Question 1

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 2

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

Alternative procedures are necessary when no reply to a positive confirmation request is received because it indicates a lack of evidence regarding the existence of the account receivable. Positive confirmations, where the customer is asked to confirm directly the balance owed, provide direct evidence of the existence and amount of the receivable. If there is no reply, the auditor must seek other ways to verify the receivable exists.

Question 3

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 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

In negative accounts receivable confirmations, recipients are expected to reply only if they disagree with the listed balance. However, the inference drawn from a lack of response may not be correct, as it could simply mean that the recipient did not receive the confirmation or did not understand its purpose. This could lead to misleading audit results and inaccuracies in financial statements. The other options (A, B, C) are also valid arguments against the use of negative confirmations, but they are not as strong as option D.

Question 5

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

Accepted Answer

Enquiries of production and sales personnel about obsolete or slow-moving inventory help the auditor assess whether inventory is valued correctly and if any write-downs are necessary, supporting the valuation and allocation assertion.

Question 6

The auditor will most likely perform extensive tests for possible understatement of
A)accounts receivable
B)revenues.
C)current liabilities.
D)non-current assets

Accepted Answer

Understatement of current liabilities can lead to an overstatement of a company's financial health, as it would show more assets or equity than actually exist. Auditors perform extensive tests on current liabilities to ensure that all obligations are properly recorded, reflecting the true financial position of the company.

Question 7

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

If accounts receivable have increased due to slow collections, the auditor would want to ensure that the accounts are properly valued and allocated. Therefore, the auditor would likely expand tests for the valuation and allocation assertion to ensure that any adjustments to the allowance for bad debts account are appropriate. This would help to ensure that the financial statements accurately reflect the value of accounts receivable at year-end. Reviewing the going concern ramifications may also be necessary if collections continue to be slow, but this is not directly related to addressing the increase in accounts receivable. Expanding tests for the existence assertion would be necessary if there were concerns about the completeness or accuracy of the accounts receivable records. However, in this scenario, slow collections are likely the main reason for the increase, so expanding tests for existence would not be the most relevant course of action. Increasing the balance in the allowance for bad debts account would not be appropriate without first conducting additional tests to confirm the need for an adjustment.

Question 8

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:
A)provide the data necessary to reconcile the accounts receivable subsidiary ledger with the general ledger.
B)analyse the notes payable journal.
C)detect kiting activities that may otherwise not be discovered.
D)corroborate information regarding Calcutta's deposits and loan balances.

Accepted Answer

The primary purpose of sending a standard bank confirmation request is to verify the accuracy of information regarding the client's deposits and loan balances. This will help to ensure that the information in the financial statements is reliable and accurate. Options A and B are irrelevant to this test, and option C relates to detecting fraud rather than verifying the accuracy of information in the financial statements.

Question 9

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 aged trial balance of accounts receivable is best used by the auditor to test the valuation and allocation assertion of accounts receivable. The audit procedures involve reviewing the ageing classification of accounts receivable to ensure that it agrees with the company's credit terms and that appropriate provisions have been made for doubtful debts. The auditor also tests the accuracy of the calculations and reviews the supporting information for credit balances. This helps to ensure that the financial statements reflect the accurate value of accounts receivable.

Question 10

Which of the following is not a primary objective of the auditor in undertaking substantive testing of current assets?
A)Determine the completeness of the recorded current assets.
B)Establish the existence of the current assets.
C)Determine the adequacy of the internal control.
D)Determine that the entity holds or controls the right to the current asset.

Accepted Answer

The primary objective of substantive testing of current assets is to determine the existence and completeness of the recorded current assets and to ensure that the entity holds or controls the right to the current asset. While the adequacy of internal control is important, it is not a primary objective of substantive testing of current assets. Rather, it is a primary objective of tests of control.

Question 11

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 primarily deals with verifying transactions and events recorded in the period under audit. This involves testing the completeness, accuracy, and validity of the transactions and arrangements that contribute to the revenue, expense, and other income statement items. On the other hand, an audit of the Statement of Financial Position (previously known as the balance sheet) focuses on the verification of the position and status of the assets, liabilities, and equity accounts as of a particular date. This involves verifying ownership, valuation, existence, and completeness of the account balances. Cut-offs, authorisations, and presentation and disclosure are important considerations in both audits, but their significance varies for different financial statement assertions.

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?
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 the 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 valid sales invoices. This ensures that the accounts receivable balance is accurate and that there are no unsupported or fictitious entries in the ledger. The auditor is not necessarily seeking to establish that all sales invoices have been recorded or represent bona fide sales, or that all sales invoices have been properly posted to customer accounts.

Question 13

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

In auditing accounts payable, the main focus of an auditor's procedures is to ensure completeness, meaning that all valid payables have been recorded and included in the financial statements. This assertion relates to whether all transactions have been recorded and reflected in the financial statements of the company. Therefore, the correct choice is completeness.

Question 14

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:
A)accuracy.
B)occurrence.
C)valuation and allocation.
D)cut-off.

Accepted Answer

The tests designed to detect goods that arrived 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 cut-off. Cut-off refers to the recording of transactions in the correct accounting period. In this case, if goods were received in one year but recorded in the subsequent year, it affects the cut-off assertion. Testing for the existence of such goods provides evidence about whether the cut-off assertion is accurate or not.

Question 15

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?
A)Completeness
B)Occurrence
C)Rights and obligations
D)Valuation and allocation.

Accepted Answer

Tracing from remittance advices to the cash receipts journal tests the completeness assertion for cash, ensuring that all cash received has been recorded in the journal.

Question 16

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

Since the ledger entries are the final record of transactions, any unsupported entries will be most likely detected by reviewing the ledger entries. Starting from the journal entries or original source documents may not provide a clear picture of unsupported entries, as corrections or adjustments may have been made in the ledger. Externally-generated documents may not relate directly to ledger entries and may not be relevant in identifying unsupported entries in the ledger.

Question 17

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?
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 year-end the bookkeeper erroneously...

Question 18

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:
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 2015.
C)check subsequent cash receipts to confirm that the amount was received.
D)reconfirm the zero balance as of 9 July 2015.

Accepted Answer

Checking subsequent cash receipts to confirm that the amount was indeed received is a direct way to verify that the payment mentioned in the confirmation was actually made, ensuring the accuracy of the receivables balance as of 30 June.

Question 19

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 20

'Dual-purpose tests' involve:
A)tests of controls that address both the design of the control procedures and their operating effectiveness.
B)tests of transactions that include substantive procedures as well as tests of controls.
C)tests that address both balances and transaction classes.
D)tests performed because of client expectations as well as for gathering audit evidence.

Accepted Answer

Dual-purpose tests involve testing transactions for both the presence of control activities (tests of controls) as well as the monetary correctness of the transactions (substantive procedures). This approach helps to save time and resources while providing a higher level of assurance. Option A is incorrect because it only tests the design and effectiveness of controls, not transactions. Option C is incorrect because it deals only with balances and not transactions. Option D is incorrect because client expectations should not drive the audit procedures; they should be based on audit objectives and risk assessments.

Quiz 9: Substantive Tests of Transactions and Balances

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 account receivable when:

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:

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

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:

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

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:

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:

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:

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

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:

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?

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

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:

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?

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

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?

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:

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

'Dual-purpose tests' involve: