Upon review of John’s income statement the vertical analysis above shows how each account compares to the total Sales for each year. When looking at the figures you can automatically see differences in amounts and can come to a conclusion about what areas to look at more closely. By applying the analysis technique for review of the income statement we have detected some areas of concern that need further analysis.
Cost of goods sold shows an increase of 5%, 8% and 2% for years 2004, 2005 and 2006 compared to 2002 and 2003 respectively. The inventory account saw increase of 6%, 1% and 5% in 2004, 2005 and 2006 respectively. The Accounts Receivables also saw increases that show a 6%, 11% and 13% in years 2004, 2005 and 2006 compared to 2003. These are the three accounts that saw the greatest increase or fluctuation from one year to the next.
In order to complete the review of the business and the financial statements the following items will need to be provided for each of the years 2002, 2003, 2004, 2005 and 2006: general journal of accounts, invoices for products, invoices for repairs and maintenance, bills associated with utilities, telephone and insurance, bank statements, travel receipts and a list of employees and their job functions. These items will enable the auditor to compare the expenses’ source documents to the general journal of accounts to ensure all entries were completed accurately and were not misstated.
A review of inventory will also need to be completed. This should be done by piece counting each item in the store room and those stocked on the shelves. This will allow for the audit team to effectively compare currant inventory to the invoices and relate those figures to accounts payable and accounts receivable and respective accounts. Any inventory statements from prior years should be provided to accurately account for the invoices and accounts payable for prior years. Once the inventory...