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Question 2 (10 marks)

Comfy Travel Inc. manufactures RVs and sells them all over North America. The RVs are sold directly to dealers, who typically finance the purchases of RVs with their banks. Comfy Travel manufactures the RVs (that is, orders the parts and assembles the RVs) only upon receiving the dealer s order. The dealers banks usually pay Comfy Travel Inc. within two weeks of shipment. In the past, the demand and margins earned on RV sales have remained relatively consistent. However, this year, the declining cost of air travel and the increasing cost of gasoline have caused a general decline in the demand for RVs. Comfy Travel Inc. s management responded to the declining demand by offering dealers increased incentives. For example, Comfy Travel offered a $1,000 rebate on each RV purchase.

It is now October 15, 2012, and you have been assigned as the senior in charge of the Comfy Travel Inc. audit for the year ended September 30, 2012. You obtained the following September 30 preliminary figures in millions of dollars:

Required

1. 1. Based on the information provided, do you expect the gross margin as a percent of sales and inventory turnover to remain consistent with prior years, to increase, or to decrease? Explain your reasoning. (2 marks)
   2. Calculate the following ratios for each year and for the industry average, and indicate whether the results are consistent with your expectation. (5 marks)

1. 1. 1. Gross margin as a percent of sales

1. 1. 1. Inventory turnover

1. 1. Suggest two possible reasons for any unexpected results. (1 mark)

1. Provide two examples of inquiries or subsequent changes to the planned substantive audit procedures that could be performed in response to the results of the analytical procedures performed. (2 marks)

Question 4 (6 marks)

Sunita Clone was a payroll manager at Blue Sky Manufacturing Inc. who embezzled approximately $190,000 in a one-year period. Sunita did this by reassigning her direct report, a payroll clerk, to a special project and assuming the clerk s role of processing terminated employees final paycheques. Sunita then processed two cheques in the final period the employee s regular automatically generated cheque and another cheque which was adjusted for the required last pay adjustments. Sunita distributed the adjusted paycheque to the employee and held and cashed the automatic cheque that had been inappropriately processed. Prior to Sunita assuming the clerk s role, the clerk would suspend the automatic cheque processed for terminated employees and only process the adjusted manual cheque. It was then Sunita s responsibility to distribute the cheques.

1. 1. What are the auditor s responsibilities in identifying this type of embezzlement? (2 marks)

1. 1. List two control procedures that would prevent or detect this type of fraud from occurring. (2 marks)

1. List two substantive analytical procedures or test of details that the auditor could perform that would have identified the embezzlement. (2 marks)