If a Company's Net Income Varies Significantly from Year to Year

question 111

True/False

If a company's net income varies significantly from year to year, the auditor might consider using an average of the net income from the prior three to five years as the materiality benchmark.

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Definitions:

T-Accounts

A simplified accounting tool that represents a ledger account and is used to understand the effects of transactions on account balances.

Underapplied Overhead

A situation where the allocated manufacturing overhead costs are less than the actual overhead costs incurred.

Overapplied Overhead

A situation in accounting where the allocated manufacturing overhead costs are more than the actual overhead incurred.

Manufacturing Overhead

The indirect costs associated with manufacturing, not directly tied to a specific product, such as factory rent, equipment depreciation, and utilities.