While auditing a client's inventory processes, an auditor computes the gross profit margin ratio and compares it to prior years and budgeted amounts. If the result indicates that the gross profit margin has increased since the prior year and exceeds the budget, it is likely that:
A) ending inventory is overstated and cost of goods sold is understated.
B) both inventory and cost of goods sold is overstated.
C) both inventory and cost of goods sold is understated.
D) ending inventory is understated and cost of goods sold is overstated.

Question

Quizplus · Accepted Answer

If the gross profit margin has increased since the prior year and exceeds the budget, it indicates that cost of goods sold has decreased or sales revenue has increased. In either case, it implies that inventory is less than what it should be, and cost of goods sold is greater. Therefore, ending inventory is overstated, and cost of goods sold is understated.

While Auditing a Client's Inventory Processes, an Auditor Computes the Gross