Question

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

1) Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year.
2) Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.
3) The annual provision for uncollectible accounts expense was inadequate because of worsening economic conditions.
4) Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year.

Answer 1

An auditor's comparison of annual revenues and expenses might reveal incorrectly recorded unrealized gains, inadequate provision for bad debts due to worsening economic conditions, or unrecorded property tax rate increases. However, this procedure would not typically detect issues related to the timing of payroll tax payments or property tax notifications.

Step-by-step explanation:

The student's question is related to the procedures an auditor might use to identify potential discrepancies or significant changes in an organization's financial statements, specifically regarding annual revenues and expenses. When the auditor compares these figures with those of the prior year and investigates all changes exceeding 10%, several findings could become apparent. For instance:

1. An increase in unrealized gains in the value of available-for-sale securities that were incorrectly recorded in the income account for trading securities instead of other comprehensive income could be spotted.
2. The procedure could reveal that the annual provision for uncollectible accounts expense was inadequate, potentially due to worsening economic conditions leading to greater than expected bad debt.
3. Lastly, it might detect that a notice of increase in property tax rates was received but not recorded in the fiscal year it pertains to.

Assessment of items such as payroll taxes being accrued but not paid until the subsequent year, or property tax rate increases received but not recorded, pertain more to issues of timing and cutoff, which are typically assessed through other audit procedures.