Auditors sometimes use comparisons of ratios as audit evidence. An unexplained decreasein the ratio of gross profit to sales may suggest which of the following possibilities?a. Unrecorded purchases.b. Unrecorded sales.c. Merchandise purchases being charged to selling and general expense.d. Fictitious sales.

Auditors sometimes use comparisons of ratios as audit evidence. An unexplained decreasein the ratio of gross profit to sales may suggest which of the following possibilities?a. Unrecorded purchases.b. Unrecorded sales.c. Merchandise purchases being charged to selling and general expense.d. Fictitious sales.

Auditing: A Risk Based-Approach (MindTap Course List)

11th Edition

ISBN:9781337619455

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter9: Auditing The Revenue Cycle.

Section: Chapter Questions

Problem 32CYBK

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The following situations represent errors and frauds that could occur in financial statements.Required:State how the ratio in question would compare (higher, equal, or lower) to what the ratio should have been had the error or fraud not occurred.a. The company recorded fictitious sales with credits to sales revenue accounts and debits to accounts receivable. Inventory was reduced, and cost of goods sold was increased for the profitable “sales.” Is the current ratio higher than, equal to, or lower than what it should have been?b. The company recorded cash disbursements by paying trade accounts payable but held the checks past the year-end date, meaning that the “disbursements” should not have been shown as credits to cash and debits to accounts payable. Is the current ratio higher than, equal to, or lower than what it should have been? Consider cases in which the currentratio before the improper “disbursement” recording was (1) higher than 1:1, (2) equal to 1:1, and (3) lower than…
Which of the following tests of details most likely would help an auditor determine whether accounts payable have been misstated?a. Examining reported purchase returns that appear too low. b. Examining vendor statements for amounts not reported as purchases. c. Searching for customer-returned goods that were not reported as returns. d. Reviewing bank transfers recorded as cash received from customers.
Imagine that you were auditing accounts receivable balances to confirm sales and found significant discrepancies between the recorded account balances and returned confirmations from customers. Recommend an alternative approach to confirming sales revenue. Provide a rationale for your recommendation.
you are auditing accounts receivable balances to confirm sales and found significant discrepancies between the recorded account balances and returned confirmations from customers. Recommend an alternative approach to confirming sales revenue. Provide a rationale for your recommendation.
What is the difference between the auditor’s approach in verifyingsales returns and allowances and that for sales? Explain the reasons for the difference
Explain why you agree or disagree with the following statement:“In most audits, it is more important to test carefully the cutoff for sales than forcash receipts.” Describe how you perform each type of test, assuming documents areprenumbered.
Which of the following audit findings would be considered a deficiency in internal controls in the revenue cycle? A. No evidence that price and quantity on an invoice was compared with supporting documentation. B. Quantity shipped differed from quantity billed. C. Recording sales several days before the shipment date. D. All of the above. E. None of the above.
Before expressing an opinion concerning the audit of income and expenses, theauditor will best proceed with the audit of the income statement by(1) applying a rigid measurement standard designed to test for understatement ofnet income.(2) analyzing the beginning and ending balance sheet inventory amounts.(3) making net income comparisons to published industry trends and ratios.(4) auditing income statement accounts concurrently with the related balance sheetaccounts
The following audit procedures are consistent with gathering evidence about the valuation assertion of a client’s accounts receivable balance, except: * Inquiry with the management with regard the client policy of providing allowance for doubtful accounts. Vouching entries in the sales journal to the delivery receipt to test the propriety of the sale transaction and the resulting receivable balance. Recomputation of the client’s aging schedule and the required allowance for doubtful accounts. Testing the reasonableness of the client’s estimation policy in determining the portion of the receivables that are doubtful of collection. None of the above.
Choose the one correct answer In auditing the client’s receivables, the auditor decided to select entries in the sales journal and trace them back to the sales invoice, delivery receipt and the sales order. This procedure is consistent in corroborating which of the following assertion? * A. ValuationB. ExistenceC. CompletenessD. Rights and Obligationse. None of the above
he auditor of Kent Ltd selects a sample from the file of shipping documents in order to confirm that all sales shipped are invoiced and recorded in accounting records. This test will confirm:Select one:a. Valuation and allocation assertion for sales.b. Cut-off assertion for sales.c. Occurrence assertion for sales.d. Completeness assertion for sales.
The following questions concern types of audit tests.Choose the best response.a. The auditor looks for an indication on duplicate sales invoices to see whether theaccuracy of invoices has been verified. This is an example of(1) a test of details of balances. (3) a substantive test of transactions.(2) a test of control. (4) both a test of control and a substantivetest of transactions.