ExpertCPA · Question 09 · Area II: Risk Assessment
During the planning phase of an audit of a manufacturing nonissuer, the auditor performs analytical procedures on the entity's gross margin. The auditor notes that the gross margin percentage has increased significantly from the prior year, while industry competitors have seen a decline due to rising raw material costs. Which of the following is the MOST likely audit risk indicated by this finding?
During the planning phase of an audit of a manufacturing nonissuer, the auditor performs analytical procedures on the entity's gross margin. The auditor notes that the gross margin percentage has increased significantly from the prior year, while industry competitors have seen a decline due to rising raw material costs. Which of the following is the MOST likely audit risk indicated by this finding?
Answer options:
The entity has failed to record a liability for warranty claims.
Ending inventory may be overstated, or cost of goods sold understated.
Sales returns and allowances have been overstated.
The entity has capitalized repair and maintenance costs that should have been expensed.
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