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Questions Requiring Analysis 14-30
Early in your first audit of Star Corporation, you notice that sales and
year-end inventory are almost unchanged from the prior year.
However, cost of goods sold is less than in the preceding year, and
accounts payable also are down substantially. Gross profit has
increased, but this increase has not carried through to net income
because of increased executive salaries. Management informs you that
sales prices and purchase prices have not changed significantly during
the past year, and there have been no changes in the product line. Star
Corporation relies on the periodic inventory system. Your initial
impression of internal control is that several weaknesses may exist.
Suggest a possible explanation for the trends described, especially the
decrease in accounts payable while sales and inventory were constant
and gross profit increased. Explain fully the relationships involved.
For this question, you’ll need to look at the ratios presented and
analyze the trends. What do the trends mean?
Problem 14-38
The following are typical questions that might appear on an internal
control questionnaire for accounts payable.