Question 1

The audit working papers often include a client-prepared, aged trial balance of accounts receivable as at balance date. This ageing is best used by the auditor to:

Accepted Answer

A)  test the accuracy of recorded sales. 
B)  assess control risk for credit sales. 
C)  verify the existence of the recorded receivables. 
D)  test the valuation and allocation assertion of accounts receivable.

Question 2

Which of the following is necessary to audit balances in an on-line IT system in an environment of destructive updating?

Accepted Answer

A)  Year-end utilisation of audit hooks. 
B)  Periodic dumping of transaction files. 
C)  A well-documented audit trail. 
D)  An integrated test facility.

Question 3

When evaluating the risk of material misstatement with regards to defalcations involving receivables (a credit entry to accounts receivable for amounts not received), the auditor would expect an experienced bookkeeper to most likely
Debit which of the following accounts?

Accepted Answer

A)  Cash. 
B)  Sales returns. 
C)  Miscellaneous income. 
D)  Accounts payable.

Question 4

During a client's stocktake you select a sample of items from the floor, count them and trace the quantities to the inventory summary sheet. Which financial report assertion is this audit procedure related to?

Accepted Answer

A)  Valuation and allocation. 
B)  Rights and obligations. 
C)  Completeness. 
D)  Existence.

Question 5

An auditor will usually trace the details of the test counts of inventory items selected from the factory floor while observing the inventory stocktake through to a final inventory schedule. This audit procedure is undertaken to
Provide evidence of which assertion(s)?

Accepted Answer

A)  Valuation and allocation. 
B)  Existence. 
C)  Completeness. 
D)  Cut-off.

Question 6

An auditor is testing sales transactions. One step is to trace a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices. What would the auditor intend to establish by this step?

Accepted Answer

A)  All sales invoices have been recorded. 
B)  Sales invoices represent bona fide sales. 
C)  Debit entries in the accounts receivable subsidiary ledger are properly supported by sales invoices. 
D)  All sales invoices have been properly posted to customer accounts.

Question 7

In violation of company policy, Warren Ltd erroneously capitalised the cost of painting its warehouse. The auditor examining Warren's financial report would most likely detect this when:

Accepted Answer

A)  examining maintenance expense accounts. 
B)  observing during the physical inventory observation that the warehouse had been painted. 
C)  examining the construction work orders supporting items capitalised during the year. 
D)  discussing the capitalisation policies with Warren's financial controller.

Question 8

Reviewing interest expense to identify payments to debt-holders not listed on the debt analysis schedule is a procedure that can be used to provide evidence for which audit assertion for loans payable:

Accepted Answer

A)  occurrence. 
B)  completeness. 
C)  cut-off. 
D)  accuracy.

Question 9

Which of the following audit procedures is least likely to detect an unrecorded liability?

Accepted Answer

A)  Analysis and re-computation of depreciation expense. 
B)  Analysis and re-computation of interest expense. 
C)  Reading of the minutes of meetings of the board of directors. 
D)  Analysis of response to a bank confirmation request.

Question 10

During the process of confirming receivables as of 30 June 2012, a positive confirmation was returned indicating the 'balance owed as of 30 June was paid on 9 July 2012.' The auditor would most likely:

Accepted Answer

A)  determine whether a customary trade discount was taken by the customer. 
B)  determine whether there were any changes in the account between 1 July and 9 July 2012. 
C)  check subsequent cash receipts to confirm that the amount was received. 
D)  reconfirm the zero balance as of 9 July 2012.

Question 11

A primary advantage of using generalised audit software in the audit of an advanced IT system is that it enables the auditor to:

Accepted Answer

A)  gather and store large quantities of supportive evidential matter in machine-readable form. 
B)  verify the performance of machine operations which leave visible evidence of occurrence. 
C)  utilise the speed and accuracy of the computer. 
D)  substantiate the accuracy of data through self-checking digits and hash totals.

Question 12

Once an auditor has determined that accounts receivable at year-end have increased due to slow collections in a 'tight money' environment, the auditor would be likely to:

Accepted Answer

A)  review the going concern ramifications. 
B)  increase the balance in the allowance for bad debts account. 
C)  expand tests for the valuation and allocation assertion. 
D)  expand tests for the existence assertion.

Question 13

Your client's inventory turnover has decreased from 8.2 times to 5.6 times during the year. Based on this decrease, which financial report assertion would you be least concerned with?

Accepted Answer

A)  Existence. 
B)  Rights and obligations. 
C)  Valuation and allocation. 
D)  Completeness.

Question 14

An auditor reviews the credit ratings of customers with overdue outstanding accounts receivable balances. The auditor's most likely purpose is to obtain evidence concerning management's assertions about:

Accepted Answer

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

Question 15

During the current financial year, the client company began dealing with certain distributors on a consignment basis (goods were delivered to the distributor but not deemed sold until the distributor had on-sold them). Which of the
Following audit procedures is least likely to bring this new fact to the auditor's attention?

Accepted Answer

A)  Test of cash receipts transactions. 
B)  Tracing of shipping documents to the sales journal. 
C)  Observation of physical inventory at the client company's premises. 
D)  Confirmation of accounts receivable.

Question 16

Tests designed to detect purchases made just before the end of the year that have been recorded in the subsequent year would provide assurance about management's assertion of:

Accepted Answer

A)  accuracy. 
B)  occurrence. 
C)  cut-off. 
D)  classification.

Question 17

Substantive testing is typically used to audit shareholders' equity because:

Accepted Answer

A)  the number of transactions is small. 
B)  controls over shareholders' equity transactions are typically weak. 
C)  a reliance strategy is most efficient. 
D)  the control environment over shareholders equity transactions is usually strong.

Question 18

When a client company does not maintain its own share records, the auditor should obtain written confirmation from the transfer agent and registrar concerning:

Accepted Answer

A)  the number of shares subject to agreements to repurchase. 
B)  guarantees of preferred share liquidation value. 
C)  restrictions on the payment of dividends. 
D)  the number of shares issued and outstanding.

Question 19

The negative form of accounts receivable confirmation request is useful except when:

Accepted Answer

A)  a large number of small balances are involved. 
B)  the internal control structure surrounding accounts receivable is considered to be effective. 
C)  individual account balances are relatively large and few in number. 
D)  the auditor has reason to believe the persons receiving the requests are likely to give them consideration.

Question 20

While undertaking the audit of the debtors' balance, you use your audit software to extract from the accounts receivable master file a report which shows those debtors with a positive balance owing that is overdue by more than 30 days. At
Which of the following account balance assertions is this report aimed?

Accepted Answer

A)  Completeness. 
B)  Valuation and allocation. 
C)  Occurrence. 
D)  Existence.

Exam 10: Substantive Tests of Transactions and Balances