1.Ana used 0.5 to 5 percent of gross profit in determining materiality of $70,000 in her audit of XYZ Inc., a company that builds replacement engines for tractors and combines. She used the $70,000 amount as her planning materiality, identifying account balances and transactions to be tested. She also used materiality as a guide when deciding on the appropriate audit opinion in her report. Suppose Ana initially reviewed parts inventory account #102641-1 and found that none of the account transactions exceeded $45,000. Which of the following describes performance materiality and the auditing of the inventory account? (Several choices may be correct.)

a. None of the transactions in the inventory accounts need to be examined as the individual transactions are below $45,000.

b. Performance materiality will likely be set between $42,000 and $59,500 supporting the requirement to examine individual transactions.

c. Individual transactions still need to be examined as individual transactions could total more than $70,000.

d. Performance materiality will likely be set between $22,000 and $39,500 supporting the decision to not test individual transactions.

e. The parts inventory account is deemed to be immaterial and no further work is required.

2. Li Chen has calculated profitability ratios using data extracted from his client's pre-audit trial balance. He also has the values for the same ratios for the preceding two years (using audited figures). The data for the gross profit and profit margins are shown below. Li is a little confused because the profit margin shows declining profitability, but the gross profit margin has improved in the current year and is higher in 2023 than in the previous two years.

		2023		2022		2021
Gross Profit Margin		0.45		0.35		0.40
Profit Margin		0.09		0.15		0.20

Which of the following are possible explanations for the pattern observed in the gross profit and profit margins? (Several choices may be correct.)

a. Misclassification of cost of goods sold as operating expenses

b. Misclassification of operating expenses as cost of goods sold

c. Overstated purchase costs

d. Understated closing inventory

e. Increased advertising costs

f. Overstated sales in the current period

g. Increase in sales with a larger increase in selling and administrative expenses

3.An increase in the gross profit of a company could be caused by:

a. Increasing selling prices faster than the increasing cost of sales

b. Decreasing operating expenses faster than the decreasing sales prices

c. Decreasing selling prices faster than the decreasing cost of sales

d. Increasing selling prices slower than the increasing cost of sales

4.How will an auditor test to ensure increased sales is accurate? (Several choices may be correct.)

a. Test exchange rate movements on goods purchased by the company

b. Seek evidence of inventory movement to customers

c. Verify dates of sales around year end

d. Verify purchase agreements and invoices

e. Check for evidence of increased prices on price lists

5.When an auditor performs a search for unrecorded liabilities, they are testing for:

a. existence.

b. classification.

c. completeness.

d. accuracy.

6.Which of the following violate the occurrence assertion?

a. The client fails to accrue management bonuses in the current year.

b. The client books revenue in the current year when it has not yet been earned.

c. The client issues a payroll cheque to an employee who no longer works for the entity.

d. The client forgets to include goods on consignment in its inventory count at year end.

e. The client records its depreciation expense in its rent expense account.

f. The client forgets to record its allowance for doubtful accounts.

g. The client accidently records its telephone bill twice for the month of November.