit procedures may include Computer-assisted audit techniques (CAATs) and substantive tests. CAATs help in identifying anomalies from the selected items. However, audit evidence may be gotten from items not selected since the auditor uses professional judgment. Substantive tests entail the activities performed by the auditor during the audit so as to obtain evidence regarding the completeness, validity and accuracy of the account balances and the ...Show more
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Name…………………………………………………………………………….xxxxxx Institution……………………………………………………………………….xxxxxx Course……………………………………………………………………………xxxxx Professor………………………………………………………………………….xxxxx @2013 Q1- Possible explanations for changes in net profit margin and gross profit margin Financial ratios are used in analyzing the performance of an entity and its trend over time…
Auditing
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