Certified Public Accountant CPA Questions + Answers Part 46
Posted: Tue Feb 22, 2022 6:49 pm
QUESTION 392
Which of the following statements is correct concerning significant deficiencies noted in an audit of a nonissuer?
A. Significantdeficienciesarematerialweaknessesinthedesignoroperationofspecificinternalcontrolcomponents.
B. Theauditorisobligatedtosearchforsignificantdeficienciesthatcouldadverselyaffecttheentity'sabilitytorecordandreportfinancialdata. C. Significant deficiencies should not be re-communicated each year if management has acknowledged its understanding of such deficiencies. D. The auditor should separately identify those significant deficiencies that are considered to be material weaknesses.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The auditor should separately identify those significant deficiencies that are considered to be material weaknesses.
Choice "a" is incorrect. Not all significant deficiencies are material weaknesses. Choice "b" is incorrect. The auditor is not obligated to search for significant deficiencies. The auditor is obligated to communicate to the client any significant deficiencies identified while auditing the financial statements.
Choice "c" is incorrect. The auditor is obligated to re-communicate significant deficiencies each year, even if management has acknowledged its understanding of such deficiencies.
QUESTION 393
Which of the following statements concerning an auditor's communication of significant deficiencies identified during the audit of a nonissuer is correct?
A. Theauditorshouldrequestameetingwithmanagementonelevelabovethesourceofthesignificantdeficienciestodiscusssuggestionsforremedialaction. B. Anyreportissuedonsignificantdeficienciesshouldindicatethatprovidingassuranceoninternalcontrolwasnotthepurposeoftheaudit.
C. Significant deficiencies discovered and communicated at an interim date should be reexamined with tests of controls before completing the engagement.
D. Suggestions concerning administration efficiencies and business strategies should not be communicated in the same report with significant deficiencies.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Any report issued on significant deficiencies should indicate that providing assurance on internal control was not the purpose of the audit. Choice "a" is incorrect. The auditor should communicate significant deficiencies to management and those charged with governance, but is not required to request a meeting with management one level above the source of the reportable conditions, to discuss suggestions for remedial action. Choice "c" is incorrect. Significant deficiencies discovered and communicated at an interim date do not need to be reexamined with tests of controls before completing the engagement. Choice "d" is incorrect. Suggestions concerning administration efficiencies and business strategies may be communicated in the same report with significant deficiencies (the significant deficiencies must be separately identified, however).
QUESTION 394
Which of the following representations should not be included in a report on internal control related matters noted in an audit of a nonissuer?
A. Significantdeficienciesrelatedtointernalcontroldesignexist,butnoneisdeemedtobeamaterialweakness.
B. Therearenosignificantdeficienciesinthedesignoroperationofinternalcontrol.
C. Corrective follow-up action is recommended due to the relative significance of material weaknesses discovered during the audit. D. The auditor's consideration of internal control would not necessarily disclose all significant deficiencies that exist.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A report on internal control related matters noted in an audit should not state that there are no significant deficiencies in internal control, since this statement might erroneously imply that the auditor searched for such conditions.
Choice "a" is incorrect. The auditor is permitted to state that no material weaknesses were identified during the audit. Typically this occurs in reports submitted to governmental authorities. Choice "c" is incorrect. The auditor may suggest that corrective follow-up action should be taken due to the relative significance of material weakness discovered. Choice "d" is incorrect. The auditor's report may state that his or her consideration of internal control would not necessarily disclose all significant deficiencies that exist.
QUESTION 395
In obtaining an understanding of an entity's internal control in a financial statement audit, an auditor is not obligated to:
A. Determinewhetherthecontrolactivitieshavebeenimplemented.
B. Performprocedurestounderstandthedesignofinternalcontrol.
C. Document the understanding of the entity's internal control components. D. Search for significant deficiencies in the operation of internal control.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. When obtaining an understanding of an entity's internal control in a financial statement audit, an auditor is not obligated to search for significant deficiencies in the operation of internal control.
Choice "a" is incorrect. In order to determine the nature, timing and extent of tests to be performed, an auditor must determine whether the control activities have been implemented. Choice "b" is incorrect. An auditor is required to perform procedures to confirm his/her understanding of the internal control systems' design,
and to determine whether relevant controls have been implemented.
Choice "c" is incorrect. An auditor is required to document his or her understanding of the entity's internal control components, even if he or she intends to use a substantive approach.
QUESTION 396
The GAO standards of reporting for governmental financial audits incorporate the AICPA standards of reporting and prescribe supplemental standards to satisfy the unique needs of governmental audits. Which of the following is a supplemental reporting standard for governmental financial audits?
A. Auditorsshouldreportthescopeoftheirtestingofcompliancewithlawsandregulationsandofinternalcontrols.
B. Materialindicationsofillegalactsshouldbereportedinadocumentdistributedonlytotheentity'sseniorofficials.
C. All changes in the audit program from the prior year should be reported to the entity's audit committee.
D. Anyprivilegedorconfidentialinformationdiscoveredshouldbereportedtotheorganizationthatarrangedfortheaudit.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The auditor's report on compliance and on internal control over financial recording (based on an audit) must include the scope of testing of compliance and internal control. Choice "b" is incorrect. Material indications of illegal acts are not only reported to the members of the governing body of the audited entity and their senior staff officials but, in some circumstances, auditors should report illegal acts directly to external parties (such as the grantor agency). Choice "c" is incorrect. Although GAO standards require that the auditor communicate information regarding the nature, timing and extent of planned testing to officials of the audited entity and to individuals contracting for the audit, reporting of all changes is not required. (For example, immaterial changes to the audit program need not be reported.)
Choice "d" is incorrect. Certain privileged or confidential information may be prohibited from general disclosure and should not be included in the audit report. The report should, however, disclose the nature of the information omitted and the requirement that makes an opinion necessary.
QUESTION 397
Analytical procedures performed in the final review stage of an audit generally would include:
A. Reassessingthefactorsthatassistedtheauditorindecidingonpreliminarymaterialitylevelsandauditrisk.
B. Consideringtheadequacyoftheevidencegatheredinresponsetounexpectedbalancesidentifiedinplanning.
C. Summarizing uncorrected misstatements specifically identified through tests of details of transactions and balances. D. Calculating projected uncorrected misstatements estimated through audit sampling techniques.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Analytical procedures applied during the final review stage should be used to determine whether adequate evidence has been gathered in response to unusual or unexpected balances identified during the audit.
Choice "a" is incorrect. Analytical procedures generally involve comparison of recorded amounts to auditor expectations. Reassessing the factors used to establish materiality levels and audit risk would not involve such comparisons.
Choice "c" is incorrect. Analytical procedures generally involve comparison of recorded amounts to auditor expectations. Summarizing uncorrected misstatements would not involve such comparisons. Choice "d" is incorrect. Analytical procedures generally involve comparison of recorded amounts to auditor expectations. Calculating projected uncorrected misstatements would not involve such comparisons.
QUESTION 398
Which of the following statements concerning material weaknesses and significant deficiencies is correct with respect to an audit of a nonissuer?
A. Anauditorneednotidentifyandcommunicatematerialweaknessesseparatelyfromsignificantdeficiencies.
B. Allmaterialweaknessesaresignificantdeficiencies.
C. Anauditorshouldreportimmediatelymaterialweaknessesandsignificantdeficienciesdiscoveredduringanaudit. D. All significant deficiencies are material weaknesses.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A material weakness in internal control is a significant deficiency that results in more than a remote likelihood that a material misstatement in the financial statements will not be prevented or detected.
Choice "a" is incorrect. The auditor is required to separately identify and communicate significant deficiencies and material weaknesses.
Choice "c" is incorrect. Significant deficiencies (including material weaknesses) are generally communicated to the appropriate parties after the audit is complete. They may, at the auditor's discretion, be communicated during the audit, but there is no requirement for immediate communication.
Choice "d" is incorrect. A material weakness is a significant deficiency that results in more than a remote likelihood that a material misstatement in the financial statements will not be prevented or detected. Not all significant deficiencies will meet this description.
QUESTION 399
At December 30, 20X3, Vida Co. had cash of $200,000, a current ratio of 1.5:1 and a quick ratio of
.5:1.
On December 31, 20X3, all cash was used to reduce accounts payable. How did these cash payments affect the ratios?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The current ratio equals current assets divided by current liabilities. Since the current assets exceed the current liabilities (as evidenced by a current ratio of 1.5:1), when each is decreased by the same amount, there will be a greater percentage reduction of the current liabilities. Thus, the ratio will increase since the current assets are now proportionately larger than the current liabilities. The quick ratio equals quick assets (including cash) divided by current liabilities. Since the quick assets are less than the current liabilities (as evidenced by a quick ratio of .5:1), when each is decreased by the same amount, the percentage decrease of the quick assets will be greater than that of the current liabilities. Thus, the ratio will decrease since the quick assets are now proportionately smaller than the current liabilities.
Choices "b", "c", and "d" are incorrect, per the above Explanation: .
QUESTION 400
An auditor's communication of internal control related matters noted in an audit usually should be addressed to:
A. Managementandthosechargedwithgovernance. B. Thedirectorofinternalauditing.
C. The chief financial officer.
D. The chief accounting officer.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E)
Explanation Explanation/Reference:
Explanation:
Choice "a" is correct. An auditor's communication of internal control related matters noted in an audit usually should be addressed to management and those charged with governance. Choices "b", "c", and "d" are incorrect. The director of internal auditing, the chief financial officer, and the chief accounting officer all would have access to the letter; however, it would not be addressed to them since they do not have the same level of authority and responsibility to the shareholders as management and those charged with governance.
QUESTION 401
Which of the following statements concerning audit evidence is correct?
A. Tobeappropriate,auditevidenceshouldbeeitherreliableorrelevant,butneednotbeboth.
B. Themeasureofthesufficiencyofauditevidenceliesintheauditor'sjudgment.
C. The difficulty and expense of obtaining audit evidence concerning an account balance is always a valid basis for omitting the test. D. A client's accounting data can be sufficient audit evidence to support the financial statements.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The measure of the sufficiency of audit evidence lies in the auditor's judgment. Choice "a" is incorrect. To be appropriate, audit evidence should be both reliable and relevant. Choice "c" is incorrect. The difficulty and expense of obtaining audit evidence concerning an account balance is not a valid basis for omitting the test when there is no acceptable alternative procedure. Choice "d" is incorrect. By itself, a client's accounting data cannot be sufficient audit evidence to support the financial statements. Sufficient, appropriate external evidence must also be obtained to corroborate management's assertions.
QUESTION 402
After making inquiries about credit granting policies, an auditor selects a sample of sales transactions and examines evidence of credit approval. This test of controls most likely supports management's financial statement assertion(s) of:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. By ensuring that credit approval is obtained before goods are shipped to customers, the auditor is testing management's assertion that accounts receivable are collectible (allocation and valuation). Ensuring that credit approval is obtained before goods are shipped does not support the rights and obligations assertion.
Choices "a", "b", and "d" are incorrect, based on the above Explanation: .
Audit Documentation
QUESTION 403
Which of the following would not be considered a significant audit finding that should be included in audit documentation?
A. Retirementoftheaccountspayablemanagerandsubsequenthiringofareplacement.
B. Discoveryofamaterialsalerecordedinthecurrentyearthatproperlybelongedinthesubsequentyear. C. Determination that there is substantial doubt about the entity's ability to continue as a going concern.
D. Implementation of a new accounting standard to account for a complex and unusual transaction.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Significant audit findings do not include staffing changes at the client. Choice "b" is incorrect. Discovery of a material sale recorded in the current year that properly belonged in the subsequent year represents a possible material misstatement in the financial statements. Possible material misstatements are considered to be significant audit findings. Choice "c" is incorrect. When substantial doubt about an entity's ability to continue as a going concern exists, there is likely to be a modification to the auditor's standard report. Items resulting in report modifications are generally considered to be significant audit findings. Choice "d" is incorrect. Matters related to the application of accounting principles to complex and unusual transactions are considered to be significant audit findings.
QUESTION 404
Which of the following is not true regarding audit documentation for a specific audit?
A. Auditdocumentationshouldbesufficienttoenablemembersoftheauditteamwithsupervisoryresponsibilitiestounderstandthenature,timing,extent,and results of auditing procedures performed.
B. Auditdocumentationshouldindicatewhichmember(s)oftheauditteamperformedandreviewedtheauditwork.
C. Auditdocumentationshoulddemonstratecompliancewithqualitycontrolstandards.
D. Audit documentation should demonstrate compliance with the standards of fieldwork.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Quality control standards relate to the conduct of a firm's audit practice as a whole, and compliance with such standards would not be demonstrated by audit documentation for one specific audit engagement.
Choice "a" is incorrect. Audit documentation should clearly indicate the work performed and the evidence obtained.
Choice "b" is incorrect. Audit documentation should indicate which parties performed and reviewed the work.
Choice "d" is incorrect. Audit documentation should demonstrate compliance with the standards of fieldwork. It should indicate an appropriate level of planning and supervision, that a sufficient understanding of the entity and its environment, including its internal control, was obtained, and that a sufficient level of appropriate evidence was obtained.
QUESTION 405
The permanent (continuing) file of audit documentation most likely would include copies of the: A. Leadschedules.
B. Attorney'sletters. C. Bank statements. D. Debt agreements.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The permanent file includes items with continuing audit significance, such as debt agreements.
Choice "a" is incorrect. Lead schedules would be included in the current audit documentation since they are applicable to the current year's audit only. Choice "b" is incorrect. Attorney's letters would be included in the current audit documentation since they are applicable to the current year's audit only. Choice "c" is incorrect. Bank statements would be included in the current audit documentation since they are applicable to the current year's audit only.
QUESTION 406
Which of the following pairs of accounts would be analyzed together in the audit documentation?
A. Notesreceivableandinterestincome.
B. Accruedinterestreceivableandaccruedinterestpayable. C. Notes payable and notes receivable.
D. Interest income and interest expense.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The auditor would most likely analyze notes receivable and its related income statement account, interest income, together.
Choice "b" is incorrect. Accrued interest payable would be analyzed along with notes payable; accrued interest receivable would be analyzed along with notes receivable. Choice "c" is incorrect. Notes payable would be analyzed along with interest payable and interest expense; notes receivable would be analyzed along with interest income. Choice "d" is incorrect. Interest income would be analyzed with notes receivable; interest expense would be analyzed with notes payable.
QUESTION 407
Audit documentation serves mainly to:
A. Providetheprincipalsupportfortheauditor'sreport.
B. Satisfytheauditor'sresponsibilitiesconcerningtheCodeofProfessionalConduct. C. Monitor the effectiveness of the CPA firm's quality control activities.
D. Document the level of independence maintained by the auditor.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Audit documentation serves mainly to provide 1) the principal support for the auditor's report; 2) assistance in the planning, conduct, and supervision of the audit; 3) accountability; and 4) useful information.
Choice "b" is incorrect. Audit documentation does not satisfy the auditor's responsibilities concerning the Code of Professional Conduct.
Choice "c" is incorrect. Audit documentation does not monitor the effectiveness of the CPA firm's quality control activities.
Choice "d" is incorrect. Audit documentation does not document the level of independence maintained by the auditor.
QUESTION 408
The permanent file of the audit documentation for an engagement generally would not include:
A. Bondindentureagreements. B. Leaseagreements.
C. Working trial balance.
D. Flowchart of internal control.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A working trial balance is a part of the current year's audit documentation. Choice "a" is incorrect. Bond indenture agreements are typically found in the permanent file. Choice "b" is incorrect. Lease agreements are typically found in the permanent file. Choice "d" is incorrect. An internal control flowchart is typically found in the permanent file.
QUESTION 409
An auditor ordinarily uses a working trial balance resembling the financial statements without footnotes, but containing columns for: A. Cashflowincreasesanddecreases.
B. Auditobjectivesandassertions.
C. Reclassifications and adjustments. D. Reconciliations and tickmarks.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The working trial balance generally contains a column for adjustments and reclassifications.
Choice "a" is incorrect. The working trial balance does not ordinarily contain information about cash flows.
Choice "b" is incorrect. Audit objectives and assertions are contained in the audit plan, which is generally kept separate from the working trial balance. Choice "d" is incorrect. Reconciliations and tickmarks are found in other parts of the audit documentation.
QUESTION 410
Which of the following factors would least likely affect the nature and extent of audit documentation?
A. Thenatureofthespecificauditprocedures.
B. Theriskofmaterialmisstatement.
C. The extent to which judgment was required in performing the specific audit procedures. D. The content of the representation letter.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The content of the representation letter will generally not affect the nature and extent of audit documentation. Factors affecting the nature and extent of audit documentation include:
1. The risk of material misstatement;
2. The extent to which judgment was required in performing the work and evaluating the results; 3. The nature of the specific auditing procedure;
4. The significance of the evidence obtained;
5. The nature and extent of any problems identified; and
6. The need to document conclusions that may not be obvious.
QUESTION 411
Audit documentation should be prepared in enough detail so that:
A. Anexperiencedauditorwhohasworkedwiththeclientinthepastcanunderstandtheproceduresperformedandtheevidenceobtained.
B. Areaderofthefinancialstatementswhohasnopreviousconnectionwiththeauditcanunderstandtheproceduresperformedandtheevidenceobtained. C. A reader of the financial statements who has a background in financial analysis can understand the procedures performed and the evidence obtained.
D. An experienced auditor who has no previous connection with the audit can understand the procedures performed and the evidence obtained.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Audit documentation should be prepared in enough detail so that an experienced auditor who has no previous connection with the audit can understand the procedures performed and the evidence obtained.
Choice "a" is incorrect. The requirement is that audit documentation be detailed enough that an experienced auditor who has no previous connection with the audit can understand the procedures performed and the evidence obtained. This is a higher standard than simply requiring the audit documentation to be appropriate for an auditor who is already familiar with the client. Choices "b" and "c" are incorrect. Readers of the financial statements typically would not have access to the audit documentation.
QUESTION 412
Which of the following is not true about the report release date?
A. Itisdefinedasthedateafterwhichexistingdocumentationmustnotbedeleted,andadditionstothedocumentationfilemustbedocumentedassuch. B. Itisoftenthedateonwhichthereportisdeliveredtotheclient.
C. It is the date on which the auditor grants the client permission to use the report.
D. It is used to define the beginning of the retention period.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The documentation completion date (and not the report release date) is defined as the date after which existing documentation must not be deleted, and additions to the documentation file must be documented as such.
Choice "b" is incorrect. The report release date is often the date on which the report is delivered to the client.
Choice "c" is incorrect. The report release date is the date on which the auditor grants the client permission to use the report. Choice "d" is incorrect. The report release date is used to define the beginning of the retention period.
QUESTION 413
What effect would the sale of a company's trading securities at their carrying amounts for cash have on each of the following ratios?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Trading securities are both current assets and quick assets. If they are sold for their carrying value, then both total current assets and total quick assets remain constant since one type of current asset and quick asset is traded for another. Thus, both the current ratio and the quick ratio would be unaffected by the sale of trading securities. Choices "b", "c", and "d" are incorrect, per the above Explanation: .
QUESTION 414
The following data pertain to Cowl, Inc., for the year ended December 31, 20X4:
What was Cowl's rate of return on assets for 20X4?
A. 5% B. 6% C. 20% D. 24%
Correct Answer: B
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Rate of return on assets is defined as the net income divided by the average total assets. In this case:
$150,000 / [($2,000,000 + $3,000,000)/2]
or [$150,000 / $2,500,000] = 6% rate of return.
Choice "a" is incorrect. Average total assets ($2,500,000) should be used, not ending assets ($3,000,000).
Choice "c" is incorrect. Net income ($150,000) and average total assets ($2,500,000) should be used, not net sales ($600,000) and ending assets ($3,000,000). Choice "d" is incorrect. Net income ($150,000) should be used, not net sales ($600,000).
QUESTION 415
Selected data pertaining to Lore Co. for the calendar year 20X4 is as follows:
The accounts receivable turnover for 20X4 was 5.0 times. What were Lore's 20X4 net credit sales?
A. $105,000 B. $107,000 C. $110,000 D. $210,000
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The accounts receivable turnover ratio equals net credit sales divided by average accounts receivable. 5.0 = net credit sales / [($20,000 + $22,000)/2]. Net credit sales equal $105,000. Choice "b" is incorrect. The accounts receivable turnover ratio equals net credit sales divided by average accounts receivable.
Choice "c" is incorrect. The accounts receivable turnover ratio equals net credit sales divided by average accounts receivable, not by year-end accounts receivable. Choice "d" is incorrect. The accounts receivable turnover ratio equals net credit sales divided by average accounts receivable, not by the sum of beginning and ending accounts receivable.
QUESTION 416
Selected data pertaining to Lore Co. for the calendar year 20X4 is as follows:
What was the inventory turnover for 20X4?
A. 1.2times. B. 1.5times. C. 2.0 times. D. 3.0 times.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Inventory turnover equals cost of goods sold divided by average inventory. Beginning inventory ($6,000) plus purchases ($24,000) less ending inventory equals cost of goods sold ($18,000). Thus, ending inventory equals $12,000 and inventory turnover = $18,000 / [($6,000 + $12,000)/2] = 2.0.
Choice "a" is incorrect. Inventory turnover equals cost of goods sold divided by average inventory. Choice "b" is incorrect. Cost of goods sold should be divided by average inventory, not by ending inventory.
Choice "d" is incorrect. Cost of goods sold should be divided by average inventory, not by beginning inventory.
QUESTION 417
Selected data pertaining to Lore Co. for the calendar year 20X4 is as follows:
Lore would use which of the following to determine the average days sales in inventory?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: B
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Average number of days sales in inventory is defined as 365 days per year divided by the inventory turnover.
Choice "a" is incorrect. The denominator used to determine average days sales in inventory is inventory turnover. Inventory turnover is cost of goods sold divided by average inventory, not simply average inventory.
Choice "c" is incorrect. The days sales in inventory calculation uses the cost of goods sold figure, not the sales figure.
Choice "d" is incorrect. The days sales in inventory calculation uses 365 in the numerator, not sales divided by 365.
Which of the following statements is correct concerning significant deficiencies noted in an audit of a nonissuer?
A. Significantdeficienciesarematerialweaknessesinthedesignoroperationofspecificinternalcontrolcomponents.
B. Theauditorisobligatedtosearchforsignificantdeficienciesthatcouldadverselyaffecttheentity'sabilitytorecordandreportfinancialdata. C. Significant deficiencies should not be re-communicated each year if management has acknowledged its understanding of such deficiencies. D. The auditor should separately identify those significant deficiencies that are considered to be material weaknesses.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The auditor should separately identify those significant deficiencies that are considered to be material weaknesses.
Choice "a" is incorrect. Not all significant deficiencies are material weaknesses. Choice "b" is incorrect. The auditor is not obligated to search for significant deficiencies. The auditor is obligated to communicate to the client any significant deficiencies identified while auditing the financial statements.
Choice "c" is incorrect. The auditor is obligated to re-communicate significant deficiencies each year, even if management has acknowledged its understanding of such deficiencies.
QUESTION 393
Which of the following statements concerning an auditor's communication of significant deficiencies identified during the audit of a nonissuer is correct?
A. Theauditorshouldrequestameetingwithmanagementonelevelabovethesourceofthesignificantdeficienciestodiscusssuggestionsforremedialaction. B. Anyreportissuedonsignificantdeficienciesshouldindicatethatprovidingassuranceoninternalcontrolwasnotthepurposeoftheaudit.
C. Significant deficiencies discovered and communicated at an interim date should be reexamined with tests of controls before completing the engagement.
D. Suggestions concerning administration efficiencies and business strategies should not be communicated in the same report with significant deficiencies.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Any report issued on significant deficiencies should indicate that providing assurance on internal control was not the purpose of the audit. Choice "a" is incorrect. The auditor should communicate significant deficiencies to management and those charged with governance, but is not required to request a meeting with management one level above the source of the reportable conditions, to discuss suggestions for remedial action. Choice "c" is incorrect. Significant deficiencies discovered and communicated at an interim date do not need to be reexamined with tests of controls before completing the engagement. Choice "d" is incorrect. Suggestions concerning administration efficiencies and business strategies may be communicated in the same report with significant deficiencies (the significant deficiencies must be separately identified, however).
QUESTION 394
Which of the following representations should not be included in a report on internal control related matters noted in an audit of a nonissuer?
A. Significantdeficienciesrelatedtointernalcontroldesignexist,butnoneisdeemedtobeamaterialweakness.
B. Therearenosignificantdeficienciesinthedesignoroperationofinternalcontrol.
C. Corrective follow-up action is recommended due to the relative significance of material weaknesses discovered during the audit. D. The auditor's consideration of internal control would not necessarily disclose all significant deficiencies that exist.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A report on internal control related matters noted in an audit should not state that there are no significant deficiencies in internal control, since this statement might erroneously imply that the auditor searched for such conditions.
Choice "a" is incorrect. The auditor is permitted to state that no material weaknesses were identified during the audit. Typically this occurs in reports submitted to governmental authorities. Choice "c" is incorrect. The auditor may suggest that corrective follow-up action should be taken due to the relative significance of material weakness discovered. Choice "d" is incorrect. The auditor's report may state that his or her consideration of internal control would not necessarily disclose all significant deficiencies that exist.
QUESTION 395
In obtaining an understanding of an entity's internal control in a financial statement audit, an auditor is not obligated to:
A. Determinewhetherthecontrolactivitieshavebeenimplemented.
B. Performprocedurestounderstandthedesignofinternalcontrol.
C. Document the understanding of the entity's internal control components. D. Search for significant deficiencies in the operation of internal control.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. When obtaining an understanding of an entity's internal control in a financial statement audit, an auditor is not obligated to search for significant deficiencies in the operation of internal control.
Choice "a" is incorrect. In order to determine the nature, timing and extent of tests to be performed, an auditor must determine whether the control activities have been implemented. Choice "b" is incorrect. An auditor is required to perform procedures to confirm his/her understanding of the internal control systems' design,
and to determine whether relevant controls have been implemented.
Choice "c" is incorrect. An auditor is required to document his or her understanding of the entity's internal control components, even if he or she intends to use a substantive approach.
QUESTION 396
The GAO standards of reporting for governmental financial audits incorporate the AICPA standards of reporting and prescribe supplemental standards to satisfy the unique needs of governmental audits. Which of the following is a supplemental reporting standard for governmental financial audits?
A. Auditorsshouldreportthescopeoftheirtestingofcompliancewithlawsandregulationsandofinternalcontrols.
B. Materialindicationsofillegalactsshouldbereportedinadocumentdistributedonlytotheentity'sseniorofficials.
C. All changes in the audit program from the prior year should be reported to the entity's audit committee.
D. Anyprivilegedorconfidentialinformationdiscoveredshouldbereportedtotheorganizationthatarrangedfortheaudit.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The auditor's report on compliance and on internal control over financial recording (based on an audit) must include the scope of testing of compliance and internal control. Choice "b" is incorrect. Material indications of illegal acts are not only reported to the members of the governing body of the audited entity and their senior staff officials but, in some circumstances, auditors should report illegal acts directly to external parties (such as the grantor agency). Choice "c" is incorrect. Although GAO standards require that the auditor communicate information regarding the nature, timing and extent of planned testing to officials of the audited entity and to individuals contracting for the audit, reporting of all changes is not required. (For example, immaterial changes to the audit program need not be reported.)
Choice "d" is incorrect. Certain privileged or confidential information may be prohibited from general disclosure and should not be included in the audit report. The report should, however, disclose the nature of the information omitted and the requirement that makes an opinion necessary.
QUESTION 397
Analytical procedures performed in the final review stage of an audit generally would include:
A. Reassessingthefactorsthatassistedtheauditorindecidingonpreliminarymaterialitylevelsandauditrisk.
B. Consideringtheadequacyoftheevidencegatheredinresponsetounexpectedbalancesidentifiedinplanning.
C. Summarizing uncorrected misstatements specifically identified through tests of details of transactions and balances. D. Calculating projected uncorrected misstatements estimated through audit sampling techniques.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Analytical procedures applied during the final review stage should be used to determine whether adequate evidence has been gathered in response to unusual or unexpected balances identified during the audit.
Choice "a" is incorrect. Analytical procedures generally involve comparison of recorded amounts to auditor expectations. Reassessing the factors used to establish materiality levels and audit risk would not involve such comparisons.
Choice "c" is incorrect. Analytical procedures generally involve comparison of recorded amounts to auditor expectations. Summarizing uncorrected misstatements would not involve such comparisons. Choice "d" is incorrect. Analytical procedures generally involve comparison of recorded amounts to auditor expectations. Calculating projected uncorrected misstatements would not involve such comparisons.
QUESTION 398
Which of the following statements concerning material weaknesses and significant deficiencies is correct with respect to an audit of a nonissuer?
A. Anauditorneednotidentifyandcommunicatematerialweaknessesseparatelyfromsignificantdeficiencies.
B. Allmaterialweaknessesaresignificantdeficiencies.
C. Anauditorshouldreportimmediatelymaterialweaknessesandsignificantdeficienciesdiscoveredduringanaudit. D. All significant deficiencies are material weaknesses.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A material weakness in internal control is a significant deficiency that results in more than a remote likelihood that a material misstatement in the financial statements will not be prevented or detected.
Choice "a" is incorrect. The auditor is required to separately identify and communicate significant deficiencies and material weaknesses.
Choice "c" is incorrect. Significant deficiencies (including material weaknesses) are generally communicated to the appropriate parties after the audit is complete. They may, at the auditor's discretion, be communicated during the audit, but there is no requirement for immediate communication.
Choice "d" is incorrect. A material weakness is a significant deficiency that results in more than a remote likelihood that a material misstatement in the financial statements will not be prevented or detected. Not all significant deficiencies will meet this description.
QUESTION 399
At December 30, 20X3, Vida Co. had cash of $200,000, a current ratio of 1.5:1 and a quick ratio of
.5:1.
On December 31, 20X3, all cash was used to reduce accounts payable. How did these cash payments affect the ratios?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The current ratio equals current assets divided by current liabilities. Since the current assets exceed the current liabilities (as evidenced by a current ratio of 1.5:1), when each is decreased by the same amount, there will be a greater percentage reduction of the current liabilities. Thus, the ratio will increase since the current assets are now proportionately larger than the current liabilities. The quick ratio equals quick assets (including cash) divided by current liabilities. Since the quick assets are less than the current liabilities (as evidenced by a quick ratio of .5:1), when each is decreased by the same amount, the percentage decrease of the quick assets will be greater than that of the current liabilities. Thus, the ratio will decrease since the quick assets are now proportionately smaller than the current liabilities.
Choices "b", "c", and "d" are incorrect, per the above Explanation: .
QUESTION 400
An auditor's communication of internal control related matters noted in an audit usually should be addressed to:
A. Managementandthosechargedwithgovernance. B. Thedirectorofinternalauditing.
C. The chief financial officer.
D. The chief accounting officer.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E)
Explanation Explanation/Reference:
Explanation:
Choice "a" is correct. An auditor's communication of internal control related matters noted in an audit usually should be addressed to management and those charged with governance. Choices "b", "c", and "d" are incorrect. The director of internal auditing, the chief financial officer, and the chief accounting officer all would have access to the letter; however, it would not be addressed to them since they do not have the same level of authority and responsibility to the shareholders as management and those charged with governance.
QUESTION 401
Which of the following statements concerning audit evidence is correct?
A. Tobeappropriate,auditevidenceshouldbeeitherreliableorrelevant,butneednotbeboth.
B. Themeasureofthesufficiencyofauditevidenceliesintheauditor'sjudgment.
C. The difficulty and expense of obtaining audit evidence concerning an account balance is always a valid basis for omitting the test. D. A client's accounting data can be sufficient audit evidence to support the financial statements.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The measure of the sufficiency of audit evidence lies in the auditor's judgment. Choice "a" is incorrect. To be appropriate, audit evidence should be both reliable and relevant. Choice "c" is incorrect. The difficulty and expense of obtaining audit evidence concerning an account balance is not a valid basis for omitting the test when there is no acceptable alternative procedure. Choice "d" is incorrect. By itself, a client's accounting data cannot be sufficient audit evidence to support the financial statements. Sufficient, appropriate external evidence must also be obtained to corroborate management's assertions.
QUESTION 402
After making inquiries about credit granting policies, an auditor selects a sample of sales transactions and examines evidence of credit approval. This test of controls most likely supports management's financial statement assertion(s) of:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. By ensuring that credit approval is obtained before goods are shipped to customers, the auditor is testing management's assertion that accounts receivable are collectible (allocation and valuation). Ensuring that credit approval is obtained before goods are shipped does not support the rights and obligations assertion.
Choices "a", "b", and "d" are incorrect, based on the above Explanation: .
Audit Documentation
QUESTION 403
Which of the following would not be considered a significant audit finding that should be included in audit documentation?
A. Retirementoftheaccountspayablemanagerandsubsequenthiringofareplacement.
B. Discoveryofamaterialsalerecordedinthecurrentyearthatproperlybelongedinthesubsequentyear. C. Determination that there is substantial doubt about the entity's ability to continue as a going concern.
D. Implementation of a new accounting standard to account for a complex and unusual transaction.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Significant audit findings do not include staffing changes at the client. Choice "b" is incorrect. Discovery of a material sale recorded in the current year that properly belonged in the subsequent year represents a possible material misstatement in the financial statements. Possible material misstatements are considered to be significant audit findings. Choice "c" is incorrect. When substantial doubt about an entity's ability to continue as a going concern exists, there is likely to be a modification to the auditor's standard report. Items resulting in report modifications are generally considered to be significant audit findings. Choice "d" is incorrect. Matters related to the application of accounting principles to complex and unusual transactions are considered to be significant audit findings.
QUESTION 404
Which of the following is not true regarding audit documentation for a specific audit?
A. Auditdocumentationshouldbesufficienttoenablemembersoftheauditteamwithsupervisoryresponsibilitiestounderstandthenature,timing,extent,and results of auditing procedures performed.
B. Auditdocumentationshouldindicatewhichmember(s)oftheauditteamperformedandreviewedtheauditwork.
C. Auditdocumentationshoulddemonstratecompliancewithqualitycontrolstandards.
D. Audit documentation should demonstrate compliance with the standards of fieldwork.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Quality control standards relate to the conduct of a firm's audit practice as a whole, and compliance with such standards would not be demonstrated by audit documentation for one specific audit engagement.
Choice "a" is incorrect. Audit documentation should clearly indicate the work performed and the evidence obtained.
Choice "b" is incorrect. Audit documentation should indicate which parties performed and reviewed the work.
Choice "d" is incorrect. Audit documentation should demonstrate compliance with the standards of fieldwork. It should indicate an appropriate level of planning and supervision, that a sufficient understanding of the entity and its environment, including its internal control, was obtained, and that a sufficient level of appropriate evidence was obtained.
QUESTION 405
The permanent (continuing) file of audit documentation most likely would include copies of the: A. Leadschedules.
B. Attorney'sletters. C. Bank statements. D. Debt agreements.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The permanent file includes items with continuing audit significance, such as debt agreements.
Choice "a" is incorrect. Lead schedules would be included in the current audit documentation since they are applicable to the current year's audit only. Choice "b" is incorrect. Attorney's letters would be included in the current audit documentation since they are applicable to the current year's audit only. Choice "c" is incorrect. Bank statements would be included in the current audit documentation since they are applicable to the current year's audit only.
QUESTION 406
Which of the following pairs of accounts would be analyzed together in the audit documentation?
A. Notesreceivableandinterestincome.
B. Accruedinterestreceivableandaccruedinterestpayable. C. Notes payable and notes receivable.
D. Interest income and interest expense.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The auditor would most likely analyze notes receivable and its related income statement account, interest income, together.
Choice "b" is incorrect. Accrued interest payable would be analyzed along with notes payable; accrued interest receivable would be analyzed along with notes receivable. Choice "c" is incorrect. Notes payable would be analyzed along with interest payable and interest expense; notes receivable would be analyzed along with interest income. Choice "d" is incorrect. Interest income would be analyzed with notes receivable; interest expense would be analyzed with notes payable.
QUESTION 407
Audit documentation serves mainly to:
A. Providetheprincipalsupportfortheauditor'sreport.
B. Satisfytheauditor'sresponsibilitiesconcerningtheCodeofProfessionalConduct. C. Monitor the effectiveness of the CPA firm's quality control activities.
D. Document the level of independence maintained by the auditor.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Audit documentation serves mainly to provide 1) the principal support for the auditor's report; 2) assistance in the planning, conduct, and supervision of the audit; 3) accountability; and 4) useful information.
Choice "b" is incorrect. Audit documentation does not satisfy the auditor's responsibilities concerning the Code of Professional Conduct.
Choice "c" is incorrect. Audit documentation does not monitor the effectiveness of the CPA firm's quality control activities.
Choice "d" is incorrect. Audit documentation does not document the level of independence maintained by the auditor.
QUESTION 408
The permanent file of the audit documentation for an engagement generally would not include:
A. Bondindentureagreements. B. Leaseagreements.
C. Working trial balance.
D. Flowchart of internal control.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A working trial balance is a part of the current year's audit documentation. Choice "a" is incorrect. Bond indenture agreements are typically found in the permanent file. Choice "b" is incorrect. Lease agreements are typically found in the permanent file. Choice "d" is incorrect. An internal control flowchart is typically found in the permanent file.
QUESTION 409
An auditor ordinarily uses a working trial balance resembling the financial statements without footnotes, but containing columns for: A. Cashflowincreasesanddecreases.
B. Auditobjectivesandassertions.
C. Reclassifications and adjustments. D. Reconciliations and tickmarks.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The working trial balance generally contains a column for adjustments and reclassifications.
Choice "a" is incorrect. The working trial balance does not ordinarily contain information about cash flows.
Choice "b" is incorrect. Audit objectives and assertions are contained in the audit plan, which is generally kept separate from the working trial balance. Choice "d" is incorrect. Reconciliations and tickmarks are found in other parts of the audit documentation.
QUESTION 410
Which of the following factors would least likely affect the nature and extent of audit documentation?
A. Thenatureofthespecificauditprocedures.
B. Theriskofmaterialmisstatement.
C. The extent to which judgment was required in performing the specific audit procedures. D. The content of the representation letter.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The content of the representation letter will generally not affect the nature and extent of audit documentation. Factors affecting the nature and extent of audit documentation include:
1. The risk of material misstatement;
2. The extent to which judgment was required in performing the work and evaluating the results; 3. The nature of the specific auditing procedure;
4. The significance of the evidence obtained;
5. The nature and extent of any problems identified; and
6. The need to document conclusions that may not be obvious.
QUESTION 411
Audit documentation should be prepared in enough detail so that:
A. Anexperiencedauditorwhohasworkedwiththeclientinthepastcanunderstandtheproceduresperformedandtheevidenceobtained.
B. Areaderofthefinancialstatementswhohasnopreviousconnectionwiththeauditcanunderstandtheproceduresperformedandtheevidenceobtained. C. A reader of the financial statements who has a background in financial analysis can understand the procedures performed and the evidence obtained.
D. An experienced auditor who has no previous connection with the audit can understand the procedures performed and the evidence obtained.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Audit documentation should be prepared in enough detail so that an experienced auditor who has no previous connection with the audit can understand the procedures performed and the evidence obtained.
Choice "a" is incorrect. The requirement is that audit documentation be detailed enough that an experienced auditor who has no previous connection with the audit can understand the procedures performed and the evidence obtained. This is a higher standard than simply requiring the audit documentation to be appropriate for an auditor who is already familiar with the client. Choices "b" and "c" are incorrect. Readers of the financial statements typically would not have access to the audit documentation.
QUESTION 412
Which of the following is not true about the report release date?
A. Itisdefinedasthedateafterwhichexistingdocumentationmustnotbedeleted,andadditionstothedocumentationfilemustbedocumentedassuch. B. Itisoftenthedateonwhichthereportisdeliveredtotheclient.
C. It is the date on which the auditor grants the client permission to use the report.
D. It is used to define the beginning of the retention period.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The documentation completion date (and not the report release date) is defined as the date after which existing documentation must not be deleted, and additions to the documentation file must be documented as such.
Choice "b" is incorrect. The report release date is often the date on which the report is delivered to the client.
Choice "c" is incorrect. The report release date is the date on which the auditor grants the client permission to use the report. Choice "d" is incorrect. The report release date is used to define the beginning of the retention period.
QUESTION 413
What effect would the sale of a company's trading securities at their carrying amounts for cash have on each of the following ratios?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Trading securities are both current assets and quick assets. If they are sold for their carrying value, then both total current assets and total quick assets remain constant since one type of current asset and quick asset is traded for another. Thus, both the current ratio and the quick ratio would be unaffected by the sale of trading securities. Choices "b", "c", and "d" are incorrect, per the above Explanation: .
QUESTION 414
The following data pertain to Cowl, Inc., for the year ended December 31, 20X4:
What was Cowl's rate of return on assets for 20X4?
A. 5% B. 6% C. 20% D. 24%
Correct Answer: B
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Rate of return on assets is defined as the net income divided by the average total assets. In this case:
$150,000 / [($2,000,000 + $3,000,000)/2]
or [$150,000 / $2,500,000] = 6% rate of return.
Choice "a" is incorrect. Average total assets ($2,500,000) should be used, not ending assets ($3,000,000).
Choice "c" is incorrect. Net income ($150,000) and average total assets ($2,500,000) should be used, not net sales ($600,000) and ending assets ($3,000,000). Choice "d" is incorrect. Net income ($150,000) should be used, not net sales ($600,000).
QUESTION 415
Selected data pertaining to Lore Co. for the calendar year 20X4 is as follows:
The accounts receivable turnover for 20X4 was 5.0 times. What were Lore's 20X4 net credit sales?
A. $105,000 B. $107,000 C. $110,000 D. $210,000
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The accounts receivable turnover ratio equals net credit sales divided by average accounts receivable. 5.0 = net credit sales / [($20,000 + $22,000)/2]. Net credit sales equal $105,000. Choice "b" is incorrect. The accounts receivable turnover ratio equals net credit sales divided by average accounts receivable.
Choice "c" is incorrect. The accounts receivable turnover ratio equals net credit sales divided by average accounts receivable, not by year-end accounts receivable. Choice "d" is incorrect. The accounts receivable turnover ratio equals net credit sales divided by average accounts receivable, not by the sum of beginning and ending accounts receivable.
QUESTION 416
Selected data pertaining to Lore Co. for the calendar year 20X4 is as follows:
What was the inventory turnover for 20X4?
A. 1.2times. B. 1.5times. C. 2.0 times. D. 3.0 times.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Inventory turnover equals cost of goods sold divided by average inventory. Beginning inventory ($6,000) plus purchases ($24,000) less ending inventory equals cost of goods sold ($18,000). Thus, ending inventory equals $12,000 and inventory turnover = $18,000 / [($6,000 + $12,000)/2] = 2.0.
Choice "a" is incorrect. Inventory turnover equals cost of goods sold divided by average inventory. Choice "b" is incorrect. Cost of goods sold should be divided by average inventory, not by ending inventory.
Choice "d" is incorrect. Cost of goods sold should be divided by average inventory, not by beginning inventory.
QUESTION 417
Selected data pertaining to Lore Co. for the calendar year 20X4 is as follows:
Lore would use which of the following to determine the average days sales in inventory?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: B
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Average number of days sales in inventory is defined as 365 days per year divided by the inventory turnover.
Choice "a" is incorrect. The denominator used to determine average days sales in inventory is inventory turnover. Inventory turnover is cost of goods sold divided by average inventory, not simply average inventory.
Choice "c" is incorrect. The days sales in inventory calculation uses the cost of goods sold figure, not the sales figure.
Choice "d" is incorrect. The days sales in inventory calculation uses 365 in the numerator, not sales divided by 365.