To be in "good standing" the bank requires the company you're auditing to maintain a 2:1 current ratio or better. Below is a partial balance sheet from which the company calculated the current ratio.

Current assets 2,500,000

Current liabilities:

accounts payable 750,000

salary and wages payable 100,000

notes payable 300,000

Total current liabilities 1,150,000

Long-term liabilities:

mortgage payable 6,860,000

lease payable 3,379,000

Total long-term debt 10,239,000

The company makes $9,600 monthly principle payments on the mortgage and $4,300 monthly principle payments on the lease. The payments will continue into the foreseeable future.

Is the company in compliance with the banks' debt covenant?

Question 37 options:

Yes, with a 2.17:1 current ratio

Yes, with a 2:1 current ratio.

No, with a 1.9:1 current ratio.

No, with a 1.7:1 current ratio.

If you find that the client you are currently auditing had paid an invoice twice and reported a debit balance in a vendor account, how should this debit balance be reported on the balance sheet?

Question 36 options:

	As an abnormal balance in the liabilities section.
	As a long-term asset on the balance sheet.
	As a reduction of sales.
	As a current asset.

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If the auditor finds receiving slips (for inventory) that are unmatched to vendor invoices, what would the auditor suspect about the amount of liabilities reported on the balance sheet?

Question 38 options:

	The total liabilities section is overstated.
	The inventory reported on the balance sheet is overvalued.
	The long-term liabilities are understated.
	The current liabilities are understated.

Question 39 (3 points)

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What liability would be the most likely one the auditor would uncover during the audit of Legal Fees?

Question 39 options:

	Contingent liability.
	Interest payable.
	Back pay due to settlement of a union strike.
	Overpaid rent.