Multiple Choice Questions
The following questions concern analytical procedures in the acquisition and payment cycle. Choose the best response.
a. Which of the following comparisons will be most useful to an auditor in auditing an entity’s income and expense accounts?
(1) Prior year accounts payable to current year accounts payable.
(2) Prior year payroll expense to budgeted current year payroll expense.
(3) Current year revenue to budgeted current year revenue.
(4) Current year warranty expense to current year contingent liabilities.
b. The controller of Excello Manufacturing, Inc., wants to use analytical procedures to identify the possible existence of idle equipment or the possibility that equipment has been disposed of without having been written off. Which of the following ratios will best accomplish this objective?
(1) Depreciation expense/book value of manufacturing equipment.
(2) Accumulated depreciation/book value of manufacturing equipment.
(3) Repairs and maintenance cost/direct labor costs.
(4) Gross manufacturing equipment cost/units produced.
c. Which of the following analytical procedures might suggest that certain repairs and maintenance expenses have been inappropriately capitalized?
(1) The ratio of additions to equipment divided by the beginning balance in the equipment account is significantly lower than the same ratio from the prior three years.
(2) The balance in the repairs and maintenance expense account is noticeably lower than amounts recorded in the past several years.
(3) The balance in the gross equipment account has decreased this year compared to the prior year.
(4) The ratio of depreciation expense divided by gross equipment is higher in the current year compared to prior years.