AA Chapter 11 Questions
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For Question 2: How does recalculation provide evidence about the operation of controls?. Reperformance of a procedure will definitely do
That’s what “recalculate” means – “repeat/reperform a calculation”.
Thank you Sir for that explanation. I really appreciate your time to explain
You are welcome but I should have asked you please, if you have questions rather than comments, can you please post them to the ask the tutor forum rather than here.
For Question 3 – All of the options contribute to fall in GP.
Why is only understatement of Revenue the right answer?
If you select “review results” option at the end of the quiz you should find full answer justifications:
GP% = GP/Revenue x100%
where GP = Revenue – Cost of goods sold
Try putting some #s into it – say revenue = 200, then:
GP% = 50% would have been calculated as (200 – 100)/200 x 100%
Now I hope you can see that if we said revenue was understated by 50, say, GP% would fall to (150 -100)/150 = 33.3% (ok so not 30%, I am just illustrating). So this is certainly the correct answer.
You are mistaken that the other options would reduce GP%, they would all increase GP%:
Increase in mark up on cost must increase GP% – try it with some numbers.
Change in demand – whether up or down – does not change GP%. You would have to know that the fall in demand was accompanied by a fall in selling price for GP% to decrease.
Remember, cost of sales = Opening inventory + purchases – closing inventory, so if inventory is overstated, cost of sales will be UNDERstated and GP will be overstated.
For Question 6 – Presentation isn’t an assertion at all? Assertions are
A – Accuracy
C – Classification
C – Completeness
A – Allocation
C – Cut off
O – Occurrence
V – Valuation
E – Existence
R – Rights and Obligations
No Presentation?
If you download the notes you can search them – so in section 4 “The financial statement assertions” in Chapter 10 you will see that for the purpose of the acronym, “Classification AND PRESENTATION” are combined (as they are clearly related).
You will see in the revisiting of the assertions in Chapter 16, however, that they are separate assertions in their own right. (Just as “rights” and “obligations” are separate assertions.