QB Chapter 13 Substantive procedures: key financial statement figures Flashcards
Which three of the following provide evidence to support the rights and obligations
assertion in relation to non-current assets?
A Title deeds
B Purchase invoices
C Vehicle registration documents
D Sales invoices
A,B,C
The rights and obligations assertion means that the entity holds or controls the rights
to assets. Although vehicle registration documents show registered keeper, not owner,
the keeper is likely to have control of the asset. Both title deeds and purchase invoices
give evidence of ownership (which gives control). Sales invoices give evidence of no
longer having ownership of something and do not therefore support the rights and
obligations assertion
Which one of the following assertions is the assurance provider least concerned with when testing a non-current asset balance? A Existence B Rights and obligations C Completeness D Cut-of
D Cut-off is a financial statement assertion that affects classes of transactions, not account
balances.
Which three of the following are the more significant risks in relation to an inventory
balance in the financial statements?
A Inventory exists but has not been included in the financial statements
B Inventory has been valued at cost when net realisable value is lower
C Inventory has been valued when it is obsolete and has no value
D Inventory has not been disclosed properly in the financial statements
A,B,C
Inventory has not been disclosed properly in the financial statements constitutes the
lowest risk, as the disclosure requirements in relation to inventory are not onerous. In
contrast, inventory is often easy to conceal or omit from records or count wrongly, and,
as it usually consists of a large number of items, valuation can be tricky also.
Which two of the following constitute the best quality evidence concerning the net
realisable value of inventory?
A Company’s controls over inventory counting
B Post year-end sales invoices
C Post year-end sales orders
D Post year-end sales price list
B,C Post year-end sales invoices and orders. The controls over counting relate to existence,
not valuation. A post year-end sales price list gives evidence of management intention
in relation to inventory, but not evidence of the price that customers are genuinely
prepared to pay (in the way that invoices and orders do).
Which one of the following is the reason why the positive method of confirming receivables
balances with customers is generally preferred?
A It is carried out in the auditor’s name
B It requires the customer to reply giving or confirming or disagreeing with the balance
C It only requires the customer to reply if he disagrees with the balance
D It requires replies to be sent to the client
B The fact that a positive confirmation requires the customer to reply to confirm or deny
the balance (or to reply giving the balance) is the reason why this method is generally
preferred in preference to a negative confirmation. This is because a negative
confirmation only requires a reply if the balance is not agreed – thereby giving poorer
quality evidence as if there is no reply the auditor cannot be sure that the customer has
not just ignored the letter (or whether he has even received it). The answer is not
option A as negative confirmations are also carried out in the auditor’s name. Option C
describes a negative confirmation and so is not correct. Option D does not apply to
any type of confirmation.
Which two of the following procedures are most appropriate to confirm the valuation of trade receivables? A Review of the receivables ledger B Direct confirmations with customers C Review of cash paid after date D Review of sales invoices
B,C Direct confirmations with customers and review of cash paid after date are most
appropriate as these provide independent confirmation of the year-end trade
receivables balance, whereas the receivables ledger and sales invoices are part of the
client’s own records.
Which one of the following procedures which could be undertaken to confirm the valuation
of a client’s bank balance is the most reliable?
A Inspection of the bank reconciliation
B Inspection of the bank statement
C Inspection of the bank letter
D Inspection of the cash book
C Inspection of the bank letter gives the most reliable evidence as this is received by the
auditor directly from the bank. Bank statements have been sent via the client, so there
is scope for them to have been tampered with in some way. Bank reconciliations and
the cash book are client-generated documents and are, therefore, less reliable.
In which two of the following situations should an auditor carry out a cash count?
A An individual cash float is material
B A client has a large number of cash floats, which are immaterial in total
C A client has poor controls over cash floats, which are immaterial in total
D The auditor suspects that a fraud has been committed in relation to immaterial cash
floats
A,D The auditor should count an individual cash float which is material because he should
test all material items. He should also count immaterial cash floats where he suspects
that a fraud has been committed as although the individual floats are immaterial, the
overall impact of such a fraud could be material to the financial statements if repeated
over time.
Which one of the following is the key assertion with which auditors are concerned in relation to payables? A Completeness B Existence C Accuracy D Classification
A Completeness (ie, understatement): liabilities are generally tested for understatement, as they are more likely to be understated than overstated. Existence (overstatement): a higher-risk assertion for assets, as opposed to liabilities. Presentation and classification are generally less risky assertions in this case.
Which three of the following are reasons why the auditors might seek direct confirmation of
balances due from suppliers?
A To obtain third party evidence
B The auditors suspect that the client is deliberately understating payables
C The internal controls relating to purchases are weak
D Supplier statements are unavailable
B,C,D
Although a payables circularisation does provide third party evidence, it is unnecessary
on those grounds alone, because supplier statements provide third party evidence as
well. Therefore a payables circularisation will only be needed where there is some
problem, such as those described in options B, C and D
Which two of the following are reasons why sales are often verified by testing the internal
controls in place over sales?
A There are usually too many individual transactions to test them individually
B Sales constitute a high volume of similar transactions which are suitable for controls
testing
C Controls over sales in a company are often strong
D Because there are so many individual transactions, there is a significant risk that sales
are misstated
B,C Option B is correct – that sales constitute a high volume of similar transactions and are
hence suitable to controls testing. Regarding option C – where controls are expected
to be strong, ISA 330 requires that the auditors test them so this is also correct. Option
A cannot be used as a reason for testing internal controls over sales – however many
transactions there are, if controls appear to be deficient, then those transactions will
need to be subjected to tests of detail. Option D is incorrect as where there is a high
risk of misstatement, substantive procedures should be used.
Which three of the following relationships/ratios are reasons why analytical procedures can
give strong evidence in relation to the accuracy of purchases?
A Operating margin
B Purchases and payables
C Purchases and inventories
D Gross margin
B,C,D
Applying analytical procedures to the operating margin which contains the effect of all
expenses, not just purchases, will not provide direct evidence as to the accuracy of
purchases.
The results of substantive tests in relation to non-current assets at Hammersmith plc are set
out below. The materiality threshold set for these tests was £5,000.
For each of the following results, select the action which should be taken by the audit
senior.
A sample of three assets worth £2,000 in total had been excluded from the non-current
asset register and the financial statements.
A Draw conclusion
B Refer to senior colleague
C Extend sample
A building revalued to £100,000 during the year was vouched to an expert valuation carried
out by a firm of chartered surveyors.
D Draw conclusion
E Refer to senior colleague
F Extend sample
C,D Extending the sample of assets inspected will test if the misstatement found to date is
an anomaly or represents a larger misstatement. Vouching the revalued building to a valuer’s report is sufficient to enable a conclusion
to be drawn.
The results of substantive tests on trade payables at Fulham Ltd are set out below. The
materiality threshold set for these tests was £17,000.
For each of the following results, select the action which should be taken by the audit
senior.
Three goods inwards records dated before the year end relating to goods worth £16,000
were traced to purchase invoices which have been included in the subsequent year and not
provided for this year.
A Draw conclusion
B Refer to senior colleague
C Extend sample
In a sample of 20 supplier statement reconciliations, statements were unavailable for
10 suppliers. Statements were available for seven of these 10 suppliers in the previous year.
D Draw conclusion
E Refer to senior colleague
F Extend sample
C,E For the misstatement in cut-off, the sample should be extended to measure the full
extent of the cut-off misstatement.
Missing supplier statements (which should make the auditor suspicious) should be
referred to a senior colleague, so that this is investigated and alternative procedures
designed if necessary
The auditor of Barnett plc carried out an external confirmation of receivables at the year end
to confirm the accuracy of total trade receivables in the statement of financial position at
that date. Two of the replies to the confirmations disagreed with the balance.
For each of these two disagreements, select whether the disagreement would or would not
be considered a misstatement for the purposes of evaluating the accuracy of total trade
receivables in the statement of financial position at the year end.
Watford Ltd disagreed with the balance because they had made a payment two days
before the year end. The auditor has confirmed that the cheque cleared the bank two days
after the year end.
A Misstatement
B Not misstatement
Radlet Ltd disagreed with the balance because their records did not contain invoice
number SI 00492. This invoice and associated goods were despatched by Barnett plc on
the last day of the year. The auditor has verified that the despatch record and cut-off with
inventory are correct.
C Misstatement
D Not misstatement
B,D Both disagreements are due to timing differences and hence do not constitute
misstatements in the accuracy of total trade receivables.
Hayley, an audit junior, has carried out the following tests to verify the valuation of inventory
in the financial statements of Cobham plc.
In each case, select whether the test proves the assertion of valuation or not.
Attending the inventory count and carrying out sample counts on a number of items
A Proves valuation
B Does not prove valuation
Comparing cost on a number of inventory items to sales invoices subsequent to the year
end
C Proves valuation
D Does not prove valuation
B,C The first statement represents a test of control over inventory counting procedures and
therefore the completeness or existence of the quantity of inventory. It is not a test of
valuation. Checking inventory items against sales invoices tests for net realisable value
(NRV) and hence valuation of the inventory.
Lisa has obtained a list of items which make up the cash and cash equivalents balance
(£3,556) in the financial statements of Baker Ltd. Materiality has been set at £4,000.
For each item, select whether or not Lisa should test the item.
Current account balance (overdrawn) £5,600
A Test
B Not test
Petty cash float £750
C Test
D Not test
Special directors’ cash account £1,294
E Test
F Not test
A,D,E
The current account balance should be tested as it is over the materiality threshold.
The petty cash float is not material and hence need not be tested.
The special directors’ cash account should be tested whatever its monetary value. Strict
materiality thresholds do not apply to directors’ emoluments which need to be
disclosed whatever their amount. In any case the auditor needs to ascertain what this
balance represents.
Kamran, an audit junior, has been asked to test the completeness of certain items in the
income statement. He has carried out the following tests.
For each test carried out, select whether that test proves the assertion of completeness or
not.
Analytical procedures on revenue figures, budget v actual and actual current year v actual
previous year
A Proves completeness
B Does not prove completeness
Tracing a sample of goods received records to payables ledger and financial statements
C Proves completeness
D Does not prove completeness
Tracing a sample of entries on the payroll to individual HR records
E Proves completeness
F Does not prove completeness
A,C,F
Analytical procedures are useful for detecting incomplete figures (ie, the auditor can
calculate what figure he expects and then compare the actual to it).
Tracing from goods received records to the payables ledger and financial statements
proves the completeness of purchases/payables (ie, that all goods received have been
recorded as purchase/payables).
Tracing a sample of entries on the payroll to human resources records does not test
completeness as the direction of testing is from the payroll balance to the source
documentation.
Which two of the following assertions is the auditor most concerned with when testing property, plant and equipment? A Occurrence B Existence C Rights and obligations D Cut-off
B,C Only existence and rights and obligations are assertions about account balances.
Occurrence and cut-off are assertions in respect of classes of transactions and events
for the period.
The auditor of Mondays Ltd is performing a test to ensure that there are no omissions from the non-current asset register. In respect of which one of the following assertions will this procedure provide audit evidence? A Cut-off B Accuracy, valuation and allocation C Completeness D Existence E Classification
C Testing for omissions is the same as testing for completeness (ie, saying that nothing
has been omitted from the register means the same as saying the register is complete).
Which two of the following procedures would provide evidence of rights and obligations of
motor vehicles?
A Vouching a sample of motor vehicles in the asset register to registration documents
B Physical inspection of motor vehicles
C Review of purchase invoices for motor vehicles acquired in the period
D Confirmation that calculations on the non-current asset schedule are correct in respect
of motor vehicles
A,C Physical inspection and confirmation of calculations provide evidence of existence and
valuation respectively as opposed to rights and obligations.
The rights and obligations assertion means that the entity holds or controls the rights
to assets. Although registration documents show registered keeper, not owner, the
keeper is likely to have control of the asset. Purchase invoices give evidence of
ownership (which gives control)
For each of the following circumstances in respect of inventory, select which financial
statement assertion would be affected.
Inventory which had been sold by the end of the period has been included in inventory.
A Completeness
B Accuracy, valuation and allocation
C Cut-off
Damaged items of inventory have not been written down to net realisable value.
D Completeness
E Accuracy, valuation and allocation
F Cut-off
C,E The cut-off assertion is affected by including inventory sold in inventory at the end of the
period (ie, cut-off is incorrect). Where damaged items have not been written down to NRV,
then the accuracy, valuation and allocation assertion is directly affected (ie, inventory is
incorrectly valued).
For each of the following circumstances in respect of inventory, select which financial
statement assertion would be affected.
Inventory items were excluded from the total in the financial statements in error.
A Completeness
B Accuracy, valuation and allocation
C Cut-off
Due to the miscalculation of cost, some inventory items have been included at cost when
net realisable value is lower.
D Completeness
E Accuracy, valuation and allocation
F Cut-off
A,E The completeness assertion is affected by the omission of inventory items (ie, inventory
is not complete).
The accuracy, valuation and allocation assertion is affected by miscalculations of cost
and the not writing down of damaged items (ie, inventory is incorrectly valued)
The following describes a number of features of the inventory count instructions of
Sydney Ltd.
For each feature, select whether it represents a strength or a deficiency.
The inventory count is performed by warehouse staff and supervised by the warehouse
manager.
A Strength
B Deficiency
Inventory sheets are completed in pencil.
C Strength
D Deficiency
There are two teams of counters, one counting and one checking.
E Strength
F Deficiency
B,D,E
The inventory count should involve personnel who are independent of the warehouse
staff. Count sheets should be completed in pen so that there is a permanent record. By
having two teams of counters involved in the inventory count, there is a check within
the inventory counting process that the count is being carried out correctly.
