At the conclusion of an audit, an auditor is reviewing the evidence gathered in support of the financial statements. With regard to the valuation of inventory, the auditor concludes that the evidence obtained is not sufficient to support management's representations. Which of the following actions is the auditor most likely to take?
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1 .A ceramics manufacturer sold cups last year for USD7.50 each. Variable costs of manufacturing were USD2.25 per unit. The company needed to sell 20,000 cups to break even. Net income was USD5,040. This year, the company expects the following changes: sales price per cup to be USD9.00; variable manufacturing costs to increase 33.3%; fixed costs to increase 10%; and the income tax rate to remain at 40%. Sales in the coming year are expected to exceed last year's sales by 1,000 units. How many units does the company expect to sell this year?
A 21,600 B 21,000 C 22,600 D 21,960
2 .In an environment that is highly automated, an auditor determines that it is not possible to reduce detection risk solely by substantive tests of transactions. Under these circumstances, the auditor most likely would:
A Perform tests of controls to support a lower level of assessed control risk. B Adjust the materiality level and consider the effect on inherent risk. C Apply analytical procedures and consider the effect on control risk. D Increase the sample size to reduce sampling risk and detection risk.
3 .At the end of a company's first year of operations, 2,000 units of inventory are on hand. Variable costs are USD100 per unit, and fixed manufacturing costs are USD30 per unit. The use of absorption costing, rather than variable costing, would result in a higher net income of what amount?
A USD200,000 B USD140,000 C USD60,000 D USD260,000
4 .Which of the following explanations best describes why an auditor may decide to reduce tests of details for a particular audit objective?
A Audit staff are experienced in performing the planned procedures. B The audit is being performed soon after the balance sheet date. C There were many transactions posted to the account during the period. D Analytical procedures have revealed no unusual or unexpected results.
5 .A company's target gross margin is 40% of the selling price of a product that costs USD89 per unit. The product's selling price should be:
A USD148.33 B USD222.50 C USD124.60 D USD142.40
7 .Marston Enterprises sells three chemicals: petrol, septine, and tridol. Petrol is the company's most profitable product; tridol is the least profitable. Which one of the following events will definitely decrease the firm's overall breakeven point for the upcoming accounting period?
A An increase in anticipated sales of petrol relative to sales of septine and tridol. B An increase in the overall market for septine. C The installation of new computer-controlled machinery and subsequent layoff of assembly-line workers. D An increase in petrol's raw material cost.
8 .An auditor may achieve audit objectives related to particular assertions by:
A Increasing the level of detection risk. B Adhering to a system of quality control. C Preparing audit documentation. D Performing analytical procedures.
9 .A company is offered a one-time special order for its product and has the capacity to take this order without losing current business. Variable costs per unit and fixed costs in total will be the same. The gross profit for the special order will be 10%, which is 15% less than the usual gross profit. What impact will this order have on total fixed costs and operating income?
A Total fixed costs increase, and operating income decreases. B Total fixed costs increase, and operating income increases. C Total fixed costs do not change, and operating income increases. D Total fixed costs do not change, and operating income does not change.
10 .Which of the following actions is an analytical procedure that an auditor most likely would use while auditing a company's notes payable?
A Sending a confirmation to the lender requesting verification of the loan's outstanding balance. B Multiplying the average outstanding loan balance by the interest rate and comparing the result to interest expense actually recorded. C Performing calculations to determine if the company is in compli...
