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As part of the audit for Pirate Battery Store, you are analyzing gross margin percentage from 2018 through 2021 as shown in Figure 1. The controller offers two possible explanations: (1) Industry gross profit percentage in the retail battery industry declined steadily for three years and (2) a declining percent of total volume results from standard batteries (D, C, AA, AAA, and 9-volt). According to the controller, standard batteries are the most profitable portion of the business, but the competition from warehouse stores prevents it from expanding as fast as the specialty batteries, such as RWP413 and IPMX22's. Figure 2 provides more detailed information obtained from industry sources and client records.

1.) Evaluate the controller's explanation. Upload a spreadsheet below, prepared in proper form, to show calculations that support your conclusions.

2.) Which specific aspects of the client's financial statements require intensive investigation in this audit?

Figure 1 Pirate Battery Store Gross margin analysis $ USD thousands Sales Cost of sales Gross margin Percent 2021 71,055 $ 46,115 24,940 $ 35.1% 2020 64,580 $ 41,330 23,250 $ 36.0% 2019 57,310 $ 36,565 20,745 $ 36.2% 2018 51,755 32,865 18,890 36.5% $ Figure 2 Pirate Battery Store Data for preliminary analytical review Pirate Battery Store Standard Specialty Specalty batteries cost batteries cost Industry Gross batteries of sales of sales Profit 45,425 $ 15,225 $ 30,890 32.7% 39,325 14,595 26,735 32.9% 33,205 13,955 22,610 33.0% 28,660 13,325 19,540 33.2% 2021 Standard batteries 25,630 $ 25,255 24,105 24,595 $ 2020 2019 2018

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