Connect Access Card for Principles of Auditing & Other Assurance Services
21st Edition
ISBN: 9781260299366
Author: Ray Whittington, Kurt Pany
Publisher: McGraw-Hill Education
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Question
Chapter 5, Problem 40QRA
a.
To determine
Provide the possible reasons behind the unexpected changes in financial relationships relative to prior years when the rate of inventory turnover (ratio of cost of goods sold to average inventory) has declined from the prior year’s rate.
b.
To determine
Provide the possible reasons behind the unexpected changes in financial relationships relative to prior years when the number of days’ sales in accounts receivable has increased over the prior year.
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When analytical procedures disclose unexpected changes in financial relationships relative to prior years, the auditors consider the possible reasons for the changes. Give several possible reasons for the following significant changes in relationships:
a. The rate of inventory turnover (ratio of cost of goods sold to average inventory) has declined from the prior year’s rate.
b. The number of days’ sales in accounts receivable has increased over the prior year.
You have performed preliminary analytical procedures on one of your audit engagements and observed the following independent situations:
The allowance for obsolete inventory increased from the prior year, but the allowance as a percentage of inventory decreased from the prior year.
Long-term debt increased from the prior year, but total interest expense decreased as a percentage of long-term debt.
The dollar amount of operating income is consistent with the prior year although the entity was more profitable on a net income basis.
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.
Required:
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…
An analyst observes a decrease in a company’s inventory turnover. Which of the following would most likely explain this trend? B . Due to problems with obsolescent inventory last year, the company wrote off a large amount of its inventory at the beginning of the period.
Chapter 5 Solutions
Connect Access Card for Principles of Auditing & Other Assurance Services
Ch. 5 - Prob. 1RQCh. 5 - Prob. 2RQCh. 5 - Prob. 3RQCh. 5 - Distinguish among routine, nonroutine, and...Ch. 5 - Prob. 5RQCh. 5 - Prob. 6RQCh. 5 - Prob. 7RQCh. 5 - As part of the verification of accounts receivable...Ch. 5 - Prob. 9RQCh. 5 - When in the course of an audit might the auditors...
Ch. 5 - Prob. 11RQCh. 5 - Prob. 12RQCh. 5 - Prob. 13RQCh. 5 - Prob. 14RQCh. 5 - Prob. 15RQCh. 5 - Prob. 16RQCh. 5 - Prob. 17RQCh. 5 - Prob. 18RQCh. 5 - Prob. 19RQCh. 5 - What disclosures should be made in the financial...Ch. 5 - Prob. 21RQCh. 5 - Prob. 22RQCh. 5 - Prob. 23RQCh. 5 - Prob. 24RQCh. 5 - Prob. 25RQCh. 5 - Prob. 26RQCh. 5 - Prob. 27RQCh. 5 - Prob. 28RQCh. 5 - Prob. 29RQCh. 5 - Prob. 30RQCh. 5 - Prob. 31RQCh. 5 - I have finished my testing of footings of the cash...Ch. 5 - Prob. 33RQCh. 5 - Prob. 34RQCh. 5 - Financial statements contain a number of...Ch. 5 - Prob. 36QRACh. 5 - In an audit of financial statements, the auditors...Ch. 5 - Prob. 38QRACh. 5 - Prob. 39QRACh. 5 - Prob. 40QRACh. 5 - Prob. 41QRACh. 5 - Prob. 42QRACh. 5 - Prob. 43QRACh. 5 - Prob. 44QRACh. 5 - Prob. 45AOQCh. 5 - Prob. 45BOQCh. 5 - Prob. 45COQCh. 5 - Prob. 45DOQCh. 5 - Prob. 45EOQCh. 5 - Prob. 45FOQCh. 5 - Prob. 45GOQCh. 5 - Prob. 45HOQCh. 5 - Prob. 45IOQCh. 5 - Prob. 45JOQCh. 5 - Prob. 45KOQCh. 5 - A difference of opinion concerning accounting and...Ch. 5 - Prob. 46OQCh. 5 - Prob. 47OQCh. 5 - Prob. 48AOQCh. 5 - Prob. 48BOQCh. 5 - Prob. 48COQCh. 5 - The cost of analytical procedures in terms of time...Ch. 5 - Prob. 48EOQCh. 5 - Prob. 49OQCh. 5 - Prob. 50PCh. 5 - Prob. 51PCh. 5 - Prob. 52PCh. 5 - Prob. 53PCh. 5 - Prob. 54PCh. 5 - Prob. 55PCh. 5 - Prob. 56P
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- Sandra: We are beginning our audit of Imex and have prepared ratio analyses to determine if there have been significant changes in financial position. This helps us guide the audit process. This analysis indicates that the inventory turnover has decreased from 5 to 2.8 and the accounts receivable turnover has decreased from 12 to 8. I was wondering if you could explain this change in operations. Travis: There is little need for concern. The inventory represents computers that we were unable to sell during the holiday buying season. We are confident, however, that we will be able to sell these computers as we move into the next fiscal year. Sandra: What gives you this confidence? Travis: We will increase our advertising and provide some very attractive price concessions to move these machines. We have no choice. Newer technology is already out there, and we have to unload this inventory. Sandra: …and the receivables? Travis: As you may be aware, the company is under tremendous pressure…arrow_forwardIn the audit of the Worldwide Wholesale Company, you did extensive ratio and trend analysis as part of preliminary audit planning. Your analytical procedures identified the following: Commission expense as a percent of sales was constant for several years but has increased significantly in the current year. Commission rates have not changed. The rate of inventory turnover has steadily decreased for three years. Inventory as a percent of current assets has steadily increased for four years. The number of days’ sales in accounts receivable has steadily increased for three years. Allowance for uncollectible accounts as a percent of accounts receivable has steadily decreased for three years. The absolute amounts of depreciation expense and depreciation expense as a percent of gross fixed assets are significantly smaller than in the preceding year. Potential Significances a. Inventory appears to be maintained at a higher level than is necessary for the company. b. Depreciation…arrow_forwardIn the audit of the Worldwide Wholesale Company, you did extensive ratio and trend analysis as part of preliminary audit planning. Your analytical procedures identified the following: Commission expense as a percent of sales was constant for several years but has increased significantly in the current year. Commission rates have not changed. The rate of inventory turnover has steadily decreased for three years. Inventory as a percent of current assets has steadily increased for four years. The number of days’ sales in accounts receivable has steadily increased for three years. Allowance for uncollectible accounts as a percent of accounts receivable has steadily decreased for three years. The absolute amounts of depreciation expense and depreciation expense as a percent of gross fixed assets are significantly smaller than in the preceding year. Required Evaluate the potential significance of each of the changes in ratios or trends identified in your analysis on the fair…arrow_forward
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- Kari Downs, an auditor with Wheeler CPAs, is performing a review of Waterway Company’s inventory account. Waterway did not have a good year, and top management is under pressure to boost reported income. According to its records, the inventory balance at year-end was $747,000. However, the following information was not considered when determining that amount.arrow_forwardImagine that the auditor of QRS has expressed concerns that the bad debts expense recorded for the year is not high enough. What would be the impact on the reported value of the following items if the auditor requires an adjustment to be made? Select higher, lower or no effect from the drop down menu. Indicate higher/lower/no effect for: Cash Accounts Receivable Allowance for Doubtful Debts Bad debts expense Current Assets Net Profitarrow_forwardAs a result of analytical procedures, the auditor determines that the gross profitpercentage has declined from 30% in the preceding year to 20% in the current year.The auditor should(1) express a qualified opinion due to inability of the client company to continue asa going concern.(2) evaluate management’s performance in causing this decline.(3) require footnote disclosure.(4) consider the possibility of a misstatement in the financial statements.arrow_forward
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