Chapter 5. Audit Evidence - Concepts and Standards

Question 1

Identify the 2 categories of substantive test of details

Answer 1

1. Tests of Ending Balances

2. Tests of Transactions

Question 2

inventory turnover

Answer 2

Cost of Goods Sold / Average inventory

Question 3

Define analytical procedures

Answer 3

Evaluations of financial information through analysis of plausible relationships among both financial and non-financial data

Question 4

Identify the 3 purposes that might be served by performing analytical procedures

Answer 4

1. Audit Planning (required)
2. As a form of substantive evidence (not required)
3. A final review (required)

Question 5

How might the auditor’s decisions about the timing of audit perocedures lower detection risk

Answer 5

Moving the auditor’s important substantive procedures away from an interim date (before year-end) to year-end will lower detection risk

Question 6

How might the auditor’s decisions about the nature of audit procedures lower detection risk

Answer 6

Choosing audit procedures that provide a stronger basis for conclusions will lower detection risk

Question 7

Identify the 4 considerations that determine the effectiveness and efficiency of analytical procedures used for substantive purposes

Answer 7

• Nature of the assertion;
• Plausibility and predictability of the relationship;
• Availability and reliability of data; and
• Precision of the expectation

Question 8

How might the auditor’s decision about the extent of audit procedures lower detection risk

Answer 8

Increasing the sample sizes for audit testing will lower detection risk

Question 9

List the 2 broad categories of substantive procedures

Answer 9

Test of details

Substantive analytical procedures

Question 10

Selected ratio

Answer 10

Liquidity ratios (=solvency ratio): Measures of an entity’s ST ability to meet its obligations

Activity ratios (=turnover or efficiency ratios): measures of an entity’s effectiveness putting its assets to use.

Profitability ratios: Measures of an entity’s operating success (failure) for a period of time.

Coverage ratios (leverage ratios): Measures of the entity’s ability to meet its obligations over time.

Question 11

Working apital

Answer 11

current assets - current liabilities. (this is a definition, not a ratio)

Question 12

Current ratio

Answer 12

CA / CL

Question 13

Quick ratio (acid-test ratio)

Answer 13

(cash + marketable securities + A/R) / CL

Question 14

Current cash to debt ratio

Answer 14

net cash from operations/average CL

Question 15

Asset turnover =

Answer 15

net sales/ average total assets

Question 16

Receivable turnover=

Answer 16

net (credit) sales / average trade receivable (net)

Question 17

Number of days sales in receivables=

Answer 17

365 days/ receivable turnover

Question 18

Inventory turnover

Answer 18

CGS / average inventory

Question 19

Number of days sales in inventory

Answer 19

365 days/ inventory turnover

Question 20

profit margin on sales =

Answer 20

net income/ net sales

Question 21

Gross profit percentage =

Answer 21

(saels - CGS) / sales

Question 22

Rate of return on assets=

Answer 22

NI / average total assets

Question 23

Rate of return on common stockholders’ equity=

Answer 23

(NI - DIV attributable to preferred stockholders) / average common stockholders’ equity

Question 24

Earnings per share (EPS)

Answer 24

(NI - preferred DIV)/average number of common shares outstanding

Question 25

Price earnings ratio (“P-E ratio”)

Answer 25

market price of stock / earnings per share

Question 26

Debt to total assets ratio =

Answer 26

total liabilities / total assets

Question 27

Debt to equity ratio =

Answer 27

total liabilities / total stockholders’ equity

Question 28

Times interest earned=

Answer 28

income before interest expense and income taxes/ interest expense

Question 29

Cash to debt coverage ratio=

Answer 29

net cash from operations/ average total liabilities