Question

2. In addition to the analytical procedures already listed in the memo, analyze an additional four that are useful in the planning process for the EarthWear audit. Discuss the meaning of the analytical procedures included and how they may affect your audit plan/procedures. Work Paper 3-6 and the Common Size Balance Sheet and Income Statement for EarthWear have been provided to assist you.

Analyze 2 additional analytical procedures that were completed in the planning process.

EarthWear's Gross Profit Percentage is 43.90% and the industry average is 38.80%

Discuss the meaning of the analytical procedure and how it may affect risks relating to the EarthWear audit or your planned audit procedures.

EarthWear's Debt to Equity ratio is 0.50 and the industry average is 0.84

Discuss the meaning of the analytical procedure and how it may affect risks relating to the EarthWear audit or your planned audit procedures.

Answer 1

1.The EarthWear’s gross profit margin has been recorded at 43.90% in comparison to the industry average of 38.80%. Thus, EarthWear’s is in the great position to rest of its pears in the industry to add more martin to the prime cost of the company. This higher margin on the prime costs will lead to higher profitability overall till net profit. The margin is going to affect the company very positively as company is earning more profits.

2.The Debt to Equity ratio of EarthWear’s is 0.50 in comparison to industry average of 0.84, which shows that EarthWear is acting quite conserve manner and not applying the leverage ie. the debt for the enhancement of the shareholders wealth. The rest of the industry is adequately utilizing the leverage to have higher profitability and wealth appreciation of shareholders. It is going to hamper the expectations of the shareholders and other stakeholders to have higher returns.