Chapter 4

Question 1

What is the purpose of analytical procedures during the final review stage of the audit?

Answer 1

The purpose of applying analytical procedures during the overall review stage of an audit is to evaluate the overall financial statement presentation, to assess the conclusions reached, and to assist in forming an opinion on whether the financial statements as a whole are free of material misstatement.

Question 2

Define rate of return on assets

Answer 2

Rate of return on assets is defined as the net income divided by the average total assets.

Question 3

How is accounts receivable turnover ratio calculated?

Answer 3

The accounts receivable turnover ratio equals net credit sales divided by average accounts receivable.

Question 4

Calculate inventory turnover ratio

Answer 4

Inventory turnover equals cost of goods sold divided by average inventory.

Question 5

Calculate ending inventory balance

Answer 5

Beginning inventory, plus purchases, minus cost of goods sold.

Question 6

Calculate the average number of days sales in inventory.

Answer 6

Average number of days sales in inventory is defined as 365 days per year divided by the inventory turnover.

Question 7

Calculate acid-test ratio

Answer 7

The acid-test ratio is calculated by taking the current assets excluding inventory and prepaid expenses and dividing by current liabilities.

Question 8

Calculate the average number of days sales in accounts receivable

Answer 8

The average number of days to collect accounts receivable is calculated by dividing 365 days by the accounts receivable turnover.

Question 9

calculate accounts receivable turnover

Answer 9

Accounts receivable turnover is net credit sales divided by the average accounts receivable.