CPA Review- Ch 8

Selected data pertaining to Lore Co. for the calendar year 20X1 is as follows: Net cash sales $ 3,000 Cost of goods sold 18,000 Inventory at beginning of year 6,000 Purchases 24,000 Accounts receivable at beginning of year 20,000 Accounts receivable at end of year 22,000 The accounts receivable turnover for 20X1 was 5.0 times. What were Lore's 20X1 net credit sales?

$105,000

Selected data pertaining to Lore Co. for the calendar year 20X1 is as follows: Net cash sales $ 3,000 Cost of goods sold 18,000 Inventory at beginning of year 6,000 Purchases 24,000 Accounts receivable at beginning of year 20,000 Accounts receivable at end of year 22,000 What was the inventory turnover for 20X1?

2 times

At December 31, 20X2, Curry Co. had the following balances in selected asset accounts: 20X2 Increase Over 20X1 Cash $ 300 $100 Accounts receivable, net 1,200 400 Inventory 500 200 Prepaid expenses 100 40 Other assets 400 150 Total assets $2,500 $890 Curry also had current liabilities of $1,000 on December 31, 20X2, and net credit sales of $7,200 for the year then ended. What was the average number of days to collect Curry's accounts receivable during 20X2?

50.7

To be effective, analytical procedures in the overall review stage of an audit engagement should be performed by which of the following?

A manager or partner who has a comprehensive knowledge of the client's business and industry

For the fiscal year ending December 31, previous year and the current year, Justin Co. has net sales of $1,000,000 and $2,000,000; average gross receivables of $100,000 and $300,000; and allowance for uncollectible accounts receivable of $30,000 and $50,000, respectively. If the accounts receivable turnover and the ratio of allowance for uncollectible accounts receivable to gross accounts receivable are calculated, which of the following best represents the conclusions to be drawn?

Accounts receivable turnovers are 10.0 and 6.6 and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.16, respectively. Examine allowance for possible understatement of the allowance.

If the business environment is experiencing a recession, the auditor most likely would focus increased attention on which of the following accounts?

Allowance for doubtful accounts

In an engagement to review the financial statements of a nonissuer, the accountant most likely would perform which of the following procedures?

Analysis of inventory turnover

An auditor compared the current-year gross margin with the prior-year gross margin to determine if cost of sales is reasonable. What type of audit procedure was performed?

Analytical procedures

Which of the following statements concerning analytical procedures is correct?

Analytical procedures alone may provide the appropriate level of assurance for some assertions.

Which of the following explanations best describes why an auditor may decide to reduce tests of details for a particular audit objective?

Analytical procedures have revealed no unusual or unexpected results.

Which of the following statements is incorrect concerning analytical procedures?

Analytical procedures used in planning an audit generally use data aggregated at a low level.

Which of the following procedures most likely would be performed in an engagement to review financial statements of a nonissuer?

Analytical review of payroll tax expense

Which of the following is not generally considered necessary if an auditor applies principal substantive tests to details of balance sheet accounts at an interim date?

Assessing control risk below the maximum is required in order to have a reasonable basis for extending audit conclusions from an interim date to the balance sheet date.

Which of the following procedures would a CPA most likely perform in the planning stage of a financial statement audit?

Compare recorded financial information with anticipated results from budgets and forecasts

Which of the following procedures would a CPA ordinarily perform when reviewing the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

Compare the financial statements with budgets or forecasts

Which of the following is an analytical procedure that an auditor most likely would perform when planning an audit?

Comparing current-year balances to budgeted balances

Which of the following analytical procedures most likely would be used during the planning stage of an audit?

Comparing current-year to prior-year sales volumes

Which of the following would be considered an analytical procedure?

Comparing inventory balances to recent sales activities

- Which of the following activities is an analytical procedure an auditor would perform in the final overall review stage of an audit to ensure that the financial statements are free from material misstatement?

Comparing the current year's financial statements with those of the prior year

Which of the following is an analytical procedure that an auditor most likely would perform during the planning stage of an audit?

Comparing the current-year account balances for conformity with predictable patterns

Which of the following procedures would an auditor most likely perform in planning a financial statement audit?

Comparing the financial statements to anticipated results

Which of the following would be used on a review engagement?

Comparison of current-year to prior-year account balances

Which of the following procedures would an auditor least likely perform before the balance sheet date?

Confirmation of accounts payable

Which of the following ratios would an engagement partner most likely consider in the overall review stage of an audit?

Cost of goods sold ÷ Average inventory

The following information pertains to Ali Corp. as of and for the year ended December 31, 20X1: Liabilities $ 60,000 Stockholders' equity $500,000 Shares of common stock issued and outstanding 10,000 Net income $ 30,000 During 20X1, Ali's officers exercised stock options for 1,000 shares of stock at an option price of $8 per share. What was the effect of exercising the stock options?

Debt-to-equity ratio decreased to 12%.

In a comparison of 20X2 to 20X1, Neir Co.'s inventory turnover ratio increased substantially although sales and inventory amounts were essentially unchanged. Which of the following statements explains the increased inventory turnover ratio?

Gross profit percentage decreased.

When applying analytical procedures during an audit, which of the following is the best approach for developing expectations?

Identifying reasonable explanations for unexpected differences before talking to client management

On December 30, 20X1, Vida Co. had cash of $200,000, a current ratio of 1.5:1 and a quick ratio of 0.5:1. On December 31, 20X1, all cash was used to reduce accounts payable. How did these cash payments affect the ratios?

Increased current ratio and decreased quick ratio

Which of the following procedures would an accountant most likely perform during an engagement to review the financial statements of a nonissuer?

Inquire of management about related party transactions

Which of the following risk assessment procedures should be performed and documented in order to obtain an understanding of the entity and its environment?

Inquiries of management and others within the entity

In which of the following circumstances is substantive testing of accounts receivable before the balance sheet date most appropriate?

Internal controls during the remaining period are effective.

Which of the following procedures most likely would be performed in a review engagement of a nonissuer's financial statements in accordance with the Statements on Standards for Accounting and Review Services (SSARS)?

Making inquiries of management

Which of the following pairs of accounts would an auditor most likely analyze on the same workpaper?

Notes receivable and interest income

- Selected data pertaining to Lore Co. for the calendar year 20X1 is as follows: Net cash sales $ 3,000 Cost of goods sold 18,000 Inventory at beginning of year 6,000 Purchases 24,000 Accounts receivable at beginning of year 20,000 Accounts receivable at end of year 22,000 Lore would use which of the following to determine the average days sales in inventory?

Numerator: 365; Denominator: Inventory turnover

Analytical procedures are most appropriate when testing which of the following types of transactions?

Operating expense transactions

What is the most likely course of action that an auditor would take after determining that performing substantive tests on inventory will take less time than performing tests of controls?

Perform only substantive tests on inventory

Which of the following procedures would an auditor most likely perform in planning a financial statement audit?

Performing analytical procedures to identify areas that may represent specific risks

Which of the following would not be considered an analytical procedure?

Projecting a deviation rate by comparing the results of a statistical sample with the actual population characteristics

Which of the following would not be considered an analytical procedure?

Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics

Gil Corp. has current assets of $90,000 and current liabilities of $180,000. Which of the following transactions would improve Gil's current ratio?

Purchasing $50,000 of merchandise inventory with a short-term account payable

Which of the following is an analytical procedure that an auditor most likely would perform during the final review stage of an audit?

Reading the financial statements and considering whether there are any unusual or unexpected balances that were not previously identified

Which of the following procedures is ordinarily performed by an accountant in a compilation engagement of a nonissuer?

Reading the financial statements to consider whether they are free of obvious mistakes in the application of accounting principles

A test of a payroll system involved comparing an individual's number of overtime hours a week with an average of weekly overtime during a similar period in a prior year and evaluating the results. This is an example of what type of test?

Reasonableness test

Which of the following procedures would an auditor most likely perform prior to the balance sheet date?

Review detail and test significant travel and entertainment expenses

An auditor confirmed accounts receivable as of an interim date, and all confirmations were returned and appeared reasonable. Which of the following additional procedures most likely should be performed at year-end?

Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year-end.

Heath Co.'s current ratio is 4:1. Which of the following transactions would normally increase its current ratio?

Selling inventory on account

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

Square footage of selling space

Which of the following statements best describes why an auditor would use only substantive procedures to evaluate specific relevant assertions and risks?

Testing the operating effectiveness of the relevant controls would not be efficient.

Analytical procedures performed during an audit indicate that accounts receivable 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 would satisfy the auditor?

The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet.

An auditor's analytical procedures performed during the overall review stage indicated that the client's accounts receivable 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?

The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

- Which of the following comparisons would an auditor most likely make in evaluating an entity's costs and expenses?

The current year's payroll expense with the prior year's payroll expense

Which of the following circumstances most likely would cause an auditor to suspect an employee payroll fraud scheme?

There are significant unexplained variances between standard and actual labor cost.

- Which of the following statements is correct concerning analytical procedures used in planning an audit engagement?

They usually use financial and nonfinancial data aggregated at a high level.

When performing analytical procedures in the planning stage, the auditor most likely would develop expectations by reviewing which of the following sources of information?

Unaudited information from internal quarterly reports

Which of the following factors would most likely influence an auditor's consideration of the reliability of data when performing analytical procedures?

Whether the data was developed under a system with adequate controls

Which of the following factors would least influence an auditor's consideration of the reliability of data for purposes of analytical procedures?

Whether the data were processed in an EDP system or in a manual accounting system

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

additional tests of details are required.

Although less encompassing than in an audit, an accountant is required to develop expectations in a review of financial statements by identifying and using plausible relationships that are reasonably expected to exist based on his or her understanding of the entity and the industry in which the entity operates. Which of the following might be sources of information for developing expectations?

all

When performing an engagement to review the financial statements of a nonissuer, an accountant most likely would

ask about actions taken at board of directors' meetings.

Before applying principal substantive tests to an entity's accounts receivable at an interim date, an auditor should

assess the difficulty in controlling the incremental audit risk.

The purpose of applying analytical procedures in planning the audit is to

assist in planning the nature, timing, and extent of auditing procedures that will be used to obtain audit evidence for specific account balances or classes of transactions.

The primary objective of analytical procedures used in the overall review stage of an audit is to

assist the auditor in assessing the validity of the conclusions reached.

A primary objective of analytical procedures used in the final review stage of an audit is to

assist the auditor in evaluating the overall financial statement presentation

In determining the appropriate analytical procedures to be performed in a review of financial statements, an accountant may consider which of the following? Knowledge obtained during current and previous engagements The likelihood of a misstatement in the financial statements

both

To measure how effectively an entity employs its resources, an auditor calculates inventory turnover by dividing average inventory into

cogs

- In auditing payroll, an auditor most likely would

compare payroll costs with entity standards or budgets.

Before applying principal substantive tests to the details of accounts at an interim date prior to the balance sheet date, an auditor should

consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.

- Analytical procedures performed in the overall review stage of an audit generally would include

considering the adequacy of the evidence gathered in response to unexpected balances identified in planning.

Analytical procedures used in the overall review stage of an audit generally include

considering unusual or unexpected account balances that were not previously identified.

tod Corp. wrote off $100,000 of obsolete inventory on December 31, 20X1. The effect of this write-off was to decrease

current

The objective of tests of details of transactions performed as substantive tests is to

detect material misstatements in the financial statements.

- An auditor uses the assessed level of control risk to

determine the acceptable level of detection risk for financial statement assertions.

An auditor most likely would apply analytical procedures in the overall review stage of an audit to

determine whether additional audit evidence may be needed.

An auditor is testing the reasonableness of dividend income from investments in publicly held companies (issuers). The auditor most likely would compute the amount that should have been received and recorded by the client by

electronically accessing the details of dividend records on the internet.

Analytical procedures used in planning an audit should focus on

enhancing the auditor's understanding of the client's business.

Analytical procedures used in the planning phase of an audit should focus on

enhancing the auditor's understanding of the transactions and events that have occurred since the last audit.

When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor will most likely increase the

extent of tests of details.

An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that

fictitious credit sales have been recorded during the year.

An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing in order to

identify potential liabilities for unpaid payroll taxes.

After testing a client's internal control activities, an auditor discovers a number of material weaknesses in the operation of a client's internal controls. Under these circumstances the auditor most likely would

increase the assessment of control risk and increase the extent of substantive tests.

Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?

interest expense

- The procedure, "The accountant should send a letter of inquiry to the entity's attorney to corroborate the information furnished by management concerning litigation," is

not required for either a compilation or a review.

In an environment that is highly automated, an auditor determines that it is not possible to reduce detection risk solely by substantive tests of transactions. Under these circumstances, the auditor most likely would

perform tests of controls to support a lower level of assessed control risk.

An entity's income statements were misstated due to the recording of journal entries that involved debits and credits to an unusual combination of expense and revenue accounts. The auditor most likely could have detected this by

performing analytical procedures designed to disclose differences from expectations.

An auditor may achieve audit objectives related to particular assertions by

performing analytical procedures.

An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim date rather than as of the balance sheet date. The auditor should be aware that this practice

potentially increases the risk that errors that exist at the balance sheet date will not be detected.

An auditor's decision whether to apply analytical procedures as substantive tests usually is determined by the

precision and reliability of the data used to develop expectations.

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

relative effectiveness and efficiency of the tests.

In assessing control risk, an auditor ordinarily selects from a variety of techniques, including

reperformance and observation

The procedure of an accountant making inquiries about events subsequent to the date of the financial statements that would have a material effect on the financial statements is

required for a review only.

The procedure of an accountant making inquiries concerning actions taken at the board of directors' meeting is

required for a review only.

If not already performed during the overall review stage of the audit, the auditor should perform analytical procedures relating to which of the following transaction cycles?

revenue

An accountant should perform analytical procedures during an engagement to

review a nonissuer's financial statements.

The procedure, "The accountant should perform analytical procedures designed to identify relationships that appear unusual," is

review only

The accounts receivable turnover ratio increased significantly over a 2-year period. This trend could indicate that

the company is more aggressively collecting customer accounts.

Before applying substantive tests to the details of asset accounts at an interim date, an auditor should assess

the difficulty in controlling the incremental audit risk.

An important element in the effective application of analytical procedures is the development by the auditor of relevant expectations regarding the client's financial statements. As expectations on the part of the auditor become more precise

the range of expected differences become narrower, and, accordingly, the likelihood increases that significant differences from the expectations are due to misstatements.

An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that

there was an improper cutoff of sales at the end of the year.

The objective of performing analytical procedures in planning an audit is to identify the existence of

unusual transactions and events.