[Anonymous]

Can any please me to solve this problem? Thank you!

An auditor compares annual revenue and expenses with similar amounts from the prior year and investigates all change changes exceeding 10%. The procedure most likely could indicate that:

a: unrealized gains from increase in the value of available for sale securities were recorded in the income account for trading securities

b: fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year

c: The annual provision for uncollectible account expense was inadequate because of worsening economic conditions.

D: Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year.

[Anonymous]

My answer: A.

Reasoning:

A. Recording unrealized gains of available-for-sale in the income account of trading securities will likely make the unrealized gains much less than the prior year and the income account much more than the prior year, so it would be detected by this test.

B. If taxes are properly accrued, then the expense for the year is likely to be in line with last year's, and thus won't be pulled by this test. When they are paid would affect assets and liabilities, but not expenses and income.

C. The key here is that conditions got worse. So, a bad debt expense that was in line with the prior year wouldn't be sufficient; however, one that was in line with the prior year wouldn't show up in a +/- 10% check, so won't be caught by this test.

D. Again, key is that it's a change from prior year. Taxes are going up, but if the increase isn't recorded, then the amount of tax will be in line with the prior year's tax. If the increase *was* properly recorded, then it would be likely to pull in this test and be explained away, but since it wasn't recorded, this +/- 10% test won't detect it at all.

[Anonymous]

Thank you very much Lilla!! The explanations that you provided are very helpful.

[Anonymous]

You're welcome – good luck with AUD. 🙂

[Author]

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