Question 1

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 auditor considers existence and valuation and allocation assertions as the most important ones. Existence assertion is important to ensure the trade receivables actually exist and include all outstanding balances. Valuation and allocation assertion is important to ensure that trade receivables are recorded at their correct values and classifications, such as current or non-current portions.

Question 2

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

Accepted Answer

This is correct. A fixed assets register is a record that tracks all fixed assets owned by an organization and includes details such as cost, acquisition date, and depreciation calculations. The register is used to track additions and disposals of fixed assets, as well as to calculate depreciation charges.

Question 3

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 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 also low. This is because low inherent risk and control risk means that the likelihood of a material misstatement in the financial statements is low, and the effectiveness of the entity's internal controls is high, respectively. Therefore, the detection risk can be set at a higher level, as the risk of not detecting a material misstatement is already low. Conversely, if inherent risk and control risk are high, then the amount of substantive testing required may be significant to reduce the detection risk to an acceptable level.

Question 4

Evaluating the adequacy of the allowance for doubtful debts 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 debts account is a substantive test of trade receivables that is always performed because it ensures that the allowance is sufficient to cover potential losses from uncollectible accounts receivable.

Question 5

When the assessment of inherent and control risk is low:
A)there are lots of controls that have been tested and found to be effective.
B)the level of substantive procedures is limited.
C)Both a and b
D)None of the above

Accepted Answer

When the assessment of inherent and control risk is low, it implies that the entity has effective controls in place (as per choice A) and, as a result, the auditor may decide to perform fewer substantive procedures (as per choice B), relying more on the controls that are in place.

Question 6

Which of the following substantive tests of cash account balances are always performed?
A)Examine the client's bank reconciliations
B)Test cut-off of cash receipts,cash payments and transfers at year-end
C)Confirm cash held by others
D)All of the above

Accepted Answer

All of the options listed are standard substantive tests for auditing cash account balances. They help ensure the accuracy and completeness of the cash balances reported in the financial statements.

Question 7

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 8

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

Accepted Answer

Ensuring that accounts payable are stated at the amounts owed at year-end relates to the completeness and accuracy assertions, not the rights and obligations assertion. The rights and obligations assertion concerns whether the entity has the legal right to control the use of all reported assets and whether it is obligated for all reported liabilities.

Question 9

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

Accepted Answer

The primary goal of performing substantive procedures is to detect and assess the risk of material misstatements in the financial statements. These misstatements can arise from errors or fraud and may be material to the overall accuracy of the financial statements. Therefore, the answer is true.

Question 10

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 11

Which of the following is not an example of a substantive test of cash payments transactions?
A)Test the mathematical accuracy of the cash receipts ledger
B)Test the account classifications of cash payments
C)Account for the numerical sequence of cheques issued during a specified period
D)Determine whether the signatures on paid cheques are authorised

Accepted Answer

Testing the mathematical accuracy of the cash receipts ledger is not an example of a substantive test of cash payments transactions, as it is related to the cash receipts ledger rather than the cash payments ledger. The other options (B, C, and D) are examples of substantive tests of cash payments transactions.

Question 12

Provisions can be easily audited by controls testing alone.

Accepted Answer

Controls testing alone cannot fully verify the accuracy and completeness of provisions. Provisions involve many estimates and judgments, and thus require a combination of controls testing and substantive testing to ensure their accuracy. Substantive testing involves reviewing actual data and records to confirm the validity of the estimates used to calculate provisions.

Question 13

Testing the mathematical accuracy of the cash payment ledger relates to the existence assertion.

Accepted Answer

Testing the mathematical accuracy of the cash payment ledger relates to the accuracy assertion, not the existence assertion. The existence assertion concerns whether assets, liabilities, and transactions exist, while accuracy deals with whether amounts and other data relating to recorded transactions and events have been recorded appropriately.

Question 14

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 15

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

Accepted Answer

Prepayments represent advance payments made for goods or services that will be received in the future. To verify the balance of prepayments, auditors need to examine the underlying invoices or contracts that show the nature, amount, and timing of the prepayments. By vouching the prepayments balance to the supporting documentation, auditors can ensure that the prepayments are legitimate and have not been overstated or misappropriated.

Question 16

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

Accepted Answer

The two key assertions for inventory are existence and rights and obligations. Completeness is another important assertion but is not paired with rights and obligations as the two key assertions specifically for inventory.

Question 17

Accounts that are clearly trivial or immaterial are usually ignored or only subjected to:
A)confirmations.
B)tests of controls.
C)analytical procedures.
D)observations.

Accepted Answer

Analytical procedures. Trivial or immaterial accounts are not significant to the financial statements and thus, do not warrant extensive testing. Analytical procedures can help identify unusual fluctuations or patterns in the account balances without incurring significant time and effort.

Question 18

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 19

The additional opportunities for influencing the timing of the work include:
A)auditing activity in the period to date.
B)auditing events occurring prior to year-end.
C)leveraging off the activities of the internal audit function.
D)All of the above

Accepted Answer

All of the options provided can be leveraged to influence the timing of the work.

A) Auditing activity in the period to date can help identify areas of focus and potential issues that need to be addressed before the year-end audit. This can help expedite the audit process and ensure that any issues are resolved in a timely manner.

B) Auditing events occurring prior to year-end can also be used to influence the timing of the work. By identifying potential issues and addressing them before year-end, the audit can be completed more quickly and efficiently.

C) Leveraging off the activities of the internal audit function can also be helpful in influencing the timing of the work. By coordinating with the internal audit team and leveraging their work, the audit team can ensure that their efforts are aligned and that any issues are addressed in a timely manner.

Therefore, all of the options contribute to influencing the timing of the work.

Question 20

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 involves reviewing payments made after the financial statement date to determine if they should have been recorded as payables at year-end. Cut-off testing involves testing the timing of transactions to ensure they have been recorded in the correct accounting period. Both of these procedures are commonly used to search for unrecorded payables.

Quiz 10: Substantive Testing and Balance Sheet Accounts

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.

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

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.

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

When the assessment of inherent and control risk is low:

Which of the following substantive tests of cash account balances are always performed?

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

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

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

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

Which of the following is not an example of a substantive test of cash payments transactions?