Question

Which of the following situations is most likely to be detected when a CPA compares 2019 revenues and expenses with the prior year and investigates all changes exceeding a fixed percent?

a) The company changed its capitalization policy for small tools in 2019.
b) The cashier began lapping accounts receivable in 2019.
c) Because of worsening economic​ conditions, the 2019 provision for uncollectible accounts was inadequate.
d) An increase in property tax rates has not been recognized in the​ company's 2019 accrual.

Answer 1

A CPA analyzing revenues and expenses and looking for changes beyond a fixed percent is likely to detect a situation where the company changed its capitalization policy for small tools in 2019, as this would lead to significant variances in the financials.

Step-by-step explanation:

When a CPA compares revenues and expenses between years and investigates changes exceeding a fixed percent, they are looking for material changes that could signal significant financial shifts or possible errors. In the scenarios given, the situation most likely to be detected would be: that the company changed its capitalization policy for small tools in 2019. This policy change represents an accounting change that could lead to a noticeable alteration in capital expenditures and potential depreciation expenses when compared to the previous year. Such a shift would likely result in variances beyond a fixed percentage threshold, triggering further investigation by the CPA.

Other scenarios like lapping accounts receivable, inadequate provision for uncollectible accounts, or an unrecognized increase in property tax may not necessarily result in variances that exceed the fixed percent threshold unless these issues are of substantial magnitude.