Which one of the following substantive analytical procedures would be most useful in alerting the auditor to the possibility of obsolete inventory?
A) Compare gross margin percentage with that of previous years.
B) Compare unit costs of inventory with previous years.
C) Compare inventory turnover ratio with previous years.
D) Compare current year manufacturing costs with previous years.

Question

Quizplus · Accepted Answer

The inventory turnover ratio compares the cost of goods sold with the average inventory. If the ratio decreases significantly compared to previous years, it may indicate that inventory is not selling or becoming obsolete. Therefore, comparing inventory turnover ratio with previous years would be the most useful analytical procedure in alerting the auditor to the possibility of obsolete inventory. A, B, and D are not directly related to identifying obsolete inventory.

Which One of the Following Substantive Analytical Procedures Would Be