Question 1

To test for unsupported entries in the ledger, the direction of audit testing should be from the:
A) journal entries.
B) Ledger entries.
C) original source documents.
D) externally-generated documents.

Accepted Answer

Ledger entries are the final entries made in the accounting system, and any unsupported or questionable entries would likely be found in the ledger. Therefore, the direction of audit testing should be from the ledger entries to the original source documents or externally-generated documents to verify their accuracy and validity. Testing from journal entries may also be useful, but it is not as reliable as testing from the ledger.

Question 2

Tests designed to detect goods which 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:
A) accuracy.
B) occurrence.
C) valuation and allocation.
D) cut-off.

Accepted Answer

The tests designed to detect goods taken ownership just before year-end and recorded in the subsequent year provide evidence about the cut-off assertion, as they assess whether the transactions are recorded in the correct accounting period.

Question 3

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?
A) All sales invoices have been recorded.
B) Sales invoices represent bona fide sales.
C) Debit entries in the accounts receivable subsidiary ledger are properly supported by sales invoices.
D) All sales invoices have been properly posted to customer accounts.

Accepted Answer

By tracing a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices, the auditor intends to establish that the debit entries are properly supported by sales invoices. This ensures that the accounts receivable balance is accurate and valid. It does not necessarily establish that all sales invoices have been recorded, represent bona fide sales, or have been properly posted to customer accounts.

Question 4

Which of the following is the best argument against the use of negative accounts receivable confirmations?
A) The cost-per-response is excessively high.
B) There is no way of knowing if the intended recipients received them.
C) Recipients are likely to feel that, in reality, the confirmation is a subtle request for payment.
D) The inference drawn from receiving no reply may not be correct.

Accepted Answer

Negative accounts receivable confirmations are sent to customers with the intention of gathering evidence that the balance they hold as accounts receivable is actually owed by the buyer. However, if the recipient does not respond, it does not necessarily mean that the balance is owed. There may be several reasons why the confirmation was not responded to, including it being lost in the mail or the recipient being too busy to respond. Therefore, the inference drawn from receiving no reply may not be correct.

Question 5

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:
A) authorisations.
B) transactions and events.
C) cut-offs.
D) presentation and disclosure.

Accepted Answer

An audit of the income statement deals with verifying transactions and events that have occurred during the period and their proper recognition in the financial statements. This includes verifying the accuracy of revenue and expense figures, proper classification of items within the income statement, and proper valuation of assets and liabilities affecting the income statement. The audit of the statement of financial position, on the other hand, deals with the verification of the entity's assets, liabilities and equity at a specific point in time, and thus focuses on verifying authorisations, cut-offs, and presentation and disclosure in the statement of financial position.

Question 6

During the process of confirming receivables as of 30 June 2012, a positive confirmation was returned indicating the 'balance owed as of 30 June was paid on 9 July 2012.' The auditor would most likely:
A) determine whether a customary trade discount was taken by the customer.
B) determine whether there were any changes in the account between 1 July and 9 July 2012.
C) check subsequent cash receipts to confirm that the amount was received.
D) reconfirm the zero balance as of 9 July 2012.

Accepted Answer

The positive confirmation received indicates that the balance as of 30 June was paid on 9 July. The auditor would want to confirm that the payment was actually received by checking subsequent cash receipts. Therefore, choice C is the best choice. Option A is not relevant to the situation because it pertains to a customary trade discount that may have been taken by the customer. Option B is also not relevant because it pertains to changes that may have occurred after the balance was paid. Option D is not necessary since the balance owed as of 30 June was paid on 9 July, a zero balance would already exist.

Question 7

Two months before the 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?
A) Analyse bank confirmation information.
B) Analyse the notes payable journal.
C) Prepare a year-end bank transfer schedule.
D) Prepare a year-end bank reconciliation.

Accepted Answer

The answer of Two months before the year-end the bookkeeper...

Question 8

In auditing accounts payable, an auditor's procedures most likely would focus primarily on management's assertion of:
A) existence.
B) rights and obligations.
C) completeness.
D) occurrence.

Accepted Answer

When auditing accounts payable, the auditor is primarily concerned with ensuring that all payables have been recorded and nothing has been omitted. Therefore, the auditor's procedures would primarily focus on management's assertion of completeness, which means that all transactions and accounts that should be recorded are included and properly stated.

Question 9

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:
A) the billing clerk's file of sales orders.
B) entries in the sales journal.
C) the shipping clerk's file of duplicate copies of bills of lading (goods shipped notices).
D) a file of duplicate copies of sales invoices for which all pre-numbered forms in the series have been accounted for.

Accepted Answer

To verify the completeness assertion, which concerns whether all transactions that should have been recorded have been recorded, testing should focus on source documents that initiate the recording of sales transactions. The shipping clerk's file of duplicate copies of bills of lading represents goods that have been shipped, and thus, should have corresponding sales transactions recorded. This makes it a suitable choice for testing completeness, as it helps ensure that all shipped goods are indeed recorded as sales.

Question 10

In auditing accounts receivable the negative form of confirmation request most likely would be used when:
A) recipients are likely to return positive confirmation requests without verifying the accuracy of the information.
B) the combined assessed level of inherent and control risk relative to accounts receivable is low.
C) a small number of accounts receivable are involved but a relatively large number of errors are expected.
D) the auditor performs a dual purpose test that assesses control risk and obtains substantive evidence.

Accepted Answer

The negative form of confirmation is typically used when the assessed level of inherent and control risk relative to accounts receivable is low. This is because the recipient is not asked to respond unless they disagree with the information provided, which is less intrusive than the positive form of confirmation. When the risks are low, the auditor can rely on other substantive procedures to obtain evidence, such as analytical procedures or vouching transactions. Choices A, C, and D do not reflect the typical circumstances in which the negative form of confirmation would be used.

Question 11

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:
A) valuation and allocation.
B) completeness.
C) existence.
D) rights and obligations.

Accepted Answer

Reviewing the credit ratings of customers with overdue accounts receivable balances helps the auditor evaluate the likelihood of collection, which directly relates to the valuation and allocation assertion. This process assesses whether the accounts receivable are recorded at appropriate amounts.

Question 12

An auditor should perform alternative procedures to substantiate the existence of an accounts receivable when:
A) no reply to a negative confirmation request is received.
B) no reply to a positive confirmation request is received.
C) pledging of the receivable is probable.
D) collectability of the receivable is in doubt.

Accepted Answer

When no reply to a positive confirmation request is received, the auditor should perform alternative procedures to verify the existence of the accounts receivable.

Question 13

Which of the following is not a primary objective of the auditor in undertaking substantive testing of accounts receivable?
A) Determine the completeness of the recorded receivables.
B) Establish existence of the receivables.
C) Determine the adequacy of the internal control.
D) Determine the approximate amount that can be expected to be received.

Accepted Answer

The primary objectives of substantive testing of accounts receivable are to determine the completeness of recorded receivables, establish existence of the receivables, and determine the approximate amount that can be expected to be received. While assessing the adequacy of internal control is important, it is not a primary objective of substantive testing of accounts receivable.

Question 14

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's account balance assertion of:
A) valuation and allocation.
B) rights and obligations.
C) existence.
D) completeness.

Accepted Answer

Inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory would support management's account balance assertion of valuation and allocation, which relates to whether inventory is recorded at the appropriate amount and is allocated properly between different categories of inventory.

Question 15

Johnson is engaged in the audit of a power company which 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, Johnson would most likely:
A) send positive confirmation requests.
B) examine evidence of subsequent cash receipts.
C) use statistical sampling instead of sending confirmation requests.
D) send negative confirmation requests.

Accepted Answer

As the internal control structure is effective and all accounts receivable balances are small, sending confirmation requests would be unnecessary. Instead, examining evidence of subsequent cash receipts would provide sufficient evidence for the valuation and allocation assertion of the accounts receivable balances.

Question 16

An aged trial balance of accounts receivable is usually used by the auditor to:
A) verify the existence assertion for recorded receivables.
B) ensure that all accounts receivable are recorded (completeness assertion).
C) evaluate the results of tests of controls for the sales/accounts receivable system.
D) evaluate the provision for bad debts related to the valuation and allocation assertion.

Accepted Answer

An aged trial balance of accounts receivable helps the auditor evaluate the adequacy of the provision for bad debts, which is related to the valuation and allocation assertion. It provides information on how long receivables have been outstanding, which can indicate the likelihood of collection and thus the appropriateness of the bad debt provision.

Question 17

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:
A) test the accuracy of recorded sales.
B) assess control risk for credit sales.
C) verify the existence of the recorded receivables.
D) test the valuation and allocation assertion of accounts receivable.

Accepted Answer

The ageing provides the auditor with information regarding the age of the receivables and helps in testing the valuation and allocation assertion of accounts receivable. The auditor can compare the ageing with the client's allowance for doubtful accounts and assess the adequacy of the allowance for doubtful accounts. The ageing does not directly help in testing the accuracy of recorded sales or verifying the existence of recorded receivables. It may provide some information for control risk assessment but is not the best use for the ageing.

Question 18

An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account, as at 30 June 2012. By this procedure, the auditor would be most likely to learn of which of the following?
A) An April cheque from a customer was posted in error to the account of another customer with a similar name.
B) An April invoice was improperly computed.
C) An account balance is past due and should be written off.
D) An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period.

Accepted Answer

When reconciling the accounts receivable subsidiary ledger to the general ledger control account, the auditor compares the opening balances of each account in the subsidiary ledger to the opening balance in the general ledger control account. If an opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period, it would result in a discrepancy between the subsidiary ledger total and the general ledger control account total. Therefore, this is the most likely issue that the auditor would discover during the reconciliation process. The other options (A, B, and C) would not necessarily be discovered during the reconciliation process as they relate to specific transactions, rather than overall balances.

Question 19

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:
A) review the going concern ramifications.
B) increase the balance in the allowance for bad debts account.
C) expand tests for the valuation and allocation assertion.
D) expand tests for the existence assertion.

Accepted Answer

Slow collections in a tight money environment may indicate a higher risk of accounts receivable being overstated or misstated. Therefore, the auditor would expand their tests for the valuation and allocation assertion to ensure that accounts receivable are accurately valued and properly allocated between current and non-current portions. This may include analyzing the aging of accounts, testing the allowance for doubtful accounts, and confirming balances with customers. Reviewing going concern ramifications and increasing the balance in the allowance for bad debts may also be necessary depending on the specific circumstances, but expanding tests for the valuation and allocation assertion is the most likely first step. Expanding tests for the existence assertion would not be necessary in this scenario as slow collections do not necessarily imply the absence of receivables.

Question 20

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)?
A) Valuation and allocation.
B) Existence.
C) Completeness.
D) Cut-off.

Accepted Answer

The answer of An auditor will usually trace the details...

Quiz 10: Substantive Tests of Transactions and Balances

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

Tests designed to detect goods which 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:

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?

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

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:

During the process of confirming receivables as of 30 June 2012, a positive confirmation was returned indicating the 'balance owed as of 30 June was paid on 9 July 2012.' The auditor would most likely:

Two months before the 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?

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

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:

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

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:

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

Which of the following is not a primary objective of the auditor in undertaking substantive testing of accounts receivable?

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

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

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:

An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account, as at 30 June 2012. By this procedure, the auditor would be most likely to learn of which of the following?

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:

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) ?