Q&A Hero

Q: The audit committee generally includes senior executives of the organization.

Q: The primary audit context with which an auditor is concerned is the auditee's industry or business.

Q: A series of business and related auditing failures led to the passage of the Sarbanes-Oxley Act (2002).

Q: Name and discuss the seven phases of the audit process.

Q: You are a new staff auditor and you are auditing a company's inventory account. Briefly describe one way you might obtain direct evidence and one way you might obtain indirect evidence that the inventory account balance is fairly stated.

Q: Why must an auditor assess materiality?

Q: You are a new employee at the accounting firm Murray & Murray, CPAs. Before you are assigned to your first audit, your supervisor tests your knowledge and asks you to explain the term "scope" in the context of a financial statement audit. A. Provide a definition of scope. B. Describe what influences an auditor's determination of scope.

Q: Define "information asymmetry" and discuss it in the context of the financial markets. Include in your discussion how information asymmetry is reduced.

Q: Explain the relationship between audit, attest and assurance services.

Q: On a high level, the accounting processes of a business consist of internal controls, individual transactions, and account balances. A. Describe the relationship between internal controls, individual transactions, and account balances. B. Discuss how evidence regarding each of these three areas can help an auditor determine if the financial statements are fairly stated.

Q: Which of the following is not a concept that is included in the scope paragraph of the auditor's report? A. The conformance of the financial statements with generally accepted accounting principles. B. The audit was conducted in accordance with applicable auditing standards. C. The audit was planned and performed to obtain reasonable, rather than absolute, assurance. D. An audit involves examining items on a test (i.e. sampling) basis.

Q: Which of the following is true with respect to the auditor's report? A. The report indicates that the company's financial statements were audited in accordance with generally accepted accounting standards. B. The report indicates that the company's financial statements were audited in accordance with applicable auditing standards. C. The report indicates that the company's financial statements were audited in accordance with the auditor's best judgment. D. The report indicates that the company's financial statements were audited in accordance with statements issued by the FASB.

Q: An auditor would issue an adverse opinion if A. The auditor encounters adverse attitudes toward the auditor on the part of company management. B. A qualified opinion cannot be given because the auditor is not qualified to do so. C. An immaterial misstatement is present. D. The statements taken as a whole do not fairly present the financial condition and results of operations of the company.

Q: The auditor's report is generally addressed to the A. Chief operating officer. B. Securities and Exchange Commission. C. Stockholders of the company. D. Chief financial officer.

Q: Preliminary engagement activities include A. Evaluating internal controls. B. Assessing audit risk at the account balance level. C. Setting materiality. D. Performing background checks on top management.

Q: An investor is reading the financial statements of the Stankey Corporation and observes that the statements are accompanied by an auditor's unqualified report. From this, the investor may conclude that A. Any disputes over significant accounting issues have been settled to the auditor's satisfaction. B. The auditor is satisfied that Stankey will be highly profitable in the future. C. The auditor is certain that Stankey's financial statements have been prepared accurately and that all account balances are precisely correct. D. The auditor has determined that Stankey's management is not qualified to lead the company.

Q: Before accepting an engagement to audit a new entity, an auditor is required to A. Make inquiries of the predecessor auditor. B. Tell the company whether or not the auditor is willing to issue a "clean" opinion. C. Prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan. D. Become a member of the entity's board of directors.

Q: Which one of the following statements best describes the concept of materiality? A. Materiality is determined by reference to specific quantitative guidelines established by the AICPA. B. Materiality depends only on the dollar amount of an item relative to other items in the financial statements. C. Materiality depends on the nature of an item but not on the dollar amount of the item. D. Materiality is largely a matter of professional judgment.

Q: When obtaining an understanding of the entity and its environment, the auditor should obtain an understanding of internal controls primarily to A. Identify areas of relatively high risk of misstatement and plan the audit accordingly. B. Provide suggestions for improvement to the company. C. Serve as a basis for setting audit risk and materiality. D. Decide whether to perform an audit for the company.

Q: Auditors are most likely to use the most rigorous audit procedures to examine A. Routine transactions. B. Management assertions that are deemed to be of low risk. C. Only the rights and obligations assertion. D. Management assertions that are deemed to be of high risk.

Q: Which of the following statements is not true with respect to assurance, attest, and audit services? A. These services are applied only to financial statements and financial statement accounts. B. These services all involve obtaining and evaluating evidence. C. These services all involve determining the correspondence of some information to a set of criteria. D. These services all involve issuing a report.

Q: Which of the following would best be described as an assurance service? A. Preparing a report representing a client's position during an IRS audit. B. Working with a company to develop a more efficient method of processing financial transactions. C. Offering an opinion concerning the accuracy of statements made on an entity's website relating to its online privacy policies. D. Assisting a company in identifying potential sources of capital for potential acquisitions.

Q: Auditing is defined as a "systematic process of objectively obtaining and evaluating evidence regarding assertions..." What is meant by "systematic process"? A. All audits involve obtaining the same evidence. B. All audits involve evaluating evidence in the same manner. C. There should be a well-planned approach for obtaining and evaluating evidence. D. All assertions are equally important for all audits.

Q: Which of the following best describes why publicly-traded corporations follow the practice of having the external auditor appointed by the board of directors or elected by the stockholders? A. To promote an adversarial relationship between the auditor and the corporation's management. B. To enhance auditor independence from the management of the corporation. C. To encourage a policy of rotation of the independent auditors. D. To give management more leverage over the auditor's decisions.

Q: Which of the following best describes the fundamental, underlying reason for why there is demand for an independent auditor to report on financial statements? A. A management fraud may exist and it is more likely to be detected by auditors if they are independent. B. Different interests may exist between the company preparing the statements and the parties using the statements. C. A misstatement of account balances may exist and it is the independent auditor's responsibility to ensure that financial statements are not misstated. D. A poorly designed internal control system may be in place.

Q: Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements? A. It is difficult to prepare financial statements that fairly present a company's financial position and changes in cash flows without the expertise of an independent auditor. B. It is management's responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements. C. The opinion of an independent party is needed because a company is not likely to be considered objective with respect to its own financial statements. D. It is a customary courtesy that all stockholders of a company receive an independent report on management's stewardship in managing the affairs of the business.

Q: In the context of agency theory, information asymmetry refers to the idea that A. Information can vary in its reliability. B. Information can vary in its relevance. C. Management has more information about the entity's true financial position than do the absentee owners (i.e. stockholders). D. Management likely will not act in the best interests of the absentee owners.

Q: During the first phase of an audit, a CPA most likely would A. Identify specific internal control activities that are likely to prevent fraud. B. Evaluate the reasonableness of the company's accounting estimates. C. Evaluate the integrity of management. D. Inquire of the company's attorney as to whether any unrecorded claims are probable or asserted.

Q: For publicly-held companies, which of the following is integrated into the audit of financial statements? A. Budgetary information audit. B. The audit of internal controls. C. Audit of management forecasts. D. Audit of interim financial statements.

Q: An auditor who accepts an audit engagement and does not possess expertise with respect to the business entity's industry, should A. Engage financial experts familiar with the nature of the business entity. B. Obtain a knowledge of matters that relate to the nature of the entity's business. C. Refer a substantial portion of the audit to another CPA, who will act as the principal auditor. D. First inform management that an unqualified opinion cannot be issued.

Q: Which of the following best describes the concept of audit risk? A. The risk of the auditor being sued because of association with an auditee. B. The risk that the auditor will provide a "clean" opinion on financial statements that are, in fact, materially misstated. C. The overall risk that a material misstatement exists in the financial statements. D. The risk that auditors use audit procedures that are inappropriate.

Q: Evidence is reliable if it A. Signals the true state of a management assertion. B. Applies to the period being audited. C. Relates to the audit assertion being tested. D. Is consistent with management's assertions.

Q: Assurance services may improve all of the following except A. Relevance. B. Credibility. C. Periodicity. D. Reliability.

Q: The basic purpose of a financial statement audit is to A. Detect fraud. B. Examine individual transactions so that the auditor may certify as to their validity. C. Provide assurance regarding whether the auditee's financial statements are fairly stated. D. Assure the consistent application of correct accounting procedures.

Q: Which of the following statements about the study of auditing is NOT true? A. The study of auditing can be valuable to future accountants and business decision makers whether or not they plan to become auditors. B. The study of auditing focuses on learning the analytical and logical skills necessary to evaluate the relevance and reliability of information. C. The study of auditing focuses on learning the rules, techniques, and computations required to analyze financial statements. D. The study of auditing begins with the understanding of a coherent logical framework and techniques useful for gathering and analyzing evidence about others' assertions.

Q: Which of the following statements best describes a relationship between sample size and other elements of auditing? A. If materiality increases, so will the sample size. B. If the desired level of assurance increases, sample sizes can be smaller. C. If materiality decreases, sample size will need to increase. D. There is no relationship between sample size and materiality or the desired level of assurance.

Q: Why do auditors generally use a sampling approach to evidence gathering? A. Auditors are experts and do not need to look at much to know whether the financial statements are correct or not. B. Auditors must balance the cost of the audit with the need for precision. C. Auditors must limit their exposure to their auditee to maintain independence. D. The auditor's relationship with the auditee is generally adversarial, so the auditor will not have access to all of the financial information of the company.

Q: Testing all transactions that occurred during the period is cost prohibitive.

Q: Auditing is a type of attest service.

Q: Auditing services and attestation services are the same.

Q: Conflicts of interest often occur between absentee owners and managers.

Q: Information asymmetry seldom occurs.

Q: Decision makers demand reliable information that is provided by accountants.

Q: Independence standards are required for audits of public companies, but not for audits of private companies.

Q: The higher the times interest earned ratio, the greater the risk of nonpayment of interest.

Q: If the debt-to-assets ratio is 0.63, it means that 37% of the company's financing has been provided by stockholders' equity.

Q: A company with a high inventory turnover requires a larger investment in inventory than another company of similar sales with a lower inventory turnover.

Q: The higher the receivables turnover, the slower accounts receivable are being collected.

Q: If earnings per share (EPS) decreases, it must mean that the company's net income has fallen.

Q: Liquidity measures the ability of a company to meet its current financial obligations.

Q: Vertical analysis is the comparison of a companys financial information over time.

Q: Horizontal analysis is the comparison of each financial statement amount to another amount on the same financial statement.

Q: Choose the appropriate letter to match the term and the definition. Not all definitions will be used. Term 1. _____ Time-Series Analysis 2. _____ Common-Size Financial Statements 3. _____ Management Discussion and Analysis 4. _____ Price/Earnings Ratio 5. _____ Earnings Per Share 6. _____ Comprehensive Income 7. _____ Discontinued Operations 8. _____ Net Income Definition A) The practice of reporting accounting data in the national monetary unit. B) A nonrecurring item associated with abandoning or selling an operation. C) The earnings of a company after taxes. D) An increase in an asset or a decrease in a liability that results from peripheral activities. E) After-tax earnings adjusted for gains and losses that may disappear before they are realized. F) A section of the annual report that can be used in interpreting the results of financial statement analysis. G) The ratio calculated by dividing the net income by the number of common shares outstanding. H) The ratio calculated by dividing the price of a share of stock by the earnings per share. I) Also known as ratio analysis. J) A nonrecurring item on the income statement that reflects gains and losses associated with extraordinary events. K) Another name for a trend analysis. L) The practice of reporting information in percentages rather than monetary amounts.

Q: Choose the appropriate letter to match the term and the definition. Not all definitions will be used. Term 1. _____ Full Disclosure Principle 2. _____ Ratio Analysis 3. _____ Liquidity 4. _____ Going-Concern Assumption 5. _____ Profitability 6. _____ Solvency 7. _____ Trend Analysis 8. _____ Vertical Analysis Definition A) The ability of a company to meet its short-run financial obligations. B) A type of analysis that focuses on relationships within a single financial statement. C) Also known as time-series analysis. D) The standard that companies should present all relevant information needed to interpret a companys financial position and performance. E) The standard that expenses should be recognized when incurred. F) A measure of current earnings performance. G) A result from comparing a company's results to other companies in the industry. H) A measure of long-run survivability. I) The standard that revenue should be recorded when earned, provided payment is reasonably expected. J) Measures that relate financial variables reported in one or more of the financial statements from the same year. K) The characteristic that financial information needs to be valuable to decision makers. L) The standard that takes for granted a companys near term financial survival.

Q: For each of the accounting treatments below, indicate whether it is followed in GAAP, or IFRS, or both, by placing an X in the appropriate column(s). Accounting Treatment GAAP IFRS 1. Record the purchase of assets at cost. 2. Report assets at current value on the balance sheet. 3. May use FIFO for inventory costing. 4. May use LIFO for inventory costing. 5. Contingent liabilities are accrued under specified circumstances. 6. Some preferred stock is classified as a liability. 7. Common stock is classified as stockholders equity. 8. Current assets precede noncurrent assets on the balance sheet. 9. Equity precedes liabilities on the balance sheet. 10. Dividends and interest received may be classified as either operating or investing activities. 11. May use either the direct method or the indirect method to prepare the statement of cash flows. 12. Different parts of a piece of equipment may be depreciated over different periods of time (e.g., for a roller coaster, the engine may be depreciated over 5 years, the seats, over 7 years, and the track over 10 years).

Q: Husain, Inc.s income statement and other financial information for the current year is presented below. Hussain, Inc. Income Statement For the year ended December 31 Sales revenue $159,131 Cost of goods sold 64,360 Gross profit 94,771 Selling, general, and administrative expenses 11,385 Operating income 83,386 Interest expense 2,847 Income before taxes 80,539 Income tax expense 3,414 Net income $ 77,125 Balance sheet information: Current assets $250,000 Noncurrent assets 500,000 Current liabilities 50,000 Long-term debt 100,000 Required: Part a. Perform vertical analysis of the income statement. (Round to the nearest whole percentage.) Part b. Calculate the debt-to-assets ratio. (Round to two decimal places.) Part c. Calculate the times interest earned ratio. (Round to two decimal places.) Part d. Evaluate the companys solvency.

Q: The following information is available for a company for the current year: Net Sales Revenue $ 345,000 Cost of Goods Sold 205,000 Average Accounts Receivable 32,500 Average Inventory 9,450 Average Net Fixed Assets 81,250 Average Total Assets 130,000 Required: Part a. Calculate the receivables turnover ratio for the current year. Part b. Calculate the days to collect for the current year. Part c. Calculate the inventory turnover ratio for the current year. Part d. Calculate the days to sell for the current year. Round all ratios to two decimal points.

Q: Carson Inc. reported net sales revenue of $850,000 and paid no dividends during the current year. The following information is also available at the end of the current and prior years: Current Year Prior Year Total Current Assets $ 500,000 $ 450,000 Property, Plant, and Equipment, Net 850,000 700,000 Total Current Liabilities 225,000 195,000 Total Long-Term Liabilities 300,000 250,000 Common Stock, $5 Par 500,000 500,000 Paid-In Capital in Excess of Par 100,000 100,000 Retained Earnings 225,000 105,000 There was no preferred stock outstanding during the current year. Required: Part a. Calculate the return on equity for the current year. Part b. Calculate the debt-to-assets ratio for the current year. Part c. Calculate the fixed asset turnover ratio for the current year. Part d. Calculate the current ratio for the current year. Round all ratios to two decimal points.

Q: The financial information below presents selected information from the financial statements of Pelican Company. Sales revenue during the current year was $13,700,300 and cost of goods sold was $8,905,195. All of Pelican's sales are made on account and are due within 30 days. Prior Year Current Year Cash and cash equivalents $ 552,330 $ 599,780 Accounts receivable 4,550,000 3,800,000 Inventory 920,360 1,223,440 Total current assets 8,700,030 8,480,100 Total assets 11,100,020 10,980,000 Total current liabilities 7,200,300 7,476,000 Total liabilities 8,449,900 8,240,700 Required: Part a. Current ratios as of the end of the current and prior year. Part b. Calculate the receivables turnover ratio for the current year. Part c. Calculate the days to collect for the current year. Part d. Calculate the inventory turnover ratio for the current year. Part d. Calculate the days to sell for the current year. Part e. Evaluate the companys liquidity position at the end of the current year. Cite any additional information not given in the problem that would be helpful in evaluating the companys liquidity. Round all ratios to two decimal places.

Q: Mercedes, Co. has the following quarterly financial information. 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter Sales Revenue $901,800 $ 911,300 $ 909,600 $ 917,400 Cost of Goods Sold 304,500 317,100 316,700 321,900 Operating Expenses 247,700 259,100 257,300 261,400 Interest Expense 3,600 3,600 3,600 3,500 Income Tax Expense 84,300 87,200 87,200 89,700 Average Number of Common Shares Outstanding 793,030 788,064 789,670 803,000 Stock price when Q4 EPS released $24.00 Required: Part a. Calculate the gross profit percentage for each quarter. Part b. Calculate the net profit margin for each quarter. Part c. Calculate the EPS for each quarter. Part d. Calculate the Price/Earnings ratio at the end of the year. Part e. Evaluate the companys profitability. Round all ratios to two decimal places.

Q: The following information is taken from the financial statements of B. Darin Company: Net sales revenue $ 900,000 Expenses 600,000 Net income 300,000 Net cash from operations 290,000 Assets, end of current year 600,000 Liabilities, end of current year 100,000 Stockholders equity, end of current year 500,000 Assets, end of previous year 590,000 Stockholders equity, end of previous year 490,000 Expenses include interest of $10,000 and income tax of $90,000. There was an average of 40,000 shares of common stock outstanding during the year and the market price of the stock is $15 per share at the end of the year. There was no preferred stock outstanding during the year. Required: Calculate the following ratios for the current year: Part a. Fixed asset turnover Part b. Return on equity (ROE) Part c. Earnings per share (EPS) Part d. Times interest earned Part e. Price/Earnings ratio Part f. Debt-to-assets ratio Part g. Net profit margin

Q: A company had 10,000 shares of common stock outstanding throughout the year. The following information is also available: Stockholders equity, end of year $4,000,000 Net income for the year 1,000,000 Market price per share, end of year $140 Required: Calculate the Price/Earnings ratio at the end of the current year.

Q: Consider the formula used to calculate each of the following financial performance ratios. From the list of financial statement items below, match its letter with the ratio it is used to calculate. Some financial statement items will be used more than once. Some ratios will use one letter from the list and some ratios will use two letters from the list. Ratio 1. ___ Net Profit Margin 2. ___ Debt-to-assets ratio 3. ___ EPS 4. ___ ROE 5. ___ Days to collect 6. ___ Days to sell 7. ___ Price earnings ratio 8. ___ Current ratio 9. ___ Fixed asset turnover 10. ___ Gross profit percentage 11. ___ Quick ratio Financial Statement Item A) Net income B) Interest paid C) Cost of goods sold D) Net sales revenue E) Total liabilities F) Total assets at year end G) Average stockholders' equity H) Current liabilities

Q: Choose the appropriate letter match each financial performance ratios with the appropriate category. Ratio 1. ___ Debt-to-assets ratio 2. ___ Receivables turnover ratio 3. ___ Fixed asset turnover ratio 4. ___ Current ratio 5. ___ Return on equity 6. ___ Price earnings ratio 7. ___ Times interest earned ratio 8. ___ Quick ratio 9. ___ Inventory turnover ratio 10. ___ Earnings per share Category P Profitability L Liquidity S Solvency

Q: Company X has net sales revenue of $1,250,000, cost of goods sold of $760,000, and all other expenses of $290,000. The beginning balance of stockholders' equity is $400,000 and the beginning balance of fixed assets is $361,000. The ending balance of stockholders' equity is $600,000 and the ending balance of fixed assets is $389,000. Required: Compute the return on equity (ROE) ratio.

Q: A condensed balance sheet for Liu Company is presented below: Liu Company Balance Sheet December 31 (amounts in millions) Current Assets Current Liabilities Cash & Cash Equivalents $2,500 Accounts Payable $ 155 Accounts Receivable 255 Accrued Liabilities 975 Inventories 225 Total Current Liabilities 1,130 Total Current Assets 2,980 Long-Term Liabilities 450 Property & Equipment, Net 1,200 Total Liabilities 1,580 Long-Term Investments 1,100 Total Stockholders Equity 3,700 Total Assets $5,280 Total Liabilities & Stockholders Equity $5,280 Required: Part a. Prepare a vertical analysis of the balance sheet above. Round to the nearest whole percent. Part b. Interpret your analysis. Identify significant items. Comment on key relationships.

Q: The income statements for Urban Outfits, Inc. are presented below: Urban Outfits, Inc. Income Statements Year Ended December 31 Prior Year Current Year Sales revenue $731,559 $683,700 Cost of goods sold 358,719 329,100 Gross profit 372,840 354,600 Operating and other expenses 122,960 114,400 Interest expense 6,600 8,500 Income tax expense 37,200 36,700 Net income $206,080 $195,000 Required: Part a. Prepare a horizontal analysis of the income statement above. Round to the nearest whole percent. Part b. Interpret your analysis. Comment on significant changes.

Q: Which of the following is not a similarity of GAAP and IFRS? A) They both generally require that an exchange take place before a transaction is recorded. B) They both promote information that is relevant and that faithfully represents the underlying transactions. C) They both include rules about recognition, classification, and measurement of transactions. D) They both allow fixed assets to be reported at fair values.

Q: Which of the following statements about nonrecurring and other special items is correct? A) Some special items, such as changes in the value of certain balance sheet accounts, are excluded from the calculation of net income. B) Nonrecurring items such as discontinued operations are presented above the income tax expense line on the income statement. C) Discontinued operations are reported net of tax as part of the income from continuing operations. D) The cumulative effect of change in accounting principles is reported on the income statement as part of income from continuing operations.

Q: Special items reported as part of comprehensive income, but not included in net income, might include: A) gains or losses on foreign currency exchange. B) interest expense. C) extraordinary gains and losses. D) income tax expense.

Q: Nonrecurring items such as a loss from discontinued operations is reported on the income statement: A) net of income tax. B) before income tax expense. C) below the net income line. D) Nonrecurring items are not subject to income taxes; therefore, they are not reported on the income statement.

Q: Which of the following types of items would you be most likely to see below the income tax expense line on an income statement? A) Gain on Sale of Discontinued Operations, Net of Tax B) Gross Profit C) Cumulative Effect of Accounting Change D) Salaries Expense

Q: Which of the following factors would cause the least amount of concern about a companys ability to continue as a going-concern? A) Excessive reliance on debt financing B) Loss of key personnel without comparable replacement C) Inadequate maintenance of long-lived assets D) Declining profit margins

Q: Which of the following nonfinancial factors is most likely to be a cause of a going-concern problem? A) Hiring a new CEO B) Loss of a key patent C) Announcing a new stock issue D) Replacing an old product line

Q: The going-concern assumption states that the: A) company will always maximize the profit for stockholders. B) company is not expected to go out of business in the near future. C) company is a separate concern from the stockholders. D) company's results will be reported in a consistent manner from period to period.

Q: Company A uses the FIFO inventory method and Company B uses the LIFO method. If prices are rising and there are no other significant differences between the companies, which of the following is correct? A) Company A will report a higher current ratio and lower earnings per share than Company B. B) Company A will report a higher current ratio and higher earnings per share than Company B. C) Company A will report a lower current ratio and higher earnings per share than Company B. D) Company A will report a lower current ratio and lower earnings per shares than Company B.

Q: How competitors calculate inventory cost is least likely to affect comparisons between competitors if inventory makes up a: A) large percentage of assets and inventory costs are stable. B) large percentage of assets and inventory costs are not stable. C) small percentage of assets and inventory costs are not stable. D) small percentage of assets and inventory costs are stable.

Q: How competitors calculate depreciation is most likely to affect comparisons between competitors if property, plant and equipment: A) makes up a large percentage of assets and average useful lives are fairly different. B) makes up a small percentage of assets and assets are financed in a different way. C) makes up a small percentage of assets and average useful lives are fairly similar. D) is primarily leased in the industry, not purchased.

Q: The ratio that measures the companys ability to meet required interest payments is the: A) debt-to-equity ratio. B) current ratio. C) Price/Earnings ratio. D) times interest earned ratio.

Q: A times interest earned ratio of 11 means that the companys: A) net income is large enough to pay interest and taxes 11 times. B) net cash flow from operations before taxes and interest is large enough to pay interest and taxes 11 times. C) net cash flow from operations is large enough to pay interest and taxes 11 times. D) income before taxes and interest is large enough to pay interest 11 times.