Question 1

Analytical procedures are one type of evidence gathering procedure. According to auditing standards, there are five general forms of analytical procedures. Auditing standards also provide examples of five sources of information for analytical procedures.Required:Describe three of the five general forms of analytical procedures. For each form, describe a typical source of the information for the form. For each source, include any questions or concerns an auditor would have about the reliability or relevancy of the source.

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Question 2

Post, CPA, accepted an engagement to audit the financial statements of General Co., a new client. General is a publicly held retailing entity that recently replaced its operating management. In the course of applying audit procedures, Post discovered that General's financial statements may be materially misstated due to the existence of fraud.Required:(a) Describe Post's responsibilities on the circumstances described above.(b) Describe Post's responsibilities for reporting on General's financial statements and other communications if Post is precluded from applying necessary procedures in searching for frauds.(c) Describe Post's responsibilities for reporting on General's financial statements and other communications if Post concludes that General's financial statements are materially affected by frauds.

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Question 3

Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. They range from simple comparisons to the use of complex models involving many relationships and elements of data. They involve comparisons of recorded amounts, or ratios developed from recorded amounts, to expectations developed by auditors.Required:Describe the broad purposes of analytical procedures.Identify the sources of information from which an auditor develops expectations.

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Question 4

This question tests your ability to perceive the place(s) where various potential problems may exist and the type of problem (overstatement or understatement) that may exist. It asks that you supply the words or descriptions that complete the analysis begun by applying analytical procedures.Required:For each of the items below, identify the account(s) that need(s) to be audited carefully and the reason (i.e., potential overstatement or understatement of _______).If the current year accounts receivable are larger than last year but the allowance for doubtful accounts is the same.If the current year inventory is larger than last year and the current year gross margin (profit) is larger.If current year long-term liabilities are larger than last year and the interest expense is the same.If current year fixed assets are larger and current depreciation expense is the same as last year.

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Question 5

Analytical procedures are evaluations of financial information made by a study of plausible relationships among financial and nonfinancial data. Understanding and evaluating such relationships are essential to the audit process.The following financial statements were prepared by ABC Manufacturing Co. for the year ended December 31, 2020. Also presented are various financial statement ratios for Holiday as calculated from the prior year's financial statements. Sales represent net credit sales. The total assets and the receivables and inventory balances at December 31, 2020, were the same as at December 31, 2019.
  Required:Items 1 through 9 below represent financial ratios that the auditor calculated during the prior year's audit. For each ratio, calculate the current year's ratio from the financial statements presented above.
 $\begin{array}{lcc}
  \text { Calculations } &12 / 31 / 2020 &12 / 31 / 2019\
 \text { 1. Current ratio } &&2.5\
 \text {  2. Quick ratio} &&1.3\
 \text {3. Accounts receivable turnover  } &&5.5\
 \text {4. Inventory turnover  } &&2.5\
 \text { 5. Total asset turnover } &&1.2\
 \text {  6. Gross margin percentage} &&35\%\
 \text { 7. Net operating margin \% } &&25\%\
 \text {  8. Times interest earned} &&1.03\
 \text {  9. Total debt to equity} &&50\%\
\end{array}$

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Question 6

Items 1 through 6 represent an auditor's observed changes in certain financial statement ratios or amounts from the prior year's ratios or amounts. For each observed change, select the most likely explanation or explanations from the list of explanations provided. Answers on the list may be selected once, more than once, or not at all.Auditor's observed changes (considered independent of each other).Inventory turnover increased substantially from the prior year. (Select 3 explanations)Accounts receivable turnover decreased substantially from the prior year. (Select 3 explanations)Allowance for doubtful accounts increased from the prior year, but allowance for doubtful accounts as a percentage of accounts receivable decreased from the prior year. (Select 3 explanations)Long term debt increased from the prior year, but interest expense increased a larger than proportionate amount than long term debt. (Select 1 explanation)Operating income increased from the prior year although the entity was less profitable than in the prior year. (Select 2 explanations)Gross margin percentage was unchanged from the prior year although gross margin increased from the prior year. (Select 1 explanation)

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Question 7

Why is it important for auditors to understand their clients' business risks?

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Quiz 4: Management Fraud and Audit Risk

Why is it important for auditors to understand their clients' business risks?