ExpertHard1 markMultiple Choice
CPA · Question 15 · Area II: Risk Assessment
An auditor is performing analytical procedures during the planning stage of an audit. The auditor observes that the client's gross margin percentage has increased significantly from the prior year, while sales volume has remained flat. Which of the following is the MOST likely explanation for this trend that would indicate a risk of material misstatement due to fraud?
An auditor is performing analytical procedures during the planning stage of an audit. The auditor observes that the client's gross margin percentage has increased significantly from the prior year, while sales volume has remained flat. Which of the following is the MOST likely explanation for this trend that would indicate a risk of material misstatement due to fraud?
Answer options:
A.
The company negotiated lower purchase prices from suppliers.
B.
Fictitious sales were recorded at year-end.
C.
The company changed its inventory valuation method from LIFO to FIFO during a period of falling prices.
D.
Sales commission rates were decreased.
How to approach this question
Analyze the ratio: Gross Margin = (Sales - COGS) / Sales. Fictitious sales increase the numerator (Sales) more than the denominator (if no COGS is recorded), or just increase Sales with 0 COGS.
Full Answer
B.Fictitious sales were recorded at year-end.✓ Correct
Fictitious sales were recorded at year-end.
Fictitious sales increase revenue but typically have no associated cost of goods sold (since no product was shipped). This disproportionately increases the gross profit margin.
Common mistakes
Ignoring where expenses are classified (e.g., commissions are OpEx, not COGS).
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