Audit and Assurance Practice Exam

What is one expected relationship when performing analytical procedures in the acquisition and payment cycle for a company with stable production and pricing strategies?

1. Gross margin is expected to improve

2. Inventory turnover is expected to decrease

3. Cost of goods sold is expected to decrease

4. Days' sales in inventory is expected to decrease

The correct answer is: Gross margin is expected to improve

When performing analytical procedures in the acquisition and payment cycle for a company that has stable production and pricing strategies, it is reasonable to expect a positive relationship concerning the gross margin. Gross margin, which is calculated as sales revenue minus cost of goods sold (COGS), reflects the efficiency of producing and selling goods relative to their costs. In a stable environment, where the pricing strategy remains consistent and production costs are managed effectively, one would typically anticipate that the gross margin would either remain stable or potentially improve. This could arise from operational efficiencies, better cost control, or an effective pricing strategy that maintains sales without increasing costs proportionately. Therefore, an improvement in gross margin supports the notion that the company is effectively managing costs while maintaining or enhancing its sales revenue. The other options suggest relationships that do not align with a stable environment. For instance, a decrease in inventory turnover or an increase in days' sales in inventory would more likely indicate inefficiencies or excess inventory rather than a stable or improving situation. Similarly, a decrease in cost of goods sold would not logically relate to stability in pricing and production unless supported by other factors, which is less likely in a consistently managed environment.