An internal auditor provided the following statement about division A's performance during the month: "Because supplies of raw material X were scarce, division
A's profits declined by 15 percent."
Which of the following can be validly concluded from the auditor's statement?
I. Division A's production level declined by 15 percent.
II. Division A could have sold more products than it produced.
III. Division A usually sells all of the products that it produces.
Division A's decline in profits by 15 percent due to the scarcity of raw material X suggests that limited availability of the raw material affected their ability to produce more. Therefore, it can be validly concluded that Division A could have sold more products than it produced if it had more raw material X available. This indicates that the production constraint was the limiting factor, supporting conclusion II only.
Why B? How can a division sell more products than produced?
This said they didn't had scarce raw materials, which meant their production was stifled. If they would have had more raw materials, they could have produced more, which means they could have sold more.
We are talking here about the performance audit engagement assessing performance of the given division. Thus, Raw materials were scarce and profits declined by 15%, however, based on performance audit and assessment from the IIA, this specific division could have sold more product. This is my understanding. Read the question and then read all the answers.
"supplies of raw material X were scarce" Indicates that there is no production in the current month, But the profit for the month only decreased by 15%. So department a has other products for sale.