EBK PRINCIPLES OF AUDITING & OTHER ASSU
21st Edition
ISBN: 9781260299434
Author: WHITTINGTON
Publisher: YUZU
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Chapter 16, Problem 37COQ
To determine
Describe the auditor’s response when the decrease in gross profit percentage is identified in the analytical procedure.
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As a result of analytical procedures, the auditor determines that the gross profitpercentage has declined from 30% in the preceding year to 20% in the current year.The auditor should(1) express a qualified opinion due to inability of the client company to continue asa going concern.(2) evaluate management’s performance in causing this decline.(3) require footnote disclosure.(4) consider the possibility of a misstatement in the financial statements.
As a result of analytical procedures an auditor determines that gross profit has declined from 30% to 15% in the current year. The auditor should..
A. Document manamgent intentions with respect to reversing the trend.
B. Evaluate managment's performance in causing the deline
C. Require a footnote disclosure
D. Consider the possibility of an error in the financial statements.
For Questions 21 through 30, assume that you are reporting on an audit of a client’s financial statements. Select the type(s) of opinion appropriate for the scenario. In addition, unless stated otherwise, assume the matter involved is material. If the problem does not tell you whether a misstatement pervasively misstates the financial statements or does not list a characteristic that indicates pervasiveness, two reports may be possible.
A company has not followed generally accepted accounting principles in the recording of its leases.
Question 21 options:
Qualified
Adverse
Disclaimer
Qualified or adverse
A client changed its depreciation method for production equipment from the straight-line method to the units-of-production method based on hours of utilization. The auditor concurs with the change.
Question 22 options:
Unmodified – standard
Unmodified with…
Chapter 16 Solutions
EBK PRINCIPLES OF AUDITING & OTHER ASSU
Ch. 16 - Prob. 1RQCh. 16 - Prob. 2RQCh. 16 - Identify three items often misclassified as...Ch. 16 - Prob. 4RQCh. 16 - Prob. 5RQCh. 16 - Prob. 6RQCh. 16 - Prob. 7RQCh. 16 - Prob. 8RQCh. 16 - Prob. 9RQCh. 16 - What safeguards should be employed when the...
Ch. 16 - You are asked by a client to outline the...Ch. 16 - Prob. 12RQCh. 16 - Prob. 13RQCh. 16 - Prob. 14RQCh. 16 - Prob. 15RQCh. 16 - What are loss contingencies? How are such items...Ch. 16 - Prob. 17RQCh. 16 - Prob. 18RQCh. 16 - Prob. 19RQCh. 16 - What is the meaning of the term commitment? Give...Ch. 16 - Prob. 21RQCh. 16 - What are subsequent events?Ch. 16 - Describe the manner in which the auditors evaluate...Ch. 16 - Prob. 24RQCh. 16 - Prob. 25RQCh. 16 - Prob. 26RQCh. 16 - In your audit of the financial statements of Wolfe...Ch. 16 - Prob. 28QRACh. 16 - Prob. 29QRACh. 16 - Prob. 30QRACh. 16 - Prob. 31QRACh. 16 - The auditors opinion on the fairness of financial...Ch. 16 - Prob. 33QRACh. 16 - Prob. 34QRACh. 16 - Prob. 35QRACh. 16 - Prob. 36QRACh. 16 - Prob. 37AOQCh. 16 - Prob. 37BOQCh. 16 - Prob. 37COQCh. 16 - When auditing the statement of cash flows, which...Ch. 16 - The search for unrecorded liabilities for a public...Ch. 16 - The aggregated misstatement in the financial...Ch. 16 - Prob. 37GOQCh. 16 - Prob. 37HOQCh. 16 - Prob. 37IOQCh. 16 - Prob. 37JOQCh. 16 - Prob. 37KOQCh. 16 - Which of the following events occurring on January...Ch. 16 - Prob. 38OQCh. 16 - Prob. 39OQCh. 16 - Prob. 40OQCh. 16 - Match the following terms to the appropriate...Ch. 16 - Prob. 42OQCh. 16 - Prob. 43PCh. 16 - Prob. 44PCh. 16 - Prob. 45PCh. 16 - Prob. 46PCh. 16 - Prob. 47PCh. 16 - Prob. 48PCh. 16 - The audit staff of Adams, Barnes Co. (ABC), CPAs,...Ch. 16 - Prob. 50RDC
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- Which of the following statements would most likely appear in an auditor's engagement letter? a. Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket expenses. b. The auditor's preliminary assessment of the risk factors relating to misstatements arising from fraudulent financial reporting. c. A reminder that management is responsible for illegal acts committed by employees. d. After performing our preliminary analytical procedures, we will discuss with you the other procedures we consider necessary to complete the engagement. e. Required evidence is needed to issue a qualified opinion.arrow_forwardWhich of the following circumstances would most likely cause an auditor to suspectthat material misstatements exist in the financial statements?(1) The assumptions used in developing the prior year’s accounting estimates havechanged.(2) Differences between reconciliations of control accounts and subsidiary recordsare not investigated.(3) More confirmation requests were sent this year relative to last year.(4) Management consults with another CPA firm about complex accounting matters.arrow_forwardWhich of the following statements is incorrect? A. As the risk of material misstatement in the financial statements increases, the auditor relies more on substantive analytical procedures rather than tests of details of transactions and balances B. It is common, but not required, to use analytical procedures as substantive tests; C. Tests of transactions are often performed during the interim audit work D.Tests of details of balances are normally done during the year-end audit workarrow_forward
- An internal auditor plans to use an analytical review to verify the correctness of various operating expenses in a division. The use of an analytical review as a verification technique would not be a preferred approach if: Select one: a. The auditor notes strong indicators of a specific fraud involving this account b. The auditor would like to identify large, unusual, or nonrecurring transactions during the year. c. The operating expenses vary in relation to other operating expenses but not in relation to revenue. d. The company has relatively stable operations that have not changed much over the past yeararrow_forward20. To correct all errors they discover in the accounting records for the year under audit. The auditors should prepare adjusting journal entries for material items only. Because they are concerned with the fairness, not the preciseness, of the client's financial statements. Select one:TrueFalsearrow_forwardAfter the audit report release date, auditors determine that an important auditing procedure was omitted. Which of the following initial courses of action is most appropriate?a. Perform the omitted procedure or an alternative procedure.b. Notify the board of directors and regulatory agencies that are currently relying on auditor’s reports.c. Determine whether the omitted procedure is important in supporting the auditor’s opinion on the entity’s financial statements.d. Engage another public accounting firm to conduct a quality assurance review.arrow_forward
- Most auditors believe that financial statements are "presented fairly" when the statements are in accordance with GAAP, and that it is also necessary to Select one: a. assure investors that net income reported this year will be exceeded in the future b. review the statements using the accounting principles promulgated by the SEC c. examine the substance of transactions and balances for possible misinformationarrow_forwardDuring a review of a nonissuer’s financial statements, accountants are required to make certaininquiries of management. Which of the following inquiries is not required by the SSARS?a. The basis for the preparation of financial statements.b. Internal control deficiencies.c. Significant transactions occurring near the end of the reporting period.d. Material subsequent eventsarrow_forwardWith respect to fraudulent financial reporting, which one of the following statements is not correct? a.The risk that the auditor will not detect misstatement due to management fraud is greater than those due to employee fraud. b.It is difficult for the auditor to determine if misstatements in accounting estimates are caused by fraud or error. c.When the audit is properly planned and performed in accordance with ISAs, material misstatements are guaranteed to be detected by the auditor. d.Excessive pressure on management to meet expectations of third parties creates incentives forarrow_forward
- Lana Company, a CPA firm, conducted an audit for the 2020 financial statements of Yara Corporation. The auditors inquired the management about the business operations and changes occurred in 2020. The auditors noticed that the turnover rate of senior accountants and other managers in the Finance Department was high during the year. This event would most probably: Affect the materiality amount Have no effect on the overall audit risk Decrease overall audit risk Increase overall audit risk None of the abovearrow_forward1.Which of the following reports are likely when management has not made available minutes to the board of directors meetings during the year? a)Neither adverse nor disclaimer. b)Adverse only. c)Both adverse and disclaimer. d)Disclaimer only. 2.Which of the following is least likely to be considered in determining whether a misstatement pervasively misstates the financial statement? a)An immaterial misstatement is similar to one that occurred in the prior year. b)A material misstatement represents a substantial proportion of the financial statements. c)A disclosure is fundamental to users’ understanding of the financial statements. d)A material misstatement is confined to specific elements, accounts, or items of the financial statements. 3.Due to complications related to a national health crisis, the auditors were unable to observe major portions of the client’s year-end inventory count. However, they believe that they have been able to perform adequate alternative procedures. If…arrow_forwardBelow are ten independent risk factors:1. The client lacks sufficient working capital to continue operations.2. The client fails to detect employee theft of inventory from the warehouse becausethere are no restrictions on warehouse access and the client does not reconcileinventory on hand to recorded amounts on a timely basis.3. The company is publicly traded.4. The auditor has identified numerous material misstatements during prior yearaudit engagements.5. The assigned staff on the audit engagement lack the necessary skills to identifyactual errors in an account balance when examining audit evidence accumulated.6. The client is one of the industry’s largest based on its size and market share.7. The client engages in several material transactions with entities owned by familymembers of several of the client’s senior executives.8. The allowance for doubtful accounts is based on significant assumptions made bymanagement.9. The audit program omits several necessary audit procedures.10.…arrow_forward
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