Question

An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the risk assessment phase of the audit by the use of:

A) Tests of transactions and balances.
B) An assessment of internal control.
C) Specialized audit programs.
D) Analytical procedures.

Answer 1

During the risk assessment phase of an audit, an abnormal fluctuation in gross profit is typically identified using analytical procedures. These procedures compare current financial details to historical data to detect unanticipated variances that may require additional audit attention.

Step-by-step explanation:

An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the risk assessment phase of the audit by the use of analytical procedures. Analytical procedures involve comparing current financial details with numbers from previous periods, budgets, or industry benchmarks to identify any unexpected variances. These procedures can raise red flags that warrant further investigation and could highlight the need to dig deeper into how sales and inventories are being recorded and managed.