An Auditor's Analytical Procedures Performed During the Overall Review Stage

question 13

Multiple Choice

An auditor's analytical procedures performed during the overall review stage indicated that the entity's accounts receivable balance had doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following explanations most likely would satisfy the auditor?

• A)The entity liberalized its credit standards in the current year and sold much more merchandise to customers with poor credit ratings.
• B)Twice as many accounts receivable were written off in the prior year than in the current year.
• C)A greater percentage of accounts receivable were currently listed in the "more than 90 days overdue" category than in the prior year.
• D)The entity opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

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Definitions:

Current Ratio

A liquidity ratio that measures a company's ability to pay short-term and long-term obligations, calculated as current assets divided by current liabilities.

Working Capital

The difference between a company's current assets and current liabilities, indicating the liquidity available to run its operations.

Fiscal Year

A twelve-month period used for accounting purposes and financial reporting by businesses, which may not align with the calendar year.

December 31

Commonly used in finance and accounting to signify the end of the fiscal or calendar year.