An Entity's Income Statements Were Misstated Due to the Recording

question 11

Multiple Choice

An entity's income statements were misstated due to the recording of journal entries that involved debits and credits to an unusual combination of expense and revenue accounts. Auditors most likely could have detected this irregularity by

• A)tracing a sample of journal entries to the general ledger.
• B)evaluating the effectiveness of the internal control policies and procedures.
• C)investigating the reconciliations between controlling accounts and subsidiary records.
• D)performing analytical procedures designed to disclose differences from expectations.

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Definitions:

Merchandise Sold

The total quantity of goods that have been sold by a business within a particular period.

Understated Inventory

A situation where the recorded amount of inventory is less than the actual inventory on hand, leading to distorted financial statements.

Net Income

The company's total earnings following the deduction of all costs, taxes, and expenses from the overall revenue.

Inventory Management

The overseeing and controlling of the ordering, storage, and use of components that a company will use in the production of the items it will sell as well as the managing of quantities of finished products for sale.