Audit EXAM 2

Question 1

What is the difference between substantive testing and tests of controls?

Answer 1

Tests of Controls: Check if internal controls are effective.

Substantive Testing: Directly tests the financial statements for misstatements (e.g., verifying transactions, recalculating balances).

Question 2

What are common analytical procedures auditors use?

Answer 2

• Comparing current and prior year financials to identify unusual trends.
• Ratio analysis (e.g., Gross Profit %, Current Ratio, Trade Receivables Days).
• Benchmarking against industry norms to spot inconsistencies.
• Reasonableness testing (e.g., checking if revenue growth aligns with market trends).

Question 3

What are key risks when auditing inventory?

Answer 3

• Overstatement of inventory (inflated profits).
• Obsolete or damaged stock not written down.
• Misstatement of inventory valuation (incorrect cost allocation).
• Cut-off errors (wrong period classification).

Question 4

What controls help mitigate inventory risks?

Answer 4

• Regular stock counts and reconciliations.
• Proper documentation for stock movements.
• Independent checks and authorisations.

Question 5

What are key risks when auditing trade receivables?

Answer 5

• Uncollectible debts not provided for.
• Early revenue recognition (inflated sales).
• Fake sales transactions to boost financial performance.

Question 6

What controls help mitigate trade receivables risks?

Answer 6

• Setting credit limits and monitoring overdue accounts.
• Regular customer statement reconciliations.
• Review of bad debt provisions and write-offs.

Question 7

What are key risks when auditing trade payables?

Answer 7

• Understatement of liabilities (delaying expense recognition).
• Incorrect classification of expenses.
• Payments to fictitious suppliers.

Question 8

What controls help mitigate trade payable risks?

Answer 8

• Proper authorisation of purchases.
• Regular supplier reconciliations.
• Ensuring recorded liabilities match supplier statements.