EBK AUDITING AND ASSURANCE SERVICES
16th Edition
ISBN: 9780134067117
Author: Hogan
Publisher: VST
expand_more
expand_more
format_list_bulleted
Question
Chapter 8, Problem 33DQP
To determine
Choose the most probable explanation for each of the independent situations.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
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…
As a result of analytical procedures an auditor determines that gross profit has declined from 30% to 15% in the current year. The auditor should..
A. Document manamgent intentions with respect to reversing the trend.
B. Evaluate managment's performance in causing the deline
C. Require a footnote disclosure
D. Consider the possibility of an error in the financial statements.
As 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.
Chapter 8 Solutions
EBK AUDITING AND ASSURANCE SERVICES
Ch. 8 - Prob. 1RQCh. 8 - Prob. 2RQCh. 8 - Prob. 3RQCh. 8 - Prob. 4RQCh. 8 - Prob. 5RQCh. 8 - Prob. 6RQCh. 8 - Prob. 7RQCh. 8 - Prob. 8RQCh. 8 - Prob. 9RQCh. 8 - Prob. 10RQ
Ch. 8 - Prob. 11RQCh. 8 - Prob. 12RQCh. 8 - Prob. 13RQCh. 8 - Prob. 14RQCh. 8 - Prob. 15RQCh. 8 - Your client, Harper Company, has a contractual...Ch. 8 - Prob. 17RQCh. 8 - Prob. 18RQCh. 8 - Prob. 19RQCh. 8 - Prob. 20RQCh. 8 - Prob. 21RQCh. 8 - Prob. 22RQCh. 8 - Prob. 23RQCh. 8 - Prob. 24RQCh. 8 - Prob. 25.1MCQCh. 8 - Prob. 25.2MCQCh. 8 - Prob. 25.3MCQCh. 8 - Prob. 26.1MCQCh. 8 - Prob. 26.2MCQCh. 8 - Prob. 26.3MCQCh. 8 - Which one of the following statements is correct...Ch. 8 - Prob. 27.2MCQCh. 8 - Prob. 27.3MCQCh. 8 - Prob. 28.1MCQCh. 8 - Prob. 28.2MCQCh. 8 - Prob. 28.3MCQCh. 8 - Prob. 29DQPCh. 8 - Prob. 30DQPCh. 8 - Prob. 31DQPCh. 8 - Your comparison of the gross margin percent for...Ch. 8 - Prob. 33DQPCh. 8 - Prob. 34DQPCh. 8 - Prob. 35DQPCh. 8 - Prob. 36DQPCh. 8 - Prob. 37DQPCh. 8 - Following are statements of earnings and financial...
Knowledge Booster
Similar questions
- 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.arrow_forwardYou are reviewing the results of the Firestone audit. These are the details of the summay of identified misstatements: • Allowance for Doubtful Accounts: $60,000 misstatement (over) • Sales Revenue: $10,000 misstatement (under) • Total identified misstatements: $50,000 (impact on Assets, pre-tax income, and equity) • Performance materiality was set at $60,000 REQUIRED: a) If overall materaility for the audit was set at $30,000, what type of audit report would be issued? Why? b) If overall materiality for the audit was set at $75,000, what type of audit report would be issued? Why?arrow_forwardConsider each of the following independent situations which have come to your attention. Ineach of the following independent and material situations assume that the client is areporting entity and that a general-purpose financial report has been prepared and audited: The annual report of Ranger Limited includes a detailed graph showing revenue for the last 10 years. You note that there are some inconsistencies between the graph and the figures in the audited financial report. Management does not want to change the graph because it would involve increased printing costsarrow_forward
- Marilyn Terrill is the senior auditor for the audit of Uden Supply Company for the year ended December 31, 20X4. In planning the audit, Marilyn is attempting to develop expectations for planning analytical procedures based on the financial information for prior years and her knowledge of the business and the industry, including these: 1. Based on economic conditions, she believes that the increase in sales for the current year should approximate the historical trend in terms of actual dollar increases. 2. Based on her knowledge of industry trends, she believes that the gross profit percentage for 20X4 should be about 2 percent less than the percentage for 20X3. 3. Based on her knowledge of regulations, she is aware that the effective tax rate for the company for 20X4 has been reduced by 5 percent from that in 20X3. 4. Based on her knowledge of economic conditions, she is aware that the effective interest rate on the company's line of credit for 20X4 was approximately 12 percent. The…arrow_forwardMarilyn Terrill is the senior auditor for the audit of Uden Supply Company for the year ended December 31, 20X4. In planning the audit, Marilyn is attempting to develop expectations for planning analytical procedures based on the financial information for prior years and her knowledge of the business and the industry, including these: 1. Based on economic conditions, she believes that the increase in sales for the current year should approximate the historical trend in terms of actual dollar increases. 2. Based on her knowledge of industry trends, she believes that the gross profit percentage for 20X4 should be about 2 percent less than the percentage for 20X3. 3. Based on her knowledge of regulations, she is aware that the effective tax rate for the company for 20X4 has been reduced by 5 percent from that in 20X3. 4. Based on her knowledge of economic conditions, she is aware that the effective interest rate on the company's line of credit for 20X4 was approximately 12 percent. The…arrow_forwardWhich of the following may not be included in a typical audit program for auditing Retained Earnings? a. Reference to market quotations for the granting of share options to employees. b. Reference to fair market value of real property declared as property dividends. c. Determination of the effect of a change in policy regarding the use of average cost formula for inventories for the current year, where the entity previously elected the first-in-first-out cost formula. d. Reference to market quotations for the declaration of a 10% stock dividends.arrow_forward
- Marilyn Terrill is the senior auditor for the audit of Uden Supply Company for the year ended December 31, 20X4. In planning the audit, Marilyn is attempting to develop expectations for planning analytical procedures based on the financial information for prior years and her knowledge of the business and the industry, including these: 1. Based on economic conditions, she believes that the increase in sales for the current year should approximate the historical trend in terms of actual dollar increases. 2. Based on her knowledge of industry trends, she believes that the gross profit percentage for 20X4 should be about 2 percent less than the percentage for 20X3. 3. Based on her knowledge of regulations, she is aware that the effective tax rate for the company for 20X4 has been reduced by 5 percent from that in 20X3. 4. Based on her knowledge of economic conditions, she is aware that the effective interest rate on the company's line of credit for 20X4 was approximately 12 percent. The…arrow_forwardYou were requested to personally deliver your auditor’s report to the board of directors of Sebal Manufacturing Corporation and answer questions posed about the financial statements. While reading the statements, one director asked what are the precise meanings of the terms cost, expense, and loss? These terms seem sometimes to identify similar items and other times dissimilar items.”book value of the component’s net assets. The component was operating at a loss from the beginning of the year. in addition, Lynn had one of its manufacturing plants destroyed by an earthquake during the year. Earthquakes are not uncommon in Lynn’s operating environment. 1. Explain how Lynn should report discoutinued operations of a component of its business on its income statement for this year. Do not discuss earnings per share requirements. 2. Explain how Lynn…arrow_forwardYou are auditing Crown Corporation for the year ended 2022, Its reported net income for the year 2021 and 2022 were P 3,000,000 and P 4,000,000, respectively. During your audit, the following errors were revealed: 1. The inventory at the end of 2022 and 2023 were P 20,000 understated and P 18,000 overstated, respectively. 2. Recalculating the depreciation charges for 2023, you found out it was short by P 4,000. 3. The 15,000 insurance premium for three years was recorded using the income statement approach on January 1, 2021. No expense amount was extracted from the balance at the end 2021 and 2022. 4. An equipment was sold on December 31, 2022 for P 32,000. Its related cost was P 200,000 with zero carrying value on date of sale. The sale transaction was recorded on January 10, 2023. QUESTIONS: What is the correct net income for the year 2022? What is the correct net income for the year 2023?arrow_forward
- Marilyn Terrill is the senior auditor for the audit of Uden Supply Company for the year ended December 31, 20X4. In planning the audit, Marilyn is attempting to develop expectations for planning analytical procedures based on the financial information for prior years and her knowledge of the business and the industry, including these: 1. Based on economic conditions, she believes that the increase in sales for the current year should approximate the historical trend in terms of actual dollar increases. 2. Based on her knowledge of industry trends, she believes that the gross profit percentage for 20X4 should be about 2 percent less than the percentage for 20X3. 3. Based on her knowledge of regulations, she is aware that the effective tax rate for the company for 20X4 has been reduced by 5 percent from that in 20X3. 4. Based on her knowledge of economic conditions, she is aware that the effective interest rate on the company's line of credit for 20X4 was approximately 12 percent. The…arrow_forwardPat Colt is auditing the financial statements of Manning Company. The following is a summary of the uncorrected misstatements that Colt has identified during the past three years. These misstatements are Immaterial and have related to Isolated matters. In this summary, parentheses Imply that the misstatements would have reduced balances if they had been corrected (e.g., In 2020, the misstatements would have reduced net income by $82,500, assets by $100,000, liabilities by $17,500, and equity by $82,500 if corrected). Year 2020 2021 2022 Effect on Net Income $ (82,500) (22,000) 30,000 Effect on Assets $ (100,000) (25,500) 30,000 Effect on Liabilities $ (17,500) (3,500) 0 Effect on Equity $ (82,500) (22,000) 30,000 During the most recent audit, Colt concluded that expenses totaling $130,000 were recognized in January 2024 (when Manning paid them) but should have been recognized in 2023. Required: a. What is the dollar Impact of the misstatement identified in 2023 on each of the following…arrow_forwardPat Colt is auditing the financial statements of Manning Company. The following is a summary of the uncorrected misstatements that Colt has identified during the past three years. These misstatements are immaterial and have related to isolated matters. In this summary, parentheses imply that the misstatements would have reduced balances if they had been corrected (e.g., in 2020, the misstatements would have reduced net income by $82,500, assets by $100,000, liabilities by $17,500, and equity by $82,500 if corrected). Year 2020 2021 Effect on Net Income $ (82,500) (22,000) 30,000 Effect on Assets $ (100,000) (25,500) 30,000 Effect on Liabilities $ (17,500) (3,500) 0 Effect on Equity $ (82,500) (22,000) 30,000 2022 During the most recent audit, Colt concluded that expenses totaling $130,000 were recognized in January 2024 (when Manning paid them) but should have been recognized in 2023. Required: a. What is the dollar impact of the misstatement identified in 2023 on each of the following…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Auditing: A Risk Based-Approach (MindTap Course L...AccountingISBN:9781337619455Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:Cengage Learning
Auditing: A Risk Based-Approach to Conducting a Q...AccountingISBN:9781305080577Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:South-Western College Pub
Auditing: A Risk Based-Approach (MindTap Course L...
Accounting
ISBN:9781337619455
Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher:Cengage Learning
Auditing: A Risk Based-Approach to Conducting a Q...
Accounting
ISBN:9781305080577
Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher:South-Western College Pub