Question 1

Which of the following ratios would an engagement partner most likely calculate when reviewing the balance sheet in the overall review stage of an audit?

Accepted Answer

The engagement partner would most likely calculate the total debt divided by total assets ratio, also known as the debt-to-assets ratio, as it provides information on the entity's overall financial risk and the extent to which it relies on debt financing. This ratio is commonly used in the overall review stage of the audit to evaluate the entity's ability to meet its financial obligations and to assess the entity's long-term solvency. Choices A, B, and C are not as commonly used ratios in the overall review stage of an audit.

Question 2

A company sells a particular product only in the last month of its fiscal year.The company uses commission agents for such sales and pays them 6% of their net sales 30 days after the sales are made.The agents' sales were $10 million.Experience indicates that 10% of the sales are usually not collected and 2% are returned in the first month of the new year.The auditor would expect the year-end balance in the accrued commissions payable account to be

Accepted Answer

The net sales of the agents are $10 million.

Commission payable = 6% of net sales = 0.06*10,000,000 = $600,000

However, considering that 10% sales ($1 million) are usually not collected and 2% ($200,000) are returned, the effective net sales would be $9 million.

Commission payable on effective net sales = 0.06*9,000,000 = $540,000

Hence, the auditor would expect the year-end balance in the accrued commissions payable account to be $540,000.

Question 3

Analytical procedures may be classified as being primarily which of the following?

Accepted Answer

Analytical procedures are primarily substantive procedures, used to obtain evidence about the reasonableness of account balances. They involve the comparison of financial information with expectations developed by the auditor, such as comparing current year balances with prior year balances or industry averages. Tests of controls and detailed tests of balances are separate types of auditing procedures. Tests of ratios may be part of analytical procedures, but they are not the primary classification.

Question 4

Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships.The results of these procedures most likely would indicate that

Accepted Answer

Unexpected relationships in accounts detected through analytical procedures during the overall review stage of an audit may suggest the need for additional tests of details to obtain sufficient evidence to support the balances or transactions in the accounts. It does not necessarily indicate the presence of fraud or ineffective internal control or require the revision of the communication with the audit committee at this stage.

Question 5

Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive procedures?

Accepted Answer

Relationships involving income statement accounts tend to be more predictable due to the recurring nature of operations and expenses, making them more suitable for analytical procedures in substantive testing.

Question 6

An auditor's analytical procedures performed during the overall review stage indicated that the client's accounts receivable balance had doubled since the end of the prior year.However,the allowance for doubtful accounts as a percentage of accounts receivable remained about the same.Which of the following client explanations most likely would satisfy the auditor?

Accepted Answer

The opening of a second retail outlet could explain the increase in accounts receivable due to increased sales, while maintaining the same allowance percentage if the credit risk profile of customers remained similar.

Question 7

The auditor generally gives most emphasis to ratio and trend analysis in the examination of the

Accepted Answer

The answer of The auditor generally gives most emphasis to...

Question 8

A not-for-profit organization published a monthly magazine that had 15,000 subscribers on January 1,2011.The number of subscribers increased steadily throughout the year and at December 31,2011,there were 16,200 subscribers.The annual magazine subscription cost was $10 on January 1,2011 and was increased to $12 for new members on April 1,2011.Subscriptions are paid in full at the beginning of the member term.An auditor should expect that the revenue from subscriptions for the year ended December 31,2011,would be approximately

Accepted Answer

To calculate the revenue from subscriptions for the year ended December 31, 2011, we need to calculate the total number of subscribers who paid $10 for the entire year (January-March) and the total number of subscribers who paid $12 for the entire year (April-December).

For January-March: 
Number of subscribers = 15,000 
Revenue per subscriber = $10 
Total revenue = 15,000 x $10 = $150,000

For April-December: 
Number of subscribers = 16,200 - 15,000 = 1200 
Revenue per subscriber = $12 
Total revenue = 1200 x $12 = $14,400

Total revenue for the year = $150,000 + $14,400 = $164,400

Therefore, the auditor should expect the revenue from subscriptions for the year ended December 31, 2011, to be approximately $163,800 (option D).

Question 9

Which of the following is not a typical analytical procedure?

Accepted Answer

Comparison of recorded amounts of major disbursements with appropriate invoices is not a typical analytical procedure, as it is more of a test of controls procedure to detect misstatements or errors in the financial statements. The other options are all common analytical procedures used in financial statement analysis.

Question 10

An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the planning phase of the audit by the use of

Accepted Answer

Analytical procedures are used in the planning phase of an audit to identify unusual fluctuations and investigate the reasons for these fluctuations. In this case, an abnormal fluctuation in gross profit would be identified through the use of analytical procedures, which would allow the auditor to determine whether extended audit procedures for sales and inventories are necessary. Tests of transactions and balances are typically used in the substantive testing phase of the audit, while a preliminary review of internal controls is used to assess control risk. Specialized audit programs may be developed in conjunction with these other procedures to address specific areas of risk or complexity.

Question 11

The auditor notices significant fluctuations in key elements of the company's financial statements.If management is unable to provide an acceptable explanation,the auditor should

Accepted Answer

The auditor should perform additional audit procedures to investigate the matter further as this is their responsibility to gather sufficient appropriate audit evidence. This can include obtaining third-party confirmations, reviewing contracts and agreements, conducting physical inspections, and gaining a deeper understanding of the company's operations. If the auditor is unable to obtain satisfactory explanations, they may need to modify their audit opinion or report a material weakness in the company's internal control over financial reporting. It may also signal the need for an extended audit engagement or even a forensic audit. However, withdrawing from the engagement or immediately assuming fraud without evidence is premature and inappropriate.

Question 12

Analytical procedures enable the auditor to predict the balance or quantity of an item under audit.Information to develop this estimate can be obtained from all of the following except:

Accepted Answer

Tracing transactions through the system to determine whether procedures are being applied as prescribed does not provide information to develop an estimate for the balance or quantity of an item under audit. It is a control testing procedure to ensure that internal controls are functioning effectively.

Question 13

Which of the following would be least likely to be comparable between similar corporations in the same industry or line of business?

Accepted Answer

The answer of Which of the following would be least...

Question 14

Explain the occurrence and completeness assertions.How does failure to meet each assertion affect the financial statements?

Accepted Answer

The answer of Explain the occurrence and completeness assertions.How does...

Question 15

Analytical procedures used in planning an audit should focus on identifying

Accepted Answer

Analytical procedures used in planning an audit should focus on identifying areas that may represent specific risks relevant to the audit. This helps the auditor to plan the appropriate audit procedures and allocate resources based on the areas of highest risk. Material weaknesses in internal control and the predictability of financial data can be assessed later in the audit, after the audit plan has been developed based on identified risks. The identification of various assertions that are embodied in the financial statements is also important, but this is typically done later in the audit during the substantive testing phase.

Question 16

Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during the planning phase of an audit?

Accepted Answer

The answer of Which of the following nonfinancial information would...

Question 17

As a result of analytical procedures conducted during the planning phase,the independent auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year.The auditor should

Accepted Answer

The auditor should consider the possibility of an error in the financial statements as the decline in gross profit percentage could be due to miscalculations or misstatements in the financial statements. The auditor should investigate further to determine the cause of the decline and whether any adjustment is necessary to the financial statements.

Question 18

Analytical procedures are

Accepted Answer

The answer of Analytical procedures are
...

Question 19

An auditor's decision either to apply analytical procedures as substantive procedures or to perform tests of transactions and account balances usually is determined by

Accepted Answer

The decision to apply analytical procedures or tests of transactions and account balances should be based on the relative effectiveness and efficiency of each method in achieving the specific audit objectives. Factors to consider include the nature of the account and assertion, the risk of material misstatement, the availability of information, and the cost and time required to perform the procedures. The other options listed may be factors to consider but are not the primary determinants of the decision.

Question 20

An example of an analytical procedure is the comparison of

Accepted Answer

The comparison of financial information with similar information regarding the industry in which the entity operates is an example of an analytical procedure. This involves analyzing financial ratios, trends and ratios in order to identify any significant fluctuations or unusual relationships that may require further investigation. This technique is commonly used in the audit process to help identify potential risks, fraud or errors in the financial statements.

Quiz 5: Evidence and Documentation