Question 1

Physically sighting fixed assets enables the auditor to test the rights and obligations assertion.

Accepted Answer

Physically sighting fixed assets primarily tests the existence assertion, ensuring the assets are present and owned by the entity, not directly testing rights and obligations. Rights and obligations are often verified through documents such as invoices, titles, or lease agreements.

Question 2

Evaluating the adequacy of the allowance for doubtful accounts account is an example of a substantive test of trade receivables that is always performed.

Accepted Answer

Evaluating the adequacy of the allowance for doubtful accounts is a crucial step in assessing the accuracy of trade receivables, and it is a substantive test that is always performed to ensure that the provision for bad debts is sufficient to cover any potential losses.

Question 3

Based on her review, Joyce Yu found both inherent risk and control risk at a major research facility to be high. One would expect that her amount of substantive testing required would be:
A) high.
B) low.
C) medium.
D) impossible to determine without more data.

Accepted Answer

When inherent risk and control risk are high, it indicates a greater likelihood of material misstatements in the financial statements. As a result, more substantive testing is required to detect those misstatements. Therefore, the amount of substantive testing required would be high.

Question 4

The typical procedures performed to search for unrecorded payables are referred to as subsequent payments testing and cut-off testing.

Accepted Answer

Subsequent payments testing and cut-off testing are the two typical procedures used to search for unrecorded payables.

Question 5

A pledge is something delivered as security for the payment of a debt or the fulfilment of a promise.

Accepted Answer

A pledge is a type of security provided to ensure the repayment of a debt or the fulfilment of a promise. It may be in the form of a valuable asset or a sum of money, and its surrender or repayment is contingent on the completion of the agreed-upon terms.

Question 6

Miriam Bakeman recently performed procedures to evaluate whether client's internal control system is preventing or detecting a material misstatement. This is an example of
A) testing detection risks.
B) testing inherent risks.
C) testing internal controls.
D) establishing materiality.

Accepted Answer

Miriam Bakeman performed procedures to test the effectiveness of the client's internal control system, which falls under the category of testing internal controls.

Question 7

The key objective when performing substantive procedures is to determine whether there are material misstatements within an account balance.

Accepted Answer

The primary purpose of substantive procedures is to identify material misstatements in account balances. By examining and testing the underlying transactions and account balances, auditors can form an opinion on the fairness of the financial statements. Therefore, the answer is true.

Question 8

When trade receivables is a significant account in an entity's balance sheet, the two audit assertions that are considered most important are existence and valuation and allocation.

Accepted Answer

When trade receivables is a significant account in an entity's balance sheet, the two most important audit assertions are existence (ensuring the receivables actually exist and are valid) and valuation and allocation (ensuring the amount recorded for the receivables is accurate).

Question 9

Testing the mathematical accuracy of the cash disbursement journal relates to the existence assertion.

Accepted Answer

The answer of Testing the mathematical accuracy of the cash...

Question 10

When the assessment of inherent risk and control risk is low, the amount of substantive testing required to reduce the detection risk to an acceptable level is significant.

Accepted Answer

When the inherent risk and control risk are low, the auditor may rely more on the controls and perform less substantive testing. Therefore, the amount of substantive testing required to reduce the detection risk to an acceptable level is not significant.

Question 11

Ensuring that accounts payable are stated at the amounts owed at year-end relates to the rights and obligations assertion.

Accepted Answer

The rights and obligations assertion pertains to ensuring that the entity has a legal obligation to pay its accounts payable, and that the amounts stated are accurate representations of the obligations as of year-end.

Question 12

Natalya Rovinescu, the external auditor at Nautilus Minerals, was trying to determine whether she could rely on the relevant work of the internal audit department. She would place most confidence if the internal auditor reported to the
A) Treasurer.
B) President.
C) Board of Directors.
D) Chief Financial Officer.

Accepted Answer

The answer of Natalya Rovinescu, the external auditor at Nautilus...

Question 13

The timing of substantive testing is dependent on the risk assessment of the significant account in question.

Accepted Answer

The timing of substantive testing is based on the risk assessment of the significant account. High-risk accounts require more extensive substantive testing, and the testing should be done earlier in the audit. In contrast, low-risk accounts require less testing, and the testing can be done later in the audit. Therefore, the answer is true.

Question 14

A fixed assets register is used to capture additions and disposals of fixed assets, as well as calculating depreciation charges.

Accepted Answer

A fixed assets register is a record-keeping tool that tracks fixed asset acquisitions and disposals, as well as depreciation charges. Therefore, the statement is true.

Question 15

Prepayments are audited by vouching the balance to the supporting invoices.

Accepted Answer

Prepayments refer to payments made in advance for goods or services that are to be received at a later date. To audit prepayments, auditors would verify the balance shown in the financial statements by vouching it to the supporting invoices or other documents that show the details of the payment and the expected receipt of goods or services. This ensures that the prepayment balance is accurate and the related expenses have not been overstated.

Question 16

The two key assertions for inventory are completeness and rights and obligations.

Accepted Answer

Completeness means that all inventory items that should be recorded are included in the inventory count, and rights and obligations mean that the entity has legal ownership or access to sell the inventory. These are two key assertions for inventory.

Question 17

Accounting for the numerical sequence of cheques issued during a specific period is a substantive test relating to the purchases process.

Accepted Answer

Accounting for the numerical sequence of cheques issued during a specific period is considered a test of control, not a substantive test, as it aims to verify the completeness and accuracy of the transactions recorded, rather than directly testing the transactions' monetary amounts.

Question 18

Martin Bellefeuille was asked by his audit manager to perform an evaluation of the operating effectiveness of controls in preventing material misstatements at the assertion level. In complying with the request, what did he do?
A) He evaluated control risk.
B) He determined audit risk.
C) He determined inherent risk.
D) None of the above.

Accepted Answer

The answer of Martin Bellefeuille was asked by his audit...

Question 19

Provisions can be easily audited by controls testing alone.

Accepted Answer

Provisions are estimates made by a company and are not always reliable. Therefore, an auditor cannot just rely on controls testing alone to audit provisions. The auditor must also perform substantive procedures like obtaining external confirmations, reviewing contractual agreements, and performing analyses of historical data.

Question 20

Priscille White was performing the review of cash transactions at Banker's Trust. Which three assertions are the most important when ensuring that there are no material misstatements for cash at Banker's Trust?
A) existence, completeness, valuation and allocation
B) existence, valuation and allocation, rights and obligations
C) existence, completeness, classification
D) none of the above

Accepted Answer

The answer of Priscille White was performing the review of...

Quiz 10: Substantive Testing and Balance Sheet Accounts