The following questions concern analytical procedures in the sales and collection cycle. Choose the best response.
a. As a result of analytical procedures, the auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditor should
(1) express a qualified opinion due to inability of the client company to continue as a going concern.
(2) evaluate management’s performance in causing this decline.
(3) require footnote disclosure.
(4) consider the possibility of a misstatement in the financial statements.
b. After a CPA has determined that accounts receivable have increased as a result of slow collections in a “tight money” environment, the CPA will be likely to
(1) increase the balance in the allowance for bad debt account.
(2) review the going concern ramifications.
(3) review the credit and collection policy.
(4) expand tests of collectibility.
c. In connection with his review of key ratios, the CPA notes that Pyzi had accounts receivable equal to 30 days’ sales at December 31, 2010, and to 45 days’ sales at December 31, 2011. Assuming that there have been no changes in economic conditions, clientele, or sales mix, this change most likely will indicate
(1) a steady increase in sales in 2011.
(2) an easing of credit policies in 2011.
(3) a decrease in accounts receivable relative to sales in 2011.
(4) a steady decrease in sales in 2011.
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