Question 1

In order to be meaningful, a company's ratios should be compared to their prior year's ratios, not industry benchmarks.

Accepted Answer

While comparing a company's ratios to its previous year's ratios is important for assessing its performance over time, comparing them to industry benchmarks can reveal how the company is performing relative to its competitors and can help identify areas where improvement is needed. Therefore, both types of comparisons are important in analyzing a company's financial health.

Question 2

Which of the following would not be classified as an analytical procedure?
A)Benchmarking the company's profitability ratios against others in the industry
B)Variance analysis of actual versus budgeted amounts for production
C)Reperforming the client's depreciation expense using the client's accounting policies for capital expenditures made during the year
D)Reconciling fixed asset dispositions with the fixed asset ledger

Accepted Answer

Reconciling fixed asset dispositions with the fixed asset ledger is a test of accuracy and completeness, rather than an analytical procedure. Analytical procedures involve the comparison of financial information with expectations developed by the auditor. Choices A, B, and C involve such comparisons and would be classified as analytical procedures.

Question 3

Auditors perform preliminary analytical procedures to better understand the client's business and to assess client business risk.

Accepted Answer

Auditors do perform preliminary analytical procedures to gain a better understanding of the client's business and to evaluate the risk associated with conducting the audit.

Question 4

Auditors routinely conduct analytical procedures in the planning, testing, and completion phases of the audit.Identify the primary and secondary purposes of performing analytical procedures in each phase of the audit.

Accepted Answer

The answer of Auditors routinely conduct analytical procedures in the...

Question 5

During audit planning, the auditor uses analytical procedures primarily to:
A)identify weaknesses in internal control.
B)determine if the company's financial statements appear reasonable and are free of material misstatement.
C)determine the correspondence of the company's financial statements to the valuation and accuracy audit objectives.
D)determine the nature, extent, and timing of audit procedures.

Accepted Answer

During audit planning, auditors use analytical procedures to help determine the nature, extent, and timing of audit procedures by identifying areas that may require more attention.

Question 6

The major concern when using nonfinancial data in analytical procedures is the:
A)accuracy of the nonfinancial data.
B)source of the nonfinancial data.
C)type of nonfinancial data.
D)presence of multiple sources of nonfinancial data.

Accepted Answer

The accuracy of nonfinancial data is the major concern because if the data is not accurate, it can lead to incorrect conclusions and decisions. It is important to ensure that the nonfinancial data used in analytical procedures is reliable and accurate. Other concerns, such as the source, type, and multiple sources of nonfinancial data, can also impact the effectiveness of analytical procedures, but accuracy is the primary concern.

Question 7

Which of the following is most correct with respect to the use of analytical procedures?
A)Analytical procedures may be used in evaluating balances in the testing phase as long as the auditor also uses them in assessing the going concern assumption.
B)Analytical procedures must be used throughout the audit.
C)Analytical procedures used in the testing phase of the audit are primarily used to direct an auditor's attention so that the auditor's understanding of the business is improved.
D)Analytical procedures are performed by studying plausible relationships between financial and nonfinancial data.

Accepted Answer

Analytical procedures involve studying plausible relationships between financial and nonfinancial data to identify any unusual trends or discrepancies that may require further investigation.

Question 8

Which of the following is a correct statement regarding analytical procedures?
A)A major strength in using industry ratios for auditing is the difference between the nature of the client's financial information and that of the firms making up the industry totals.
B)Common-size financial statements display all items as a percentage change from a base year.
C)Auditors should investigate the most significant differences between budgeted and actual results.
D)In order to look for a misstatement in the allowance for bad debts, the auditor should divide gross sales by sales returns and allowances.

Accepted Answer

Auditors should investigate significant differences between budgeted and actual results as part of their analytical procedures to identify potential misstatements or areas requiring further investigation.

Question 9

When performing planning analytical procedures for a client the auditor detected that the gross profit percentage had declined by 50% from the previous year to the year currently under audit.The auditor should:
A)investigate the possibility the client may have made an error in their cost of goods sold computation.
B)assist management in developing greater cost efficiencies in their product line.
C)prepare a going concern opinion for the client.
D)advise the client to have extensive disclosure to alleviate investor concerns.

Accepted Answer

A decline in gross profit percentage could indicate an issue with the cost of goods sold computation. Therefore, the auditor should investigate this possibility before considering any further actions.

Question 10

Discuss the four primary purposes of analytical procedures performed during the planning phase of an audit.

Accepted Answer

The answer of Discuss the four primary purposes of analytical...

Question 11

Whenever an auditor compares client data to client-prepared budgets, there are two special concerns.Indicate if the two items below are concerns.
A) 
B) 
C) 
D)

Accepted Answer

The answer of Whenever an auditor compares client data to...

Question 12

When using financial ratios, the most important comparisons are to those of previous years for the company and to industry averages or similar companies for the same year.

Accepted Answer

Comparisons to previous years for the company provide insight into the company's own financial performance, while comparisons to industry averages or similar companies provide context for how the company is performing relative to its competitors.

Question 13

Which is a liquidity activity ratio?
A)Profit margin
B)Inventory turnover
C)Return on assets
D)Times interest earned

Accepted Answer

Inventory turnover is a liquidity activity ratio as it measures how efficiently a company is converting its inventory into sales. It helps to determine whether a company has enough sales to keep up with its inventory purchases and whether it needs to adjust its purchasing strategy. Profit margin, return on assets, and times interest earned are profitability, efficiency, and coverage ratios, respectively.

Question 14

When are auditors likely to encounter judgment problems in the use of analytical procedures?
A)Whenever the auditor places reliance on management's explanations for unusual fluctuations in account balances without first developing independent expectations
B)Whenever the auditor allows unaudited balances to unduly influence his/her expectations of current balances
C)Whenever the auditor fails to consider the pattern reflected by several unusual fluctuations when trying to explain what caused them
D)The auditor is likely to encounter judgment problems in each of the above instances.

Accepted Answer

The auditor is likely to encounter judgment problems in each of the instances mentioned in choices A, B, and C. In choice A, relying solely on management's explanations without developing independent expectations can lead to incomplete or inaccurate analysis. In choice B, using unaudited balances as a reference point can result in expectations that are not representative of current balances. In choice C, failing to consider the pattern reflected by several unusual fluctuations can lead to incomplete or inaccurate analysis. As such, auditors should exercise sound judgment and maintain professional skepticism when performing analytical procedures.

Question 15

Management is the primary source for identifying client business risks.

Accepted Answer

Management is responsible for identifying and assessing business risks as it has access to all relevant information about the organization's operations, finances, and environment. They are accountable for developing and implementing risk management strategies to mitigate or address these risks.

Question 16

Which of the following statements is not correct with respect to analytical procedures?
A)Auditing standards emphasize the need for auditors to develop and use expectations.
B)Analytical procedures must be performed throughout the audit.
C)Analytical procedures may be performed at any time during the audit.
D)Analytical procedures use comparisons and relationships to assess whether account balances appear reasonable.

Accepted Answer

Analytical procedures are not required to be performed throughout the audit. They can be performed at any time during the audit depending on the auditor's assessment of risk and the availability of data. However, auditing standards do require auditors to perform analytical procedures as a substantive procedure during the planning and overall review stages of the audit.

Question 17

Analytical procedures:
A)are not a type of audit evidence.
B)are not required during the completion phase of the audit.
C)performed during the planning phase of the audit are used as a substantive test in support of account balances.
D)performed in the completion phase serve as a final review for material misstatements or financial problems.

Accepted Answer

Analytical procedures performed in the completion phase of an audit serve as a final review to identify any material misstatements or financial problems that may have been overlooked during the audit.

Question 18

One purpose of performing preliminary analytical procedures in the planning phase of an audit is to help the auditor make a preliminary assessment of control risk.

Accepted Answer

Preliminary analytical procedures are primarily used to understand the client's business and identify areas of potential risk, but they do not directly assess control risk. Control risk assessment is typically done through understanding and testing the client's internal controls.

Question 19

Define business risk.List several factors that may impact the auditor's assessment of business risk.

Accepted Answer

The answer of Define business risk.List several factors that may...

Question 20

Sarbanes-Oxley encourages management to certify that it has informed the auditor and audit committee of any significant deficiencies in internal control.

Accepted Answer

The answer of Sarbanes-Oxley encourages management to certify that it...

Quiz 8: Audit Planning and Analytical Procedures

In order to be meaningful, a company's ratios should be compared to their prior year's ratios, not industry benchmarks.

Which of the following would not be classified as an analytical procedure?

Auditors perform preliminary analytical procedures to better understand the client's business and to assess client business risk.

Auditors routinely conduct analytical procedures in the planning, testing, and completion phases of the audit.Identify the primary and secondary purposes of performing analytical procedures in each phase of the audit.

During audit planning, the auditor uses analytical procedures primarily to:

The major concern when using nonfinancial data in analytical procedures is the:

Which of the following is most correct with respect to the use of analytical procedures?

Which of the following is a correct statement regarding analytical procedures?

When performing planning analytical procedures for a client the auditor detected that the gross profit percentage had declined by 50% from the previous year to the year currently under audit.The auditor should:

Discuss the four primary purposes of analytical procedures performed during the planning phase of an audit.

Whenever an auditor compares client data to client-prepared budgets, there are two special concerns.Indicate if the two items below are concerns.

When using financial ratios, the most important comparisons are to those of previous years for the company and to industry averages or similar companies for the same year.

Which is a liquidity activity ratio?

When are auditors likely to encounter judgment problems in the use of analytical procedures?

Management is the primary source for identifying client business risks.

Which of the following statements is not correct with respect to analytical procedures?

Analytical procedures:

One purpose of performing preliminary analytical procedures in the planning phase of an audit is to help the auditor make a preliminary assessment of control risk.

Define business risk.List several factors that may impact the auditor's assessment of business risk.

Sarbanes-Oxley encourages management to certify that it has informed the auditor and audit committee of any significant deficiencies in internal control.