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      Question

      While applying analytical procedures, auditor notes

      gross profit margin fell from 25% to 18% though sales increased. Inventory valuation appears unchanged. What should be auditor’s response?
      A Ignore since sales are higher. Correct Answer Incorrect Answer
      B Obtain explanations and corroborative evidence for unusual fluctuations. Correct Answer Incorrect Answer
      C Assume misstatement and qualify opinion. Correct Answer Incorrect Answer
      D Conclude cost of goods sold is misstated. Correct Answer Incorrect Answer
      E Escalate to regulators directly. Correct Answer Incorrect Answer

      Solution

      Analytical procedures identify unusual variances. Auditor must seek explanation and supporting evidence before drawing conclusions.

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