Auditors sometimes use ratios as audit evidence. For example, an unexplained increase in the ratio of gross profit to sales may suggest which of the following possibilities?
A)Fictitious purchases.
B)Fictitious sales.
C)Selling and general expenses erroneously being recorded as merchandise purchases.
D)Unrecorded sales.

Question

Quizplus · Accepted Answer

An unexplained increase in the ratio of gross profit to sales suggests that there may be fictitious sales being recorded, as gross profit is calculated by deducting cost of goods sold from sales. If cost of goods sold is not actually being incurred due to fictitious sales, it would cause an increase in the gross profit to sales ratio.

Auditors Sometimes Use Ratios as Audit Evidence