Final answer:
An unexplained increase in the gross profit to sales ratio could indicate fictitious sales, suggesting that sales may have been recorded without actual delivery of goods or services. This inflates the revenue and gross profit, and is a sign of possible financial statement fraud.
option 'B' is the correct.
Step-by-step explanation:
An unexplained increase in the ratio of gross profit to sales may suggest the possibility of fictitious sales. This financial indicator is analyzed by auditors to gauge the accuracy of the financial statements. If the ratio increases significantly without a clear reason, it might indicate that sales have been recorded without actual delivery of goods or services, inflating revenue and gross profit.
When considering this issue, auditors will review transactions and corroborate the sales records with other evidence such as shipping documents, customer orders, and subsequent cash receipts.
If the sales are fictitious, it means that revenue is overstated, which would also result in an overstated profit. This scenario is considered one of the common types of financial statement fraud.
In contrast, fictitious purchases would not lead to an increase in the gross profit to sales ratio. Additionally, erroneously recording selling and general expenses as merchandise purchases (option c) would typically decrease the gross profit ratio, as it inflates the cost of goods sold.
Unrecorded sales (option d) would also not lead to an increase in the gross profit ratio, as it would result in lower reported sales.
Therefore, an unusual increase in the gross profit to sales ratio is more closely associated with fictitious sales, as it suggests that sales may have been recorded without the goods or services actually being provided, leading to an overstatement of revenue and profit margins.