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The auditor’s inquiries of management regarding required supplementary information (RSI) should be directed to the judgments made concerning
Measurement and presentation.
RSI is information that the designated accounting standards setter has determined must accompany the basic financial statements. Thus, authoritative guidelines for its measurement and presentation have been prescribed. The auditor should inquire about whether the RSI is within the guidelines, (2) whether methods of measurement or presentation have changed and the reasons for any change, and (3) any significant assumptions or interpretations (AU-C 730).
In estimating the total value of supplies on repair trucks, Baker Company draws random samples from two equal-sized strata of trucks. The mean value of the inventory stored on the larger trucks (stratum 1) was computed at $1,500, with a standard deviation of $250. On the smaller trucks (stratum 2), the mean value of inventory was computed as $500, with a standard deviation of $45. If Baker had drawn an unstratified sample from the entire population of trucks, the expected mean value of inventory per truck would be $1,000, and the expected standard deviation would be
Greater than $250.
The standard deviation is a measure of variability within a population. That the population was stratified indicates that each stratum has a smaller standard deviation than the population as a whole. If the two diverse populations are combined, the resulting standard deviation is likely to be larger than that of either of the separate strata. Because the standard deviations of the two strata were $250 and $45, the expected standard deviation is likely to be greater than $250.
When a practitioner examines projected financial statements, the report should include a separate paragraph that
Describes the limitations on the usefulness of the presentation.
According to AT 301, when the presentation is a projection, the practitioner’s report should include a separate paragraph that describes the limitations on the usefulness of the presentation.
Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?
Investigate changes in noncurrent debt occurring after year end.
Procedures that should be performed as near as practicable to the report date include investigating any increases in capital or issuance of debt, such as the issue of new shares or bonds.
Auditors sometimes use comparison of ratios as audit evidence. For example, an unexplained decrease in the ratio of gross profit to sales suggests which of the following possibilities?
Fraud or error that decreases gross profit relative to sales (or increases sales relative to gross profit) causes the ratio to decline. Unrecorded sales cause inventory to decrease and cost of sales to increase with no increase in sales, thereby decreasing gross profit relative to sales and lowering the ratio.