(A3)M7-M9

Question 1

when using ratio analysis, would an increase in the numerator increase or decrease the ratio?

Answer 1

increase!

Question 2

when using ratio analysis, would an increase in the denominator increase or decrease the ratio?

Answer 2

decrease

Question 3

current ratio

Answer 3

current assets/current liabilities

(liquidity) 1.5

Question 4

quick ratio

Answer 4

cash + ST marketable securities + receivables (net)/current liabilities
(liquidity) .8

Question 5

accounts receivable turnover

Answer 5

sales (net)/avg AR (net)

activity

Question 6

days sales in AR

Answer 6

ending AR (net)/(net sales/365)
(activity)

Question 7

inventory turnover

Answer 7

COGS/avg inventory

activity

Question 8

days in inventory

Answer 8

ending inventory/(COGS/365)

activity

Question 9

AP turnover

Answer 9

COGS/avg AP

activity

Question 10

days of payables outstanding

Answer 10

ending AP/(COGS/365)

activity

Question 11

cash conversion cycle

Answer 11

days sales in AR + days in inventory - days of payables outstanding
(activity)

Question 12

asset turnover

Answer 12

sales (net)/avg total assets

(activity) *higher is better

Question 13

profit margin

Answer 13

net income/sales (net)

profit

Question 14

ROA

Answer 14

net income/avg total assets

profit

Question 15

return on equity

Answer 15

net income/avg total equity

profit

Question 16

gross profit margin

Answer 16

sales (net) - COGS/sales (net)

Question 17

operating cash flow

Answer 17

cash flow from operations/ending current liabilities

Question 18

debt to equity

Answer 18

total liabilities/total equity

(LT debt paying ability) *lower is better

Question 19

total debt

Answer 19

total liabilities/total assets

LT debt paying ability

Question 20

equity multipler

Answer 20

total assets/total equity

(LT debt) *lower is better

Question 21

times interest earned

Answer 21

income before interest exp and taxes/interest exp

LT debt

Question 22

there is a ___ relationship between sample size and tolerable rate/misstatement.

Answer 22

inverse

Question 23

if the upper deviation rate (sample deviation rate + allowance for sampling risk) is greater than the tolerable rate, should auditor rely on the control?

Answer 23

NO

Question 24

name the non statistical sampling techniques.

Answer 24

block, haphazard, stratified

Question 25

what kind of relationship exists between sample size and the expected error rate?

Answer 25

Direct

Question 26

the sample size in an attribute sampling application is affected by which 3 factors?

Answer 26

allowable risk of assessing control risk too low, tolerable deviation rate, likely rate of deviations (expected)

Question 27

what type of sampling would be used to determine whether a given account balance is reasonable?

Answer 27

variables

Question 28

if dual purpose sampling is used, auditor should use which sample size?

Answer 28

larger of the two

Question 29

upper deviation rate = ___ + ___

Answer 29

sample deviation rate, allowance for sampling risk

Question 30

the ___ sampling technique is not designed to test for zero or negative balances.

Answer 30

probability-proportional-to-size (PPS)

Question 31

what kind of relationship is there between assessed level of control risk and sample size?

Answer 31

direct

Question 32

discuss mean-per-unit estimation

Answer 32

uses the avg value of items in the sample to estimate the true population value. (audited value of sample/sample size) x population size = point est

Question 33

discuss ratio estimation

Answer 33

uses the ratio of the audited values of items to their book values to project true population value. Efficient when audited amounts are approx proportional to client's book amounts. (audited value of sample/BV of sample) x total BV of population = point est

Question 34

discuss difference estimation

Answer 34

uses the avg difference between audited values of items and their book values to project actual population value. Used when ratio estimation is not efficient. ((BV of sample - audited value of sample)/sample size) x population size = projected error total BV of population - projected error = point est

Question 35

risk of incorrect acceptance has a direct or inverse relationship with sample size?

Answer 35

inverse

Question 36

population variability has a direct or inverse relationship with sample size?

Answer 36

direct

Question 37

number of items in population has a direct or inverse relationship with sample size?

Answer 37

neither, it has virtually no impact

Question 38

what does stratification generally result in?

Answer 38

smaller sample size and more precise estimate

Question 39

which account typically has a smaller balance, AR or sales.

Answer 39

AR, so when calculating days sales in AR an equal increase in sales and AR would have a greater impact on AR