ACCA Strategic Professional · Advanced Audit and Assurance (International) · Planning, materiality and assessing the risk of material misstatement

Orion Retail's draft profit before tax is $4.0m, revenue $80m and total assets $50m. For the year, gross margin fell from 32% to 27% with no change in selling price policy, while inventory days rose from 50 to 85. Which combination of conclusions is most appropriate for the auditor at the planning stage?

A lower gross margin combined with much longer inventory days points to risks of overvalued, slow-moving or obsolete inventory and possible cost or cut-off errors. The auditor should respond with NRV testing and inventory count attendance, and should corroborate management's explanations.

1. AConsider risks of inventory overvaluation and cut-off or margin manipulation, and respond with procedures such as net realisable value testing and attendance at the inventory countCorrect
2. BConclude that the fall in margin reduces audit risk because profits are lower, so reduce inventory testing
3. CConclude that the fall in margin is a financial statement presentation issue only, with no assertion-level risk
4. DRely on management's explanation without corroboration because analytical procedures are only substantive