TASK
8-32 (OBJECTIVE 8-4) In the audit of the Worldwide Wholesale Company, you did extensive
ratio and trend analysis as part of preliminary audit planning. Your analytical procedures
identified the following:
1. Commission expense as a percent of sales was constant for several years but has in-
creased significantly in the current year. Commission rates have not changed.
2. The rate of inventory turnover has steadily decreased for three years.
3. Inventory as a percent of current assets has steadily increased for four years.
4. The number of days’ sales in accounts receivable has steadily increased for three years.
5. Allowance for uncollectible accounts as a percent of accounts receivable has steadily
decreased for three years.
6. The absolute amounts of depreciation expense and depreciation expense as a percent
of gross fixed assets are significantly smaller than in the preceding year.
a. Evaluate the potential significance of each of the changes in ratios or trends identified
in your analysis on the fair presentation of financial statements.
b. State the follow-up procedures you would perform for each fluctuation to determine
whether a material misstatement exists.
8-33 (OBJECTIVES 8-3, 8-4) Target and Kohl’s are chains of stores that cater to customers
who desire name-brand goods at lower prices. The Securities and Exchange Commission
(SEC) Form 10-K filing rules require management of U.S. public companies to include
background information about the business, as well as the most recent financial condition and results of operations. Access each company’s most recent Form 10-K. These obtained through the SEC website (www.sec.gov), or directly from the investor relations section of the Target (www.target.com) and Kohl’s (www.kohls.com) websites.
a. Read the description of each company’s business in Part I, Item 1 of Form 10-K. Evaluate the similarity of each company as a basis for making financial comparisons.
b. Each company follows what is called a 52/53-week year in which the fiscal year ends on the Saturday nearest January 31. Given the nature of these companies, why does a year end near January 31 make sense? Note that most public companies have a December 31 year end.
c. Use the financial statements included in Part II, Item 8 to calculate the gross margin percentage and inventory turnover ratio for each company for the most recent year. Which company has the higher gross margin percentage? Which company has the higher inventory turnover?
d. Evaluate whether the relation between the gross margin percentage and inventory turnover makes sense given the description of each company’s business.
