Question

While applying analytical procedures, auditor notes

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

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.

B Obtain explanations and corroborative evidence for unusual fluctuations.

C Assume misstatement and qualify opinion.

D Conclude cost of goods sold is misstated.

E Escalate to regulators directly.

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