Week 8

Question 1

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:

Answer 1

transactions and events.

Question 2

‘Dual-purpose tests’ involve:

Answer 2

tests of transactions that include substantive procedures as well as tests of controls.

Question 3

To test for unsupported entries in the ledger, the direction of audit testing should be from the:

Answer 3

ledger entries.

Question 4

The auditor will most likely perform extensive tests for possible understatement of

Answer 4

current liabilities.

Question 5

In auditing accounts payable, an auditor’s procedures most likely would focus primarily on management’s assertion of:

Answer 5

completeness

Question 6

Which of the following is not a primary objective of the auditor in undertaking substantive testing of current assets?

Answer 6

Determine the adequacy of the internal control.

Question 7

An auditor most likely would make enquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management’s account balance assertion of:

Answer 7

valuation and allocation.

Question 8

Tests designed to detect goods that arrived at the warehouse just before year-end and for which the audit client took ownership that have not been recorded in the perpetual inventory records until the subsequent year would most likely provide evidence about management’s assertion of:

Answer 8

cut-off.

Question 9

Tracing from a sample of remittance advices to determine whether associated entries are recorded in the cash receipts journal tests which of the following assertions for cash?

Answer 9

Completeness

Question 10

You are auditing the bank account of Calcutta Ltd (Calcutta). You decide to send a standard bank confirmation request to the financial institutions with which Calcutta has done business during the year. A primary purpose of this test is to:

Answer 10

corroborate information regarding Calcutta’s deposits and loan balances

Question 11

Two months before 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?

Answer 11

Analyse bank confirmation information.

Question 12

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?

Answer 12

Debit entries in the accounts receivable subsidiary ledger are properly supported by sales invoices.

Question 13

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:

Answer 13

the shipping clerk’s file of duplicate copies of bills of lading (goods shipped notices).

Question 14

During the process of confirming receivables as of 30 June 2015, a positive confirmation was returned indicating the ‘balance owed as of 30 June was paid on 9 July 2015’. The auditor would most likely:

Answer 14

check subsequent cash receipts to confirm that the amount was received.

Question 15

An auditor should perform alternative procedures to substantiate the existence of an account receivable when:

Answer 15

no reply to a positive confirmation request is received.

Question 16

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:

Answer 16

expand tests for the valuation and allocation assertion.

Question 17

An aged trial balance of accounts receivable is usually used by the auditor to:

Answer 17

evaluate the provision for bad debts related to the valuation and allocation assertion.

Question 18

Which of the following is the best argument against the use of negative accounts receivable confirmations?

Answer 18

The inference drawn from receiving no reply may not be correct.

Question 19

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:

Answer 19

valuation and allocation.

Question 20

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:

Answer 20

test the valuation and allocation assertion of accounts receivable.

Question 21

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

Answer 21

the combined assessed level of inherent and control risk relative to accounts receivable is low.

Question 22

An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account, as at 30 June 2015. By this procedure, the auditor would be most likely to learn of which of the following?

Answer 22

An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period.

Question 23

Hoang is engaged in the audit of a power company that 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, Hoang would most likely:

Answer 23

examine evidence of subsequent cash receipts.

Question 24

In determining the adequacy of the allowance for uncollectible accounts, the least reliance should be placed upon which of the following?

Answer 24

The credit manager’s opinion

Question 25

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?

Answer 25

Observation of physical inventory at the client company’s premises.

Question 26

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?

Answer 26

Sales returns.

Question 27

An auditor, having accounted for a sequence of inventory tags, traces information on a representative number of tags to the physical inventory sheets. The purpose of this procedure is to obtain assurance that:

Answer 27

the inventory listed on the inventory sheets is complete.

Question 28

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

Answer 28

purchased and received immediately before year-end was recorded in the correct period.

Question 29

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:

Answer 29

valuation and allocation.

Question 30

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?

Answer 30

Completeness.

Question 31

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)?

Answer 31

Completeness.

Question 32

An auditor would be most likely to learn of slow-moving inventory through:

Answer 32

review of perpetual inventory records.

Question 33

When perpetual inventory records are maintained, and control risk for inventory is high, the auditor would probably:

Answer 33

want the client to schedule the physical inventory count at the end of the year.

Question 34

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

Answer 34

cut-off.

Question 35

An auditor selected items that are on the store floor for test counts while observing a client’s physical inventory. The auditor then traced the test counts to the client’s inventory listing. This procedure most likely obtained evidence concerning management’s assertion of:

Answer 35

completeness.

Question 36

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

Answer 36

Testing the entity’s computation of standard overhead rates.

Question 37

Which of the following procedures would best detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10, and a few items selling for hundreds of dollars?

Answer 37

Maintain perpetual inventory records with frequent periodic verification of the accuracy of these records.

Question 38

From the auditor’s point of view, inventory counts are more acceptable prior to the year-end when:

Answer 38

accurate perpetual inventory records are maintained.

Question 39

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:

Answer 39

purchases.

Question 40

When outside firms of non-accountants specialising in the taking of physical inventories are used to count, list, price and subsequently compute the total dollar amount of inventory on hand at the date of the physical count, the auditor will ordinarily:

Answer 40

make or observe some physical counts of the inventory, re-compute certain inventory calculations and test certain inventory transactions.

Question 41

An auditor usually examines receiving reports to support entries in the:

Answer 41

voucher register and sales returns journal.

Question 42

When auditing Steel Ltd, a large manufacturer of building supplies, which one of the following audit procedures would give the least assurance with regards to the valuation and allocation assertion for inventory?

Answer 42

Obtaining confirmation of inventories pledged under loan agreements.

Question 43

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

Answer 43

request the client to schedule the physical inventory count at the end of the year.

Question 44

Which assertion for ending inventory is most likely at risk of material misstatement if the gross profit percentage is much greater than last year?

Answer 44

Existence.

Question 45

The physical count of inventory of Clyers Pty Ltd, a medium-sized retailer, was higher than shown by the perpetual records. Which of the following could explain the difference?

Answer 45

Credit memos for several items returned by customers had not been recorded.

Question 46

’While auditing James Ltd, you find that their inventory turnover has decreased from 7.8 times to 5.4 times during the year. Based on this decrease, which financial report assertion would you be least concerned with?

Answer 46

Completeness.

Question 47

The auditor will most likely perform extensive tests for possible understatement of:

Answer 47

accounts payable.

Question 48

To determine whether accounts payable are complete, an auditor commonly performs sampling procedures to test whether all merchandise received is recorded. The population of documents for this test consists of all:

Answer 48

receiving reports.

Question 49

In order to efficiently test the purchases/accounts payable cut-off, an auditor will be most likely to:

Answer 49

coordinate cut-off tests with physical inventory observation.

Question 50

Which of the following is the best audit procedure for determining the completeness of the accrued liabilities listing?

Answer 50

Examine a sample of cash disbursements in the period subsequent to year-end.

Question 51

All of the following can assist the auditor in testing the existence assertion for investment securities except:

Answer 51

comparing fair value to cost.

Question 52

A normal audit procedure is to analyse the current year’s repairs and maintenance accounts to provide evidence in support of the audit proposition that:

Answer 52

the listing of fixed assets is complete.

Question 53

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

Answer 53

valuation and allocation.

Question 54

The auditor may conclude that depreciation charges are insufficient by noting:

Answer 54

excessive recurring profits on assets retired.

Question 55

The auditor is least likely to learn of retirements of equipment through which of the following?

Answer 55

Review of the purchase returns and allowance account.

Question 56

Which of the following is one of the auditor’s primary objectives when externally confirming holdings of marketable securities?

Answer 56

To determine whether recorded securities are the property of the client.

Question 57

All of the following evidence-gathering procedures can assist the auditor in testing the existence assertion for investment securities except:

Answer 57

comparing fair value to the original cost.

Question 58

Which of the following explanations might satisfy an auditor who discovers significant debits to an accumulated depreciation account?

Answer 58

There were numerous fixed asset retirements during the year.

Question 59

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

Answer 59

examining the construction work orders supporting items capitalised during the year.

Question 60

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

Answer 60

property, plant and equipment.

Question 61

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

Answer 61

Owners’ equity.

Question 62

One of the primary reasons for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense presented in the financial report is to:

Answer 62

detect unrecorded liabilities.

Question 63

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

Answer 63

the number of shares issued and outstanding.

Question 64

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:

Answer 64

completeness

Question 65

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

Answer 65

the number of transactions is small.

Question 66

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

Answer 66

Analysis and re-computation of depreciation expense.

Question 67

Which of the following is the most effective audit procedure for verification of dividends earned on investments in marketable equity securities?

Answer 67

Reconciling amounts received with published dividend records.

Question 68

An auditor analyses the repairs and maintenance expense account primarily to obtain evidence that:

Answer 68

expenditures for property, plant and equipment have not been charged to expenses.

Question 69

Which of the following analytical procedures should be applied to the income statement?

Answer 69

Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.

Question 70

The auditor is most likely to verify the liability account ‘accrued comissions payable’ in conjunction with the:

Answer 70

review of sales transactions.

Question 71

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

Answer 71

Notes receivable and interest income.

Question 72

Auditors often make use of computer programs that perform routine processing functions such as sorting and merging. These programs are made available by IT companies and others and are specifically referred to as:

Answer 72

utility programs.

Question 73

Which of the following is an exception report that the auditor would generate using generalised audit software in order to test the valuation and allocation assertion for accounts receivable?

Answer 73

A report outlining those balances that are greater than three months overdue.

Question 74

The auditor is least likely to use generalised audit software to:

Answer 74

directly test weaknesses in the client’s programmed controls.

Question 75

Which of the following audit procedures would an auditor be least likely to perform using generalised audit software?

Answer 75

Inputting test transactions to ensure that the check digit control is operating.

Question 76

For which of the following tests would the auditor use generalised audit softwareto test the completeness assertion of inventory?

Answer 76

A sequence check looking for missing purchase invoice numbers.

Question 77

Which of the following is necessary to audit balances in an on-line IT system in an environment where updated information is written over existing information?

Answer 77

A well-documented audit trail.

Question 78

The auditor is least likely to use generalised audit software to:

Answer 78

identify weaknesses in the client’s IT controls.

Question 79

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

Answer 79

Economic order quantity.

Question 80

While undertaking the audit of the debtors’ balance, you use your audit software to extract from the accounts receivable master file a report that 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?

Answer 80

Valuation and allocation.