Question 1

Which of the following concerns in auditing issued and paid- up capital involves tests of balances?
A) Issued and paid- up capital is properly disclosed.
B) Existing capital stock transactions are recorded.
C) Recorded capital stock transactions exist and are accurately recorded.
D) All of the above

Accepted Answer

The answer of Which of the following concerns in auditing...

Question 2

Which one of the general tests of details of balance objectives is NOT important in the audit of borrowings?
A) Realisable value
B) Completeness
C) Existence
D) Valuation

Accepted Answer

Realisable value is not important in the audit of borrowings as borrowings are typically recognized at their face value or nominal value and not at their realisable value. Completeness, existence, and valuation are all important in the audit of borrowings to ensure that all borrowings are accounted for, actually exist, and are valued accurately.

Question 3

Which of the following misstatements would normally be discovered as part of the audit of the bank reconciliation?
A) Cash received by the client subsequent to the balance sheet date but recorded as cash receipts in the current year
B) Deposits recorded as cash receipts near the end of the year, deposited in the bank in the same month and included in the bank reconciliation as a deposit in transit
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

All of the misstatements would normally be discovered as part of the audit of the bank reconciliation because they all involve transactions that affect the bank balance but are not recorded in the client's records.

Question 4

Which of the following procedures can test the audit objective of determining that cash in bank, as stated on the reconciliation, foots correctly and agrees with the general ledger?
A) Examining the minutes of the board of directors for restrictions on the use of cash
B) Performing tests for kiting
C) Adding the unpresented cheques list and the list of deposits in transit
D) Receiving and testing a cutoff bank statement

Accepted Answer

Adding the unpresented cheques list and the list of deposits in transit is a procedure used to verify that cash in bank, as stated on the reconciliation, foots correctly and agrees with the general ledger. Examining the minutes of the board of directors for restrictions on the use of cash would not directly test this audit objective. Performing tests for kiting and receiving and testing a cutoff bank statement may be useful in other audit objectives, but not specifically for this objective.

Question 5

The most important objective for depreciation is accuracy. One aspect of this objective is the consistency of depreciation policy. The four considerations in determining this do NOT include:
A) the estimated residual value.
B) the policy of depreciating assets in the year of acquisition and disposition.
C) what accounting standards must be used.
D) the method of depreciation.

Accepted Answer

The considerations for consistency in depreciation policy typically include the estimated residual value, the policy for depreciating assets in the year of acquisition and disposition, and the method of depreciation. The accounting standards to be used are not a consideration in determining consistency of depreciation policy, as they are external requirements rather than internal policy decisions.

Question 6

The amount of time spent verifying owners' equity is frequently minimal for private companies because:
A) the few owners all have access to the books so the auditor spends more time on accounts like liabilities, which affect outsiders.
B) there are few if any transactions during the year for the owners' equity accounts, except for earnings and dividends.
C) these companies are so small that it is not necessary to audit the capital section.
D) there is no public interest in these companies.

Accepted Answer

Private companies usually have few transactions related to owners' equity accounts, such as share issuances or repurchases, which are easy to verify. The main changes to these accounts come from earnings and dividends. Therefore, the auditor may spend less time verifying owners' equity and focus more on accounts that affect third parties, such as liabilities or revenue. However, this does not mean that the capital section is not audited at all, especially if there are complex capital structures or changes in ownership during the year.

Question 7

In the audit of property, plant and equipment, it is helpful to separate the tests into all of the following categories EXCEPT:
A) verification of the beginning balance.
B) verification of the ending balance.
C) verification of current year disposals.
D) verification of current year acquisitions.

Accepted Answer

Verification of the beginning balance is not typically a separate category in the audit of property, plant, and equipment, as it is usually covered in the verification of the ending balance and current year transactions.

Question 8

The periodic payments of interest and principal are normally tested as a part of the:
A) capital acquisitions and repayments cycle.
B) interest and notes/bonds payable cycle.
C) acquisition and payment cycle.
D) sales and collection cycle.

Accepted Answer

The answer of The periodic payments of interest and principal...

Question 9

Estimated unpaid obligations for services or benefits that have been received prior to the balance sheet date are classified as:
A) miscellaneous assets.
B) accrued liabilities.
C) accounts payable.
D) deferred charges.

Accepted Answer

Accrued liabilities represent obligations for services or benefits that have been received but not yet paid, and are therefore the best choice for estimated unpaid obligations that have been received prior to the balance sheet date. Miscellaneous assets, accounts payable, and deferred charges are not appropriate classifications for this type of obligation.

Question 10

Which one of the following is NOT a characteristic of the capital acquisition and repayment cycle?
A) Relatively few transactions affect the account balances, but each transaction is often highly material in amount.
B) There is a direct relationship between the interest and dividends accounts and debt and equity.
C) There is a legal relationship between the client and the holder of the equity securities.
D) The exclusion of a few transactions is rarely material by itself.

Accepted Answer

The exclusion of a few transactions in the capital acquisition and repayment cycle can be highly material due to the large amounts typically involved in each transaction.

Question 11

To prevent the improper or incorrect issue of share certificates, it is common practice for publicly listed companies to engage:
A) a share register.
B) an imprest dividend account.
C) an independent share registrar.
D) an independent internal audit department.

Accepted Answer

Engaging an independent share registrar is the best choice as they are responsible for maintaining accurate records of shareholders and issuing share certificates in accordance with the company's policies and procedures. They also ensure that any transfers of ownership are properly recorded and approved. This helps prevent the improper or incorrect issue of share certificates. The other options listed may be useful in preventing other forms of fraud or errors, but they are not specifically focused on preventing the improper or incorrect issue of share certificates.

Question 12

The test of details of balance procedure which requires the auditor to foot the loans payable list for loans payable and accrued interest satisfies the objective of:
A) accuracy.
B) existence.
C) completeness.
D) detail tie- in.

Accepted Answer

The answer of The test of details of balance procedure...

Question 13

Analytical procedures are essential for borrowings because:
A) there are few internal controls in this area which the auditor can rely upon to reduce substantive testing.
B) of the paucity of documentation in this area.
C) the large quantity of transactions would make this an expensive area to audit if some other means of reducing tests were not available.
D) tests of details for interest expense and accrued interest can frequently be eliminated when results are favourable.

Accepted Answer

Analytical procedures can help auditors assess the reasonableness of interest expense and accrued interest, potentially reducing the need for detailed testing if the results are consistent with expectations.

Question 14

Which of the following cycles does NOT affect cash in bank?
A) Capital acquisitions cycle
B) Inventory and warehousing
C) Payroll and personnel cycle
D) Acquisitions and disbursements

Accepted Answer

The inventory and warehousing cycle primarily deals with the management and storage of inventory, not directly affecting cash in the bank.

Question 15

The balance- related audit objective to determine that cash in bank is properly presented and disclosed can be met through which of the following tests of details of balances?
A) Foot the outstanding cheque list and deposits in transit
B) Test for kiting
C) Examine minutes, loan agreements and the bank confirmation for restrictions on the use of cash and compensating balances
D) Trace outstanding cheques to subsequent period bank statement

Accepted Answer

Examining minutes, loan agreements, and bank confirmations for restrictions on the use of cash and compensating balances helps ensure that cash is properly presented and disclosed, as it identifies any limitations or conditions affecting the cash balance.

Question 16

The two most important audit procedures for prepayments are:
A) tests of controls and substantive tests of transactions.
B) tests for reasonableness or plausible relationships using analytical procedures and recalculation.
C) consistency and accounting standards.
D) tests of controls and tests of details of balances.

Accepted Answer

Tests for reasonableness or plausible relationships using analytical procedures and recalculation are the most important audit procedures for prepayments as they allow auditors to verify the completeness and accuracy of prepayments by comparing them to expectations based on historical data or industry norms. Tests of controls and tests of details of balances may also be necessary but are not as essential as analytical procedures and recalculations. Consistency and accounting standards are general concepts that apply to all audit procedures and are not specific to prepayments.

Question 17

It should ordinarily be unnecessary to examine supporting documentation for each addition to property, plant and equipment, but it is normal to verify:
A) a representative sample of typical additions.
B) all large transactions.
C) all unusual transactions.
D) all of the above

Accepted Answer

A comprehensive approach is often taken to verify a representative sample of typical additions, all large transactions, and all unusual transactions to ensure accuracy and completeness in financial reporting.

Question 18

To prevent the payment of a larger amount of dividends than was authorised, the corporation should use:
A) an outside independent disbursing agency.
B) cheques which cannot be written for an amount in excess of a stated maximum amount.
C) a separate imprest dividend account.
D) all of the above

Accepted Answer

The answer of To prevent the payment of a larger...

Question 19

In verifying accumulated depreciation, the credits to accumulated depreciation are verified as part of the audit of depreciation expense, whereas the debits are normally tested as a part of the audit of:
A) disposal of assets.
B) capital acquisitions.
C) accumulated depreciation.
D) asset acquisitions.

Accepted Answer

The credits to accumulated depreciation account are verified as part of the audit of depreciation expense because depreciation expense is a credit entry to the income statement and a corresponding credit entry is made to the accumulated depreciation account. Therefore, the debits to accumulated depreciation are normally tested as a part of the audit of disposal of assets, as any disposal of an asset will involve reducing the accumulated depreciation balance.

Question 20

Cash account is primarily affected by which transactions in the acquisitions and payment cycle?
A) Expenses
B) Accounts payable
C) Both A and B
D) None of the above

Accepted Answer

The answer of Cash account is primarily affected by which...

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

Which of the following concerns in auditing issued and paid- up capital involves tests of balances?

Which one of the general tests of details of balance objectives is NOT important in the audit of borrowings?

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

Which of the following procedures can test the audit objective of determining that cash in bank, as stated on the reconciliation, foots correctly and agrees with the general ledger?

The most important objective for depreciation is accuracy. One aspect of this objective is the consistency of depreciation policy. The four considerations in determining this do NOT include:

The amount of time spent verifying owners' equity is frequently minimal for private companies because:

In the audit of property, plant and equipment, it is helpful to separate the tests into all of the following categories EXCEPT:

The periodic payments of interest and principal are normally tested as a part of the:

Estimated unpaid obligations for services or benefits that have been received prior to the balance sheet date are classified as:

Which one of the following is NOT a characteristic of the capital acquisition and repayment cycle?

To prevent the improper or incorrect issue of share certificates, it is common practice for publicly listed companies to engage:

The test of details of balance procedure which requires the auditor to foot the loans payable list for loans payable and accrued interest satisfies the objective of:

Analytical procedures are essential for borrowings because:

Which of the following cycles does NOT affect cash in bank?

The balance- related audit objective to determine that cash in bank is properly presented and disclosed can be met through which of the following tests of details of balances?

The two most important audit procedures for prepayments are:

It should ordinarily be unnecessary to examine supporting documentation for each addition to property, plant and equipment, but it is normal to verify:

To prevent the payment of a larger amount of dividends than was authorised, the corporation should use:

In verifying accumulated depreciation, the credits to accumulated depreciation are verified as part of the audit of depreciation expense, whereas the debits are normally tested as a part of the audit of:

Cash account is primarily affected by which transactions in the acquisitions and payment cycle?