Question

Which of the following comparisons would an auditor most likely make in evaluating an entity’s costs and expenses?

a. The current year’s accounts receivable with the prior year’s accounts receivable.

b. The current year’s payroll expense with the prior year’s payroll expense.

c. The budgeted current year’s sales with the prior year’s sales.

d. The budgeted current year’s warranty expense with the current year’s contingent liabilities.

Answer 1

Cost and expenses:

The term cost refers to the amount of money that is spent on manufacturing a product or providing the services. Cost and expenses represent all the expenditure that was incurred while delivering a product or service to its customers. The cost can be divided into various categories like direct cost, indirect cost, fixed cost, variable cost, etc. the expenses can relate to factory overheads, office and administration, selling and distribution, etc.

Payroll expense:

The payroll expenses are related to the amount spent on the employees of the company. The payroll expense includes the employee salary, wages and other benefits given to employees.

An auditor cannot evaluate the overall cost and expenses of an entity by comparing only the payroll expenses.

Hence, option (b) is incorrect.

Sales budget:

The sales budget is an estimation of the sales revenue and overhead, which a company wants to achieve for a particular period of time.

Therefore, a comparison of the current year’s budgeted sales will not be effective for evaluating the overall cost and expenses of an entity.

Hence, option (c) is incorrect.

Warranty expenses:

Warranty expenses are related to the cost of replacement or repairs incurred by an entity.

Contingent Liability:

A contingent liability is recorded based on prediction. It is a liability that may or may not arise in the future and totally depends on the happening or non-happening of an uncertain event.

They are not used for the evaluation of the cost and expenses of an entity.

Hence, option (d) is incorrect.

For monitoring the costs and expenditure of an entity, the auditor will compare the current year’s account receivable with the accounts receivables of the prior year.

Hence, the option is correct.