Which specific aspects of the client’s financial statements require intensive investiga- tion in this audit?

Your comparison of the gross margin percent for Jones Drugs for the years 2016 through 2019 indicates a significant decline. This is shown by the following
information:
2019 2018 2017 2016
Sales (thousands) $ 14,211 $ 12,916 $ 11,462 $ 10,351
CGS (thousands) 9,223 8,266 7,313 6,573
Gross margin $ 4,988 $ 4,650 $ 4,149 $ 3,778
Percent 35.1 36.0 36.2 36.5
A discussion with Tanvi Anand, 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 three 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. Anand 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:
Jones Drugs ($ in thousands) Industry Gross
Profit Percent for
Retailers of Drugs
and Related ProductsDrug Sales
Nondrug
Sales
Drug Cost of
Goods Sold
Nondrug Cost
of Goods Sold
2019 $5,126 $9,085 $3,045 $6,178 32.7
2018 5,051 7,865 2,919 5,347 32.9
2017 4,821 6,641 2,791 4,522 33.0
2016 4,619 5,732 2,665 3,908 33.2
Required
262Part 2 / THE AUDIT PROCESS
a. Evaluate the explanation provided by Anand. Show calculations to support your
conclusions.
b. Which specific aspects of the client’s financial statements require intensive investiga-
tion in this audit?

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