1. This question tests your ability to perceive the place(s) where various potential problems may exist and the type of problem (overstatement or understatement) that may exist. It asks that you supply the words or descriptions that complete the analysis begun by applying analytical procedures.

Required:

For each of the items below, identify the account(s) that need(s) to be audited carefully and the reason (i.e., potential overstatement or understatement of _______).

1. If the current year accounts receivable are larger than last year but the allowance for doubtful accounts is the same.

2. If the current year inventory is larger than last year and the current year gross margin (profit) is larger.

3. If current year long-term liabilities are larger than last year and the interest expense is the same.

d. If current year fixed assets are larger and current depreciation expense is the same as last year.