You have performed preliminary analytical procedureson one of your audit engagements and observed the following independent situations:1. The allowance for obsolete inventory increased from the prior year, but the allowance as a percentage of inventory decreased from the prior year.2. Long-term debt increased from the prior year, but total interest expense decreasedas a percentage of long-term debt.3. The dollar amount of operating income is consistent with the prior year althoughthe entity was more profitable on a net income basis.4. The quick ratio decreased from the prior year, although the amount of cash and netaccounts receivable is almost the same as the prior year.Below are possible explanations for each of the observed changes in the financial statementamounts and ratios. For each observed change, select the most likely explanation(s)from the list below. Note: There may be more than one explanation for a given observedchange, and an explanation can be used more than once.a. Shipments of inventory sold prior to year end were included in the client’s inventorycounts as of the balance sheet date.b. Selling and general administrative expenses were lower this year relative to last year.c. Sales have decreased compared to the prior year, and the client is maintaining lessinventory as a result.
You have performed preliminary analytical procedures
on one of your audit engagements and observed the following independent situations:
1. The allowance for obsolete inventory increased from the prior year, but the allowance as a percentage of inventory decreased from the prior year.
2. Long-term debt increased from the prior year, but total interest expense decreased
as a percentage of long-term debt.
3. The dollar amount of operating income is consistent with the prior year although
the entity was more profitable on a net income basis.
4. The quick ratio decreased from the prior year, although the amount of cash and net
accounts receivable is almost the same as the prior year.
Below are possible explanations for each of the observed changes in the financial statement
amounts and ratios. For each observed change, select the most likely explanation(s)
from the list below. Note: There may be more than one explanation for a given observed
change, and an explanation can be used more than once.
a. Shipments of inventory sold prior to year end were included in the client’s inventory
counts as of the balance sheet date.
b. Selling and general administrative expenses were lower this year relative to last year.
c. Sales have decreased compared to the prior year, and the client is maintaining less
inventory as a result.
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