Which of the Following Is Not a Reason Why the Auditor

question 75

Multiple Choice

Which of the following is not a reason why the auditor needs to take special care to review significant estimates in the financial statements?

• A) Organizations may try to use the estimates to "smooth" earnings.
• B) Organizations may create hidden reserves in unusually good years that can be used in years when real profits do not meet expectations.
• C) Companies may underestimate liabilities or impairment of asset values to achieve reported earning goals in years when real profits to not meet expectations.
• D) Companies may try to overestimate liabilities in computing leverage ratios.

---

Definitions:

Cost Ledger

A subsidiary ledger that records the individual costs of production, providing detailed cost information.

Period Cost

Expenses that are not directly tied to the production of goods and are expensed in the period in which they are incurred, such as selling and administrative costs.

Factory Lunchroom

An area within a manufacturing facility allocated for employee meals and breaks.

Receiving Report

A document used to confirm the receipt of goods delivered, detailing the quantity and condition of the items.