Which of the following comparisons would an auditor most likely make in evaluating an entity's costs and expenses?
a. The budgeted current year's warranty expense with the current year's contingent liabilities.
b. The current year's accounts receivable with the prior year's accounts receivable.
c. The budgeted current year's sales with the prior year's sales.
d. The current year's payroll expense with the prior year's payroll expense.
Explanation
Choice "d" is correct. The most likely analytical review procedure involving costs and expenses would be to compare the current year's payroll expense (average amount per employee) to the prior year, taking into consideration an average increase in wage rates. This is a very effective technique in auditing payroll expense.
Choice "b" is incorrect. Comparing the current year's accounts receivable balance with the prior year provides little evidence because accounts receivable may fluctuate based on timing of cash payments, which is unpredictable.
Choice "c" is incorrect. Comparing the budgeted current year's sales with the prior year's sales provides evidence regarding the reasonableness of the current year sales budget, but does not provide evidence about costs and expenses.
Choice "a" is incorrect. The current year's budgeted warranty expense would likely be compared to the current year's actual warranty expense, not to all of the contingent liabilities for the year.
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