ACCT 444 Week 3 Homework

Chapter 8
8-22 (Objective 8-7) Gale Gordon, CPA, has found ratio and trend analysis relatively useless as a
tool in conducting audits. For several engagements, he computed the industry ratios included in
publications by Standard and Poor’s and compared them with industry standards. For most
engagements, the client’s business was significantly different from the industry data in the
publication and the client automatically explained away any discrepancies by attributing them to
the unique nature of its operations. In cases in which the client had more than one branch in
different industries, Gordon found the ratio analysis no help at all. How can Gordon improve the
quality of his analytical procedures?
8-33 (Objectives 8-3, 8-7, 8-8) Your comparison of the gross margin percent for Jones Drugs for
the years 2008 through 2011 indicates a significant decline. This is shown by the following
information:
A discussion with Marilyn Adams, the controller, brings to light two possible explanations. She
informs you that the industry gross profit percent in the retail drug industry declined fairly
steadily for 3 years, which accounts for part of the decline. A second factor was the declining
percent of the total volume resulting from the pharmacy part of the business. The pharmacy sales
represent the most profitable portion of the business, yet the competition from discount
drugstores prevents it from expanding as fast as the nondrug items such as magazines, candy,
and many other items sold. Adams feels strongly that these two factors are the cause of the
decline.
The following additional information is obtained from independent sources and the client’s
records as a means of investigating the controller’s explanations:
Required