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Question 1: An auditor performs an analytical review by comparing the gross margins of various divisional
operations with those of other divisions and with the individual division's performance in previous
years. The auditor notes a significant increase in the gross margin at one division. The auditor does
the preliminary investigation and notes that there were no changes in products, production methods,
or divisional management during the year.
Based on the above information, the most likely cause of the increase in gross margin would be
A. An increase in the number of competitors selling similar products.
B. A decrease in the number of suppliers of the material used in manufacturing the product.
C. An overstatement of year-end inventory.
D. An understatement of year-end accounts receivable.
Correct Answer: C
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