Tag: Ethics

As part of Alex’s analytical procedures work on the financial statements of Big Staffie Ltd, he has identified that the gross profit margin has fallen from 27% to 24%.

Which ONE of the following could be a valid explanation for this decrease?

Select ONE answer:

1. Unusually high sales at the end of the year resulted in lower levels of closing inventory as compared to the previous year
2. Increased competition resulted in sales prices being cut
3. A bank overdraft resulted in a higher interest expense than in previous years
4. There was no significant change in the mix of products sold

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 2

1. Not correct
2. Correct == > If sales prices are cut but costs remain the same gross profit margins will fall. If the company sells a greater proportion of goods with a lower margin than in previous years the overall margin will be reduced. Increased levels of sales (and therefore lower closing inventory) will not affect gross profit margins provided selling prices are maintained. Interest expense is not deducted in arriving at gross profit, therefore it can have no effect on gross profit margins.
3. Not correct
4. Not correct

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For each of the following situations, select the most appropriate audit approach that should be used by the assurance firm.

The audit of a long-standing client with a sophisticated IT system and an internal audit department………..?

Select ONE answer:

1. Tests of controls only
2. Substantive procedures only
3. Analytical procedures only
4. A mix of tests of controls and substantive procedures

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 4

1. Not correct
2. Not correct
3. Not correct
4. Correct => A mix of tests of control and substantive procedures may be used for the audit of a long-standing client with a sophisticated IT system and an internal audit department, as it will be possible to rely on internal controls and then perform reduced substantive procedures.

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For each of the following situations, select the most appropriate audit approach that should be used by the assurance firm.

The audit of a new client, recently started up, with just a few employees in its accounting department………..?

Select ONE answer:

1. Tests of controls only
2. Substantive procedures only
3. Analytical procedures only
4. A mix of tests of controls and substantive procedures

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 2

1. Not correct
2. Correct => Substantive procedures only – a new client with few employees implies a lack of segregation of duties and hence high control risk. Therefore, reliance should not be placed on the internal control system. Audit evidence should be gathered using substantive procedures.
3. Not correct
4. Not correct

This work is licensed under a Creative Commons Attribution 4.0 International License.

As part of his overall risk assessment, Alex, the audit partner, has concluded that detection risk must be low.

For the issue of sample sizes, please select the appropriate consequence of this conclusion………..?

Select ONE answer:

1. Higher
2. Lower
3. Bigger
4. Smaller

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 3

1. Not correct
2. Not correct
3. Correct => If detection risk is low this means that the auditor must have a higher expectation of identifying errors and misstatements. Materiality is lower as the financial statements are more sensitive and sample sizes are increased so that more work is performed.
4. Not correct

This work is licensed under a Creative Commons Attribution 4.0 International License.

A furniture store and a local high-street bakery have the same markup on cost.

However, the gross profit margin of the furniture store is significantly higher than that of the bakery.

Which ONE of the following is a possible reason for this?

Select ONE answer:

1. The Bakery’s revenue is increasing, while that of the Furniture shop is decreasing
2. The Bakery has a higher level of wastage of inventory than the Furniture store
3. The Furniture shop takes advantage of trade discounts for bulk buying
4. The Bakery has a higher turnover of inventory than the Furniture store

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 2

1. Not correct
2. Correct => If the Bakery has a higher level of wastage of inventory than the Furniture shop, then the cost of wasted inventory will be treated as an expense in cost of sales. This will reduce the Bakery’s cost of sales independently of the mark-up applied. Cost of sales will therefore be high in relation to revenue, so the Bakery’s gross margin will be lower than the Furniture store’s.
3. Not correct
4. Not correct

This work is licensed under a Creative Commons Attribution 4.0 International License.