Question 1

An auditor would be least likely to use confirmation in connection with the examination of:
A) income tax expense.
B) inventories.
C) accounts receivable.
D) long-term debt.

Accepted Answer

Confirmation is least likely to be used for income tax expense because it is typically verified through examination of tax returns and supporting documentation rather than through direct confirmation with third parties.

Question 2

Which of the following analytical procedures should be applied to the income statement?
A) Ascertain that the net income amount in the statement of cash flow agrees with the net income amount in the income statement.
B) Select sales and expense items and trace amounts to related supporting documents.
C) Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.
D) Obtain from the proper client representatives the beginning and ending inventory amounts that were used to determine costs of sales.

Accepted Answer

Analyzing and comparing actual revenues and expenses with the corresponding figures of the previous year is a common procedure applied to the income statement. The purpose of this analysis is to identify any significant differences that could indicate potential errors or irregularities in the financial statements. Choices A, B, and D are not specifically related to the income statement but rather to other financial statement elements.

Question 3

Which of the following is true of generalised audit software?
A) They can be used on any computer without modification.
B) They can only be used in auditing on-line computer systems.
C) They enable the auditor to perform manual procedures related to tests of controls less expensively.
D) They each have their own characteristics which the auditor must carefully consider before using in a given audit situation.

Accepted Answer

Generalised audit software each have their own unique features and capabilities that must be evaluated by the auditor before determining their suitability for a particular audit situation. Options A and B are incorrect as generalised audit software may need modification or may be used in auditing offline computer systems as well. Option C is also incorrect as generalised audit software automate manual procedures, making them more efficient but not necessarily less expensive.

Question 4

A primary advantage of using generalised audit software in the audit of an advanced IT system is that it enables the auditor to:
A) gather and store large quantities of supportive evidential matter in machine-readable form.
B) verify the performance of machine operations which leave visible evidence of occurrence.
C) utilise the speed and accuracy of the computer.
D) substantiate the accuracy of data through self-checking digits and hash totals.

Accepted Answer

Generalised audit software allows for the use of computer speed and accuracy, which can be beneficial when auditing advanced IT systems. Option A discusses the ability to store large amounts of data, which is not necessarily an advantage in and of itself. Option B focuses on verifying the performance of particular machine operations, which is not necessarily a primary advantage of using generalised audit software. Option D discusses the use of self-checking digits and hash totals, which can also be an advantage, but not the primary one.

Question 5

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:
A) occurrence.
B) completeness.
C) cut-off.
D) accuracy.

Accepted Answer

Reviewing interest expense to identify payments to debt-holders not listed on the debt analysis schedule would help to ensure that all loans payable balances have been included in the completeness assertion.

Question 6

Which of the following tests would the auditor use generalised audit software for in order to test the completeness assertion of inventory?
A) Identification of inventory items which haven't been sold for three months.
B) A sequence check looking for missing purchase invoice numbers.
C) A sequence check looking for duplicate purchase invoice numbers.
D) Selecting items from the inventory records in order to trace back to physical inventory counts.

Accepted Answer

The answer of Which of the following tests would the...

Question 7

Substantive testing is typically used to audit shareholders' equity because:
A) the number of transactions is small.
B) controls over shareholders' equity transactions are typically weak.
C) a reliance strategy is most efficient.
D) the control environment over shareholders equity transactions is usually strong.

Accepted Answer

Substantive testing is often used for auditing shareholders' equity due to the relatively small number of transactions involved, making it more efficient to directly test these transactions rather than rely heavily on the assessment of controls.

Question 8

When a client company does not maintain its own share records, the auditor should obtain written confirmation from the transfer agent and registrar concerning:
A) the number of shares subject to agreements to repurchase.
B) guarantees of preferred share liquidation value.
C) restrictions on the payment of dividends.
D) the number of shares issued and outstanding.

Accepted Answer

When a client company does not maintain its own share records, the auditor should obtain written confirmation from the transfer agent and registrar concerning the number of shares issued and outstanding. This is important information for the auditor to properly value the company's equity and ensure accuracy in financial reporting. The other options, while important, are not directly related to the number of shares issued and outstanding.

Question 9

Which of the following audit procedures would an auditor be least likely to perform using generalised audit software?
A) Inputting test transactions to ensure that the check digit control is operating.
B) Searching records of accounts receivable balances for credit balances.
C) Listing unusually large inventory balances.
D) Selecting accounts receivable for positive and negative confirmation.

Accepted Answer

Generalised audit software is typically used for analyzing large volumes of data, searching for specific criteria, and selecting samples. Inputting test transactions to ensure that the check digit control is operating is more of a manual testing procedure or specific application control testing, not ideally suited for generalized audit software, which is more about data analysis and extraction.

Question 10

Which of the following pairs of accounts would an auditor most likely analyse on the same working paper?
A) Notes receivable and interest income.
B) Accrued interest receivable and accrued interest payable.
C) Notes payable and notes receivable.
D) Interest income and interest expense.

Accepted Answer

Notes receivable and interest income are directly related as the interest income is generated from the notes receivable, making them logical to analyze together on the same working paper.

Question 11

An auditor would be least likely to use external confirmation procedures in connection with the examination of:
A) long-term debt.
B) property, plant and equipment.
C) inventories.
D) issued share capital.

Accepted Answer

External confirmation procedures are less likely to be used for property, plant, and equipment because these assets are physical in nature and their existence and condition are usually verified through inspection rather than through external confirmation. External confirmations are more commonly used for verifying the existence and terms of long-term debt, the existence and rights to inventories, and the details of issued share capital with external parties like creditors, suppliers, or registrars.

Question 12

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:
A) ascertain the reasonableness of accrued interest.
B) detect unrecorded liabilities.
C) determine the validity of prepaid interest expense.
D) assess control risk for securities.

Accepted Answer

The answer of One of the primary reasons for preparing...

Question 13

The auditor is least likely to use generalised audit software to:
A) access information stored on the client's IT files.
B) perform analytical procedures on the client's data.
C) test the accuracy of the client's computations.
D) directly test weaknesses in the client's programmed controls.

Accepted Answer

Generalized audit software is less effective in directly testing weaknesses in the client's programmed controls as it is not specific enough to identify and test the relevant control activities. Specialized software may be necessary to perform such tests.

Question 14

In the audit of a medium-sized manufacturing concern, which one of the following areas would be expected to require the least amount of audit time?
A) Revenue.
B) Owners' equity.
C) Liabilities.
D) Assets.

Accepted Answer

Owners' equity typically involves fewer transactions compared to other areas such as revenue, liabilities, and assets. This means that it would generally require the least amount of audit time. However, the exact amount of time needed for each area would depend on the specific circumstances of the audit and the level of risk associated with each area.

Question 15

Which of the following explanations might satisfy an auditor who discovers significant debits to an accumulated depreciation account?
A) Prior years' depreciation charges were erroneously understated.
B) There were numerous fixed asset retirements during the year.
C) There were numerous fixed asset purchases during the year.
D) A reserve for possible loss on retirement has been recorded.

Accepted Answer

When fixed assets are retired, the accumulated depreciation account is debited to remove the depreciation associated with those assets from the books.

Question 16

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?
A) Adding the accounts receivable ledger, and checking the total to the accounts receivable balance in the general ledger.
B) A sequence check looking for missing sales invoice numbers.
C) A report outlining those balances that are greater than three months overdue.
D) A sample of debtors to be confirmed by positive debtors' confirmation procedures.

Accepted Answer

An exception report outlining those balances that are greater than three months overdue is an appropriate method to test the valuation and allocation assertion for accounts receivable. This report identifies potential issues with the collectability of these balances, which could affect their valuation and allocation in the financial statements. The other options listed (A, B, and D) do not relate specifically to the valuation and allocation assertion for accounts receivable.

Question 17

To establish the existence and ownership of a long-term investment in the shares of a publicly traded company, an auditor ordinarily performs a security count or:
A) confirms the number of shares owned with the issuing company.
B) determines the market price per share at the balance sheet date from published quotations.
C) confirms the number of shares owned that are held by an independent custodian.
D) relies on the client's internal control if the auditor has reasonable assurance that the control activities are being applied as prescribed.

Accepted Answer

Confirming the number of shares owned that are held by an independent custodian provides reliable evidence of both existence and ownership of the investment.

Question 18

In violation of company policy, Warren Ltd erroneously capitalised the cost of painting its warehouse. The auditor examining Warren's financial report would most likely detect this when:
A) examining maintenance expense accounts.
B) observing during the physical inventory observation that the warehouse had been painted.
C) examining the construction work orders supporting items capitalised during the year.
D) discussing the capitalisation policies with Warren's financial controller.

Accepted Answer

The auditor would most likely detect the erroneous capitalisation by examining the construction work orders supporting items capitalised during the year, as this would reveal that the painting costs were incorrectly recorded as capital expenditures instead of maintenance expenses.

Question 19

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:
A) user programs.
B) utility programs.
C) supervisory programs.
D) compiler programs.

Accepted Answer

Utility programs are software programs that perform routine functions such as sorting, merging, and backing up data. These programs are commonly used by auditors to aid in data analysis and processing. User programs are generally designed specifically for end-users and do not typically perform routine processing functions. Supervisory programs are typically used for managing computer systems, and compiler programs are used for translating source code into executable code.

Question 20

Which of the following audit procedures is least likely to detect an unrecorded liability?
A) Analysis and re-computation of depreciation expense.
B) Analysis and re-computation of interest expense.
C) Reading of the minutes of meetings of the board of directors.
D) Analysis of response to a bank confirmation request.

Accepted Answer

Analysis and re-computation of depreciation expense is not directly related to liabilities and therefore is the least likely to detect an unrecorded liability. The other options are more likely to detect unrecorded liabilities: (B) analyzing interest expense could reveal unrecorded loans or interest payable, (C) reading board of director minutes could reveal discussion of potential liabilities, and (D) bank confirmation requests could reveal outstanding loans or guarantees which may create liabilities.

Quiz 10: Substantive Tests of Transactions and Balances

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

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

Which of the following is true of generalised audit software?

A primary advantage of using generalised audit software in the audit of an advanced IT system is that it enables the auditor to:

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:

Which of the following tests would the auditor use generalised audit software for in order to test the completeness assertion of inventory?

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

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

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

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

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

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:

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

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

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

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?

To establish the existence and ownership of a long-term investment in the shares of a publicly traded company, an auditor ordinarily performs a security count or:

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

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:

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