4.04 - ANALYTICAL PROCEDURES (AP)

Question 1

4.04 - ANALYTICAL PROCEDURES (AP)

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

A) Whether the data were developed in a computerized or a manual accounting system.

B) Whether the data were prepared on the cash basis or in conformity with GAAP.

C) Whether the data were processed in an online system or a batch entry system.

D) Whether the data were developed under a system with adequate controls.

Answer 1

D) Whether the data were developed under a system with adequate controls.

Data developed under a system with adequate controls is more reliable than data developed under a system without
effective controls.

Whether data is computerized or manual, prepared on the cash basis or GAAP, or processed in an on-line or batch entry system will not affect the reliability of the data.

Question 2

4.04 - ANALYTICAL PROCEDURES (AP)

Which of the following financial
ratios would be most useful to an auditor seeking information on a company’s
ability to cover current obligations?

A) Gross profit margin
B) Quick ratio
C) Sales to assets
D) Earnings per share

Answer 2

B) Quick ratio

The quick ratio, which is the ratio of current liquid assets to total current liabilities provides information about the
resources that are immediately available to cover current obligations.

Earnings per share provides information about the amount of net income earned per share.

The gross profit margin indicates how much sales generate toward covering expenses and profit.

The ratio of sales to assets, the asset turnover ratio, shows how efficiently assets are used to generate sales.

None of these, with the exception of the quick ratio, provides information about liquidity.

Question 3

4.04 - ANALYTICAL PROCEDURES (AP)

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

A) Identify account balances that represent specific risks relevant to the audit.

B) Gather evidence from tests of details to corroborate financial statement assertions.

C) Detect fraud that may cause the financial statements to be misstated.

D) Assist the auditor in evaluating the overall financial statement presentation

Answer 3

D) Assist the auditor in evaluating the overall financial statement presentation
.
Analytical procedures performed in the review stage of an audit consist largely of evaluating the overall financial
statement presentation and comparing it to the auditor’s expectations as to financial position, results of operations, and cash flows.

Analytical procedures used in planning assist the auditor in identifying balances that represent specific risks.

Analytical procedures performed as substantive tests gather evidence from tests of details and can be useful in the detection of fraud.