Analytical Procedures in Planning Stage of Audit Paper

In a 2-3 page paper, complete the case below
Describe the purpose of analytical procedures performed in the planning stage of the audit.
Uden Supply has projected its 2004 gross profit at 31% of sales despite expectation for some shrinkage in margins. On the basis of Uden’s operating performance in years 2001 – 2003 project your best guess for 2004. Project 2004 based on the incremental changes for each line item over the last three years.
Uden’s unaudited financial statements for the current year show a 31 percent gross profit rate. Assuming that this represents a misstatement from the amount that you developed as an expectation, calculate the estimated effect of this misstatement on net income before taxes for 20X4.
Indicate whether you believe that the difference calculated in part (c) is material. Explain your answer. (50-100 words).
Comparative income statement information for Uden Supply Company is presented in the accompanying table.
UDEN SUPPLY COMPANY
Comparative Income Statement
Years Ended December 20X1, 20X2, and 20X3
(Thousands)
20X1 Audited
20X2 Audited
20X3 Audited
20X4 Expected
Sales
8,700
9,400
10,100
Cost of goods sold
6,000
6,500
7,000
Gross profit
2,700
2,900
3,100
Sales Commissions
610
660
710
Advertising
175
190
202
Salaries
1,061
1,082
1,103
Payroll taxes
184
192
199
Employee benefits
167
174
181
Rent
60
61
62
Depreciation
60
63
66
Supplies
26
28
30
Utilities
21
22
23
Legal and accounting
34
37
40
Miscellaneous
12
13
14
Interest expense
210
228
240
Net income before taxes
80
150
230
Incomes taxes
18
33
50
Net income
62
117
180

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