Question 1

Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's assertion of valuation and allocation of inventory?

Accepted Answer

A)  Testing the entity's computation of standard overhead rates. 
B)  Obtaining confirmation of inventories pledged under loan agreements. 
C)  Reviewing shipping and receiving cut-off procedures for inventories. 
D)  Tracing test counts to the entity's inventory listing.

Question 2

Procedures related to the purchases cut-off assertion should be designed to test whether or not all inventory:

Accepted Answer

A)  purchased and received before the year-end was recorded. 
B)  on the year-end statement of financial position was recorded at lower of cost or market. 
C)  on the year-end statement of financial position was paid for by the company. 
D)  owned by the company is in the possession of the company.

Question 3

A client's physical count of inventory was higher than the inventory per the perpetual records. This situation could be the result of the failure to record:

Accepted Answer

A)  sales discounts. 
B)  sales. 
C)  purchase returns. 
D)  purchases.

Question 4

Two months before the year-end the bookkeeper erroneously recorded the receipt of a long-term bank loan by a debit to cash and a credit to sales. Which of the following is the most effective procedure for detecting this
Type of misstatement?

Accepted Answer

A)  Analyse bank confirmation information. 
B)  Analyse the notes payable journal. 
C)  Prepare a year-end bank transfer schedule. 
D)  Prepare a year-end bank reconciliation.

Question 5

Which of the following is true of generalised audit software?

Accepted Answer

A)  They can be used on any computer without modification. 
B)  They can only be used in auditing on-line computer systems. 
C)  They enable the auditor to perform manual procedures related to tests of controls less expensively. 
D)  They each have their own characteristics which the auditor must carefully consider before using in a given audit situation.

Question 6

Which of the following tests would the auditor use generalised audit software for in order to test the completeness assertion of inventory?

Accepted Answer

A)  Identification of inventory items which haven't been sold for three months. 
B)  A sequence check looking for missing purchase invoice numbers. 
C)  A sequence check looking for duplicate purchase invoice numbers. 
D)  Selecting items from the inventory records in order to trace back to physical inventory counts.

Question 7

In the audit of a medium-sized manufacturing concern, which one of the following areas would be expected to require the least amount of audit time?

Accepted Answer

A)  Revenue. 
B)  Owners' equity. 
C)  Liabilities. 
D)  Assets.

Question 8

The primary difference between an audit of the statement of financial position and an audit of the income statement lies in the fact that the audit of the income statement deals with the verification of:

Accepted Answer

A)  authorisations. 
B)  transactions and events. 
C)  cut-offs. 
D)  presentation and disclosure.

Question 9

A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably:

Accepted Answer

A)  insist that the client perform physical counts of inventory items several times during the year. 
B)  apply gross profit tests to ascertain the reasonableness of the physical accounts. 
C)  increase the extent of tests of controls of the inventory cycle. 
D)  request the client to schedule the physical inventory count at the end of the year.

Question 10

The auditor tests the quantity of materials charged to work-in-process by tracing these quantities to:

Accepted Answer

A)  perpetual inventory records. 
B)  cost ledgers. 
C)  material requisition forms. 
D)  receiving reports.

Question 11

In auditing intangible assets, an auditor would determine whether the amortisation amount is reasonable in support of management's financial statement assertion of:

Accepted Answer

A)  valuation and allocation. 
B)  existence. 
C)  completeness. 
D)  rights and obligations.

Question 12

An auditor using audit software would probably be least interested in which of the following fields in a computerised perpetual inventory file?

Accepted Answer

A)  Quantity sold. 
B)  Date of last purchase. 
C)  Warehouse location. 
D)  Economic order quantity.

Question 13

The accuracy of perpetual inventory records may be established, in part, by comparing entries on the perpetual records with details from:

Accepted Answer

A)  receiving reports. 
B)  purchase requisitions. 
C)  vendor payments. 
D)  purchase orders.

Question 14

Which of the following pairs of accounts would an auditor most likely analyse on the same working paper?

Accepted Answer

A)  Notes receivable and interest income. 
B)  Accrued interest receivable and accrued interest payable. 
C)  Notes payable and notes receivable. 
D)  Interest income and interest expense.

Question 15

An auditor would be least likely to use external confirmation procedures in connection with the examination of:

Accepted Answer

A)  long-term debt. 
B)  property, plant and equipment. 
C)  inventories. 
D)  issued share capital.

Question 16

To verify that all sales transactions have been recorded (the completeness assertion), a test of transactions should be completed on a representative sample drawn from:

Accepted Answer

A)  the billing clerk's file of sales orders. 
B)  entries in the sales journal. 
C)  the shipping clerk's file of duplicate copies of bills of lading (goods shipped notices). 
D)  a file of duplicate copies of sales invoices for which all pre-numbered forms in the series have been accounted for.

Question 17

Johnson is engaged in the audit of a power company which supplies power to a residential community. All accounts receivable balances are small and the internal control structure is effective. Customers are billed twice monthly. In
Order to obtain evidence with regards the valuation and allocation assertion of the accounts receivable balances as
At balance date, Johnson would most likely:

Accepted Answer

A)  send positive confirmation requests. 
B)  examine evidence of subsequent cash receipts. 
C)  use statistical sampling instead of sending confirmation requests. 
D)  send negative confirmation requests.

Question 18

Your client sells a high-technology product which is subject to frequent technological improvements and design changes in order to keep current with the market. Based on this information, for the inventory account, the
Assertion upon which you should concentrate your audit procedures is:

Accepted Answer

A)  valuation and allocation. 
B)  existence. 
C)  completeness. 
D)  rights and obligations.

Question 19

The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of the following could explain the difference?

Accepted Answer

A)  Credit memos for several items returned by customers had not been recorded. 
B)  Inventory items had been counted but the tags placed on the items had not been taken off the items and added to the inventory accumulation sheets. 
C)  An item purchased 'FOB shipping point' had not arrived at the date of the inventory count and had not been reflected in the perpetual records. 
D)  No journal entry had been made on the retailer's books for several items that the retailer returned to its suppliers.

Question 20

In auditing accounts receivable the negative form of confirmation request most likely would be used when:

Accepted Answer

A)  recipients are likely to return positive confirmation requests without verifying the accuracy of the information. 
B)  the combined assessed level of inherent and control risk relative to accounts receivable is low. 
C)  a small number of accounts receivable are involved but a relatively large number of errors are expected. 
D)  the auditor performs a dual purpose test that assesses control risk and obtains substantive evidence.

Exam 10: Substantive Tests of Transactions and Balances

Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's assertion of valuation and allocation of inventory?

Procedures related to the purchases cut-off assertion should be designed to test whether or not all inventory:

A client's physical count of inventory was higher than the inventory per the perpetual records. This situation could be the result of the failure to record:

Two months before the year-end the bookkeeper erroneously recorded the receipt of a long-term bank loan by a debit to cash and a credit to sales. Which of the following is the most effective procedure for detecting this Type of misstatement?

Which of the following is true of generalised audit software?

Which of the following tests would the auditor use generalised audit software for in order to test the completeness assertion of inventory?

In the audit of a medium-sized manufacturing concern, which one of the following areas would be expected to require the least amount of audit time?

The primary difference between an audit of the statement of financial position and an audit of the income statement lies in the fact that the audit of the income statement deals with the verification of:

A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably:

The auditor tests the quantity of materials charged to work-in-process by tracing these quantities to:

In auditing intangible assets, an auditor would determine whether the amortisation amount is reasonable in support of management's financial statement assertion of:

An auditor using audit software would probably be least interested in which of the following fields in a computerised perpetual inventory file?

The accuracy of perpetual inventory records may be established, in part, by comparing entries on the perpetual records with details from:

Which of the following pairs of accounts would an auditor most likely analyse on the same working paper?

An auditor would be least likely to use external confirmation procedures in connection with the examination of:

To verify that all sales transactions have been recorded (the completeness assertion) , a test of transactions should be completed on a representative sample drawn from:

Your client sells a high-technology product which is subject to frequent technological improvements and design changes in order to keep current with the market. Based on this information, for the inventory account, the Assertion upon which you should concentrate your audit procedures is:

The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of the following could explain the difference?

In auditing accounts receivable the negative form of confirmation request most likely would be used when: