The net profit margin is calculated as:
Net Profit Margin=Net ProfitTotal Sales×100\text{Net Profit Margin} = \frac{\text{Net Profit}}{\text{Total Sales}} \times 100Net Profit Margin=Total SalesNet Profit×100
The given data shows:
Gross profit margin (Revenue – Cost of Goods Sold) remained constant at 40% in both years.
Net profit margin declined from 18% in Year 1 to 13% in Year 2.
Since the gross profit margin remained unchanged, the cost of sales did not increase relative to sales. This eliminates Option A as a possible cause.
A decline in net profit margin while gross profit remains the same suggests an increase in operating expenses, interest, or taxes.
If the government increased the corporate tax rate, net income after taxes would be lower, leading to a reduced net profit margin.
The IIA’s GTAG 14 – Auditing Governance, Risk, and Compliance recommends analyzing external factors like tax rate changes when evaluating financial performance.
A. Cost of sales increased relative to sales → Incorrect. If this were true, gross profit margin would have declined, but it remained stable.
B. Total sales increased relative to expenses → Incorrect. If sales increased while expenses stayed constant, net profit margin would have increased, not decreased.
C. The organization had a higher dividend payout rate in year two → Incorrect. Dividends do not affect net profit margin, as they are paid out from net income after it is calculated.
IIA Standard 2120 – Risk Management states that auditors should analyze changes in financial performance due to external economic factors.
COSO ERM Framework highlights tax rate changes as a key risk factor in financial analysis.
IFRS (International Financial Reporting Standards) require companies to disclose changes in tax rates and their impact on profitability.
Why Option D is Correct?Explanation of the Other Options:IIA References & Best Practices:Thus, the correct answer is D. The government increased the corporate tax rate.
