Question 1

The audit objective which requires the auditor to determine that loans payable on the loans payable schedule are properly classified can be tested with the following procedure:
A) Confirm loans payable.
B) Examine notes, minutes and bank confirmations for restrictions.
C) Review the notes to determine whether any are with related parties.
D) Examine corporate minutes for loan approval.

Accepted Answer

Reviewing the notes to determine whether any are with related parties helps ensure that loans are properly classified, as related party transactions may require different disclosure or classification.

Question 2

Cash account is primarily affected by which transactions in the sales and collection cycle?
A) Sales
B) Collections
C) Both A and B
D) None of the above

Accepted Answer

Cash account is primarily affected by collections, as this is when cash is actually received and recorded in the cash account.

Question 3

The record of the issuance and transfer of shares for the life of the corporation is maintained in the:
A) schedule of shareholders.
B) share register.
C) shareholders' master file.
D) corporate directory.

Accepted Answer

The share register is a document that contains a record of all the shares issued by a company, as well as details of the shareholders who own them. It is maintained by the company secretary or registrar, and is an important legal document that is used to keep track of the ownership of the company. The other options are not accurate or commonly used terms in this context.

Question 4

The bank reconciliation should be prepared by:
A) someone independent of handling cash receipts and cash payments.
B) someone independent of handling or recording cash receipts.
C) someone independent of the finance manager.
D) the finance manager.

Accepted Answer

The bank reconciliation is a key control process that helps to identify discrepancies between the balance in the bank account and the balance in the accounting records. To ensure the accuracy and reliability of this process, it is important that the person preparing the bank reconciliation is independent of handling cash receipts and cash payments. This separation of duties helps to reduce the risk of fraudulent activity and errors.

Question 5

The most important objective for depreciation expense is:
A) cutoff.
B) disclosure.
C) classification.
D) accuracy.

Accepted Answer

The most important objective for depreciation expense is accuracy, as it ensures that the asset's cost is being allocated properly over its useful life, and that the financial statements reflect the true value of the asset. Cutoff, disclosure, and classification are also important considerations in depreciation accounting, but accuracy is the most essential objective.

Question 6

Cash account is primarily affected by which transactions in the payroll and personnel cycle?
A) Sales
B) Collections
C) Both A and B
D) None of the above

Accepted Answer

The cash account is primarily affected by disbursements related to payroll, not by sales or collections.

Question 7

The auditor's starting point for verifying disposals of property, plant and equipment is the:
A) equipment subsidiary ledger.
B) equipment account in the general ledger.
C) client's schedule of recorded disposals.
D) file of shipping documents.

Accepted Answer

The client's schedule of recorded disposals provides a list of all disposals that the client claims to have made during the period under audit. This is the starting point for the auditor to verify the disposals. The auditor can then obtain supporting documentation for each disposal, such as sales invoices, asset removal authorizations, and other relevant documentation. This will allow the auditor to verify that the disposals have been properly recorded and that the proceeds from the disposals have been accurately reflected in the financial statements. The other choices, such as the equipment subsidiary ledger, equipment account in the general ledger, and file of shipping documents, may be used as supporting documents, but they are not the starting point for verifying disposals.

Question 8

The failure to capitalise a permanent asset, or the recording of an asset acquisition at the improper amount, affects the balance sheet:
A) for the current period.
B) forever.
C) for the depreciable life of the asset.
D) until the firm disposes of the asset.

Accepted Answer

The answer of The failure to capitalise a permanent asset,...

Question 9

Typically, bank confirmations in the audit verify:
A) actual cash balance.
B) loan information.
C) both A and B
D) none of the above

Accepted Answer

Bank confirmations in the audit can verify both the actual cash balance as well as loan information, making choice C the best answer. Confirmation with the bank helps provide external evidence and assurance to the auditor that the information on the client's financial statements is accurate and complete. By verifying both cash and loan information, the auditor gains a more comprehensive understanding of the client's financial position.

Question 10

Which of the following objective/s is usually the focus in auditing cash balances?
A) Existence, completeness, accuracy and detail tie- in
B) Completeness, accuracy and detail tie- in
C) Existence and completeness
D) Existence, completeness and cutoff

Accepted Answer

The answer of Which of the following objective/s is usually...

Question 11

Property, plant and equipment are assets that:
A) have expected lives of more than one year.
B) are used in the business.
C) are not acquired for resale.
D) meet all of the requirements stated above.

Accepted Answer

Property, plant and equipment are assets that have expected lives of more than one year, are used in the business, and are not acquired for resale. Therefore, all of the requirements stated above must be met for an asset to be considered property, plant, and equipment.

Question 12

One typical difference between the asset prepaid expenses and other assets, such as accounts receivable and inventory, is the immateriality of the former in many audits. Because of this immateriality, frequently the only audit procedure necessary to perform is:
A) analytical procedures.
B) tests of transactions.
C) tests of control.
D) tests of details of balances.

Accepted Answer

Analytical procedures are generally sufficient for prepaid expenses since they are typically immaterial in nature. Analytical procedures involve analyzing variances and relationships in financial information to identify potential misstatements. Tests of transactions, tests of control, and tests of details of balances are more appropriate for significant account balances, such as accounts receivable and inventory.

Question 13

Information typically confirmed on liabilities to the bank would NOT include:
A) interest rate.
B) the existence of security included on the confirmation form.
C) loans beyond those included on the confirmation form.
D) all of the above

Accepted Answer

Liabilities would only include loans or lines of credit confirmed on the confirmation form, so any loans beyond those listed would not be included as a liability to the bank. The interest rate and existence of security included on the confirmation form would be confirmed as part of the liability verification process.

Question 14

The auditor recalculates approximate interest expense, using overall monthly installments payable and average interest rates, to test for:
A) omitted loans payable.
B) misstatement of interest expense.
C) both A and B
D) none of the above

Accepted Answer

The auditor's recalculation of interest expense can help identify both omitted loans payable (A) and misstatements of interest expense (B) by ensuring that the recorded interest aligns with the expected amounts based on known loans and interest rates.

Question 15

Which of the following misstatements will normally be discovered as part of the audit of the bank reconciliation?
A) Payment for raw materials that were not received
B) Payment to an employee for more hours than he or she worked
C) Payments on loans debited directly to the bank account but not entered in the client's records
D) All of the above

Accepted Answer

Payments on loans debited directly to the bank account but not entered in the client's records would be discovered as part of the audit of the bank reconciliation as they would cause a difference between the bank balance and the company's records. The other misstatements listed may not be discovered as part of the bank reconciliation and would require other audit procedures to detect.

Question 16

Cash balance is important in the audit because of:
A) the potential for fraud.
B) the potential for error.
C) both A and B
D) none of the above

Accepted Answer

Cash is a highly liquid asset and subject to manipulation by fraud or errors. Hence, auditors should pay close attention to cash balances to detect and prevent potential frauds or errors. Hence, both A and B are correct options.

Question 17

The audit objective to determine that loans payable in the schedule exist is verified by the tests of balances procedure to:
A) foot the loans payable list.
B) examine the balance sheet for proper disclosure of noncurrent portions.
C) examine duplicate copy of loans for authorisation.
D) recalculate interest expense.

Accepted Answer

Examining duplicate copies of loans for authorisation will confirm that the loans payable in the schedule exist. Footing the loans payable list and examining the balance sheet for proper disclosure of noncurrent portions will not verify the existence of loans payable in the schedule. Recalculating interest expense is irrelevant to this audit objective.

Question 18

The audit objective to determine that existing loans payable are included in the loans payable schedule (completeness) is accomplished by the following test of balances procedure:
A) Examine duplicate copies of loan agreements for principal and interest rates.
B) Trace the individual loans payable on the schedule to the master file.
C) Review the bank reconciliation for new loans credited directly to the bank account by the bank.
D) Review loans to determine whether any are related- party loans or accounts payable.

Accepted Answer

Reviewing the bank reconciliation for new loans credited directly to the bank account by the bank helps ensure that all loans are recorded and included in the loans payable schedule, addressing the completeness objective.

Question 19

Which of the following misstatements would result in the improper payment of cash or failure to receive cash not normally discovered as part of the audit of the bank reconciliation?
A) Duplicate payment of a vendor's invoice
B) Payment of raw materials that were not received
C) Payment to an employee for more hours than worked
D) All of the above

Accepted Answer

All the options listed (A, B, and C) involve misstatements that could lead to improper cash payments or failures to receive cash, and they may not be detected during a standard bank reconciliation audit, which primarily focuses on reconciling bank statements with the company's cash records.

Question 20

Listing all bank transfers made a few days before and after the balance sheet date and tracing each to the accounting records for proper recording is a useful approach to test for:
A) kiting.
B) unintentional errors in recording bank transfers.
C) both A and B.
D) kiting and lapping.

Accepted Answer

The answer of Listing all bank transfers made a few...

Quiz 16: Audit of Transaction Cycles and Financial Statement Balances II

The audit objective which requires the auditor to determine that loans payable on the loans payable schedule are properly classified can be tested with the following procedure:

Cash account is primarily affected by which transactions in the sales and collection cycle?

The record of the issuance and transfer of shares for the life of the corporation is maintained in the:

The bank reconciliation should be prepared by:

The most important objective for depreciation expense is:

Cash account is primarily affected by which transactions in the payroll and personnel cycle?

The auditor's starting point for verifying disposals of property, plant and equipment is the:

The failure to capitalise a permanent asset, or the recording of an asset acquisition at the improper amount, affects the balance sheet:

Typically, bank confirmations in the audit verify:

Which of the following objective/s is usually the focus in auditing cash balances?

Property, plant and equipment are assets that:

One typical difference between the asset prepaid expenses and other assets, such as accounts receivable and inventory, is the immateriality of the former in many audits. Because of this immateriality, frequently the only audit procedure necessary to perform is:

Information typically confirmed on liabilities to the bank would NOT include:

The auditor recalculates approximate interest expense, using overall monthly installments payable and average interest rates, to test for:

Which of the following misstatements will normally be discovered as part of the audit of the bank reconciliation?

Cash balance is important in the audit because of:

The audit objective to determine that loans payable in the schedule exist is verified by the tests of balances procedure to:

The audit objective to determine that existing loans payable are included in the loans payable schedule (completeness) is accomplished by the following test of balances procedure:

Which of the following misstatements would result in the improper payment of cash or failure to receive cash not normally discovered as part of the audit of the bank reconciliation?

Listing all bank transfers made a few days before and after the balance sheet date and tracing each to the accounting records for proper recording is a useful approach to test for: