Construction Industry Resources, Inc Analytical procedures

In audit planning the audit of Construction Industry Resources, Inc., a building supply company. You have completed analytic procedures relevant to purchases and inventory. The results of these procedures are included in Figure 8-13.

Analytical procedures show that inventory turnover decreased from 31-34 days to 27 days, and gross margins declined to the lowest level in five years. What might this indicate about the risk of misstatement with respect to inventory and inventory purchases?

Figure 8-13 ? Selected Financial Information ($000)
X1 X2 X3 X4 X5
Building supply revenues $ 90,100 $ 99,380 $ 117,468 $ 137,085 $ 160,800
Lumber brokerage revenues $ â?” $ â?” $ 45,021 $ 63,480 $ 90,141
$ 90,100 $ 99,380 $ 162,489 $ 200,564 $ 250,941
Inventory turn days
Building supplies 32 34 31 33 27
Lumber brokerage 7 6 6
Gross margin
Building supplies 20.1% 18.5% 18.6% 19.1% 18.0%
Lumber brokerage 3.9% 4.1% 4.2%

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Three potential causes for this shift in the inventory metrics is given and the potential misstatement is discussed.