AUD 3.5 - Audit Data Analytics and Analytical Procedures Flashcards
Which of the following is the most reliable analytical approach to verification of the year-end financial statement balances of a wholesale business?
A. Verify depreciation expense by multiplying the depreciable asset balances by one divided by the depreciation rate.
B. Verify commission expense by multiplying sales revenue by the company’s standard commission rate.
C. Verify FICA tax liability by multiplying total payroll costs by the FICA contribution rate in effect during the year.
D. Verify interest expense, which includes imputed interest, by multiplying noncurrent debt balances by the year-end prevailing interest rate.
Answer (B) is correct.
If the wholesaler uses a standard commission rate, commission expense should be related to sales revenue. The auditor should also compare actual with budgeted and prior year amounts.
Which of the following factors has the least influence on an auditor’s consideration of the reliability of data for purposes of analytical procedures?
A. Whether sources within the entity were independent of those who are responsible for the amount being audited.
B. Whether the data were processed in a computer system or in a manual accounting system.
C. Whether the data were subjected to audit testing in the current or prior year.
D. Whether the data were obtained from independent sources outside the entity or from sources within the entity.
Answer (B) is correct.
The consideration of the reliability of data should include sources of the data and the conditions under which the data were gathered. Whether (1) sources within the entity were independent of those who are responsible for the amount being audited, (2) the data were subjected to audit testing in the current or prior year, and (3) the data were obtained from independent sources outside the entity or from sources within the entity are more influential than the mode of processing. Other factors include whether the auditor’s expectations were developed using data from a variety of sources and whether the data were developed under a reliable system with adequate controls.
Which of the following ratios would be the least useful in reviewing the overall profitability of a manufacturing company?
A. Net income to working capital.
B. Net income to net worth.
C. Net income to total assets.
D. Net income to sales.
Answer (A) is correct.
The ratio of net income to working capital is not typically considered in evaluating overall profitability. It does not give a broad measure of how effectively the firm is managed because it does not consider noncurrent assets and liabilities.
An auditor discovers that a client’s accounts receivable turnover is substantially lower for the current year than for the prior year. This trend may indicate that:
A. Fictitious credit sales have been recorded during the year.
B. The client recently tightened its credit-granting policies.
C. Employees have stolen inventory just before year end.
D. An employee has been lapping receivables in both years.
Answer (A) is correct.
The accounts receivable turnover ratio equals net credit sales divided by average accounts receivable. Accounts receivable turnover will decrease if net credit sales decrease or average accounts receivable increases. Fictitious sales increase both the numerator and denominator. Adding an equal amount to both the numerator and denominator decreases a fraction greater than 1.0. For example, adding 1 to both parts of the fraction 3 ÷ 2 decreases it to 4 ÷ 3. The turnover ratio will decrease still more in the next period because fictitious items will continue to increase receivables (a real account) but not sales (a nominal account).
Answer (B) is incorrect.
Tightening of credit-granting policies will decrease net credit sales and receivables. Subtracting an equal amount from the numerator and denominator increases a fraction greater than 1.0.
Answer (C) is incorrect.
Stolen inventory has no effect on accounts receivable turnover. It affects inventory turnover.
Answer (D) is incorrect.
Lapping is the delayed recording of cash receipts to cover a cash shortage. Current receipts are posted to accounts of customers who paid 1 or 2 days previously. If lapping occurs in both years, the turnover ratio is not affected.
An auditor compares this year’s revenues and expenses with those of the prior year and investigates all changes exceeding 10%. By this procedure the auditor would be most likely to learn that:
A. The client changed its capitalization policy for small tools this year.
B. This year’s provision for uncollectible accounts is inadequate because of worsening economic conditions.
C. An increase in property tax rates has not been recognized in the client’s accrual.
D. Fourth quarter payroll taxes were not paid.
Answer (A) is correct.
Investigating changes in revenues and expenses should detect unusual events, transactions, etc., that have an impact on the income statement accounts. A change in the capitalization policy for tools in the current year would probably have a significant effect on small tools expense.
