Deck 11: Substantive Testing, Caat and Audit Programmes

Question 1

When ABC Co. receives a purchase invoice it is checked by the accounts clerk for accuracy then authorised by the line manager who signs it to verify that it has been authorised. How can the auditor test the control over authorisation of invoices is being carried out?

A) Enquire with the accounts clerk to verify that they observe the line manager do this on a regular basis.
B) For a sample of the invoices, re-calculate the invoice amount to ensure it is arithmetically correct.
C) For a sample of invoices ensure that they have been signed by the line manager.
D) For a sample of the invoices verify that the supplier is one of those on the authorised suppliers list.

Answer 1

For a sample of invoices ensure that they have been signed by the line manager.

Question 2

The financial statements include various assertions made by management which underpin the figures. Which of the following statements is correct relating to assertions?

A) The auditor makes the assertion and then tests it during the course of the audit.
B) Management make the assertions by inclusion of items in the financial statements and the auditor tests those assertions.
C) Management make formal assertions to the auditor in the form of a letter and those assertions are given to the shareholders.
D) The auditor may assume that the assertions made by management are correct if the Finance Director is a qualified accountant.

Answer 2

Management make the assertions by inclusion of items in the financial statements and the auditor tests those assertions.

Question 3

Which of the following are perceived benefits of using audit software?
1) Quicker auditing - due to the ability to use CAATs to analyse data and improve planning.
2) Auditing the computer system rather than auditing around the computer
3) More testing can be done on bigger volumes of data.
4) Audit costs can be reduced.

A) All of the above
B) 1, 2 and 4
C) 2, 3, and 4
D) 1, 3, and 4

Answer 3

All of the above

Question 4

Which of the following items are likely to be included in a management representation letter to the auditor?
1) That management have assessed the risk of fraud.
2) That management are financially qualified.
3) That all related parties have been identified.
4) That management have complied with all laws and regulations.

A) All of the above
B) 1, 2 and 3
C) 2, 3 and 4
D) 1, 3 and 4

Question 5

Which of the following is an objective of the auditor in obtaining written representations from management?

A) To provide an answer to systems weaknesses and accounting errors or misstatements identified by the auditor.
B) To inform audit clients of their legal responsibilities in respect of the audit
C) To inform audit clients of the rights and duties of the auditor.
D) To support other audit evidence relevant to the financial statements.

Question 6

You are an audit senior of Auditron & Co and are currently conducting the audit of Winterking for the year ended 30 June 2019. Materiality has been set at $100,000, and you are carrying out the detailed substantive testing on the year-end Payables Ledger balances. Understatement of the Trade Payables balances was identified as a significant audit risk during the planning process.
This is an extract from the list of supplier statements as at 30 June 2019 held by the company and corresponding Payables Ledger balances at the same date along with some commentary on the noted differences:

Screwport
The difference in the balance is due to an invoice which is under dispute due to faulty goods which were returned on 29 June 2019.
Washpot
The difference in the balance is due to the supplier statement showing an invoice dated 28 June 2019 for $140,000 which was not recorded in the financial statements until after the year end. The payables clerk has advised the audit team that the invoice was not received until 2 July 2019.
The audit manager has asked you to review the full list of trade payables and select balances on which supplier statement reconciliations will be performed.
Which of the following items should you select for testing?
(1) Suppliers with material balances at the year end
(2) Suppliers which have a high volume of business with Winterking
(3) Major suppliers with nil balances at the year end
(4) Major suppliers where the statement agrees to the ledger

A) 1 only
B) 1, 2 and 3 only
C) 2 and 4 only
D) 1, 2, 3 and 4

Question 7

You are an audit senior of Auditron & Co and are currently conducting the audit of Winterking for the year ended 30 June 2019. Materiality has been set at $100,000, and you are carrying out the detailed substantive testing on the year-end Payables Ledger balances. Understatement of the Trade Payables balances was identified as a significant audit risk during the planning process.
This is an extract from the list of supplier statements as at 30 June 2019 held by the company and corresponding Payables Ledger balances at the same date along with some commentary on the noted differences:
Screwport
The difference in the balance is due to an invoice which is under dispute due to faulty goods which were returned on 29 June 2019.
Washpot
The difference in the balance is due to the supplier statement showing an invoice dated 28 June 2019 for $140,000 which was not recorded in the financial statements until after the year end. The payables clerk has advised the audit team that the invoice was not received until 2 July 2019.
Which of the following audit procedures should be performed in relation to the balance with Washpot to determine if the payables balance is understated?

A) Inspect the goods received note to determine when the goods were received.
B) Inspect the purchase order to confirm it is dated before the year end.
C) Review the post year-end cashbook for evidence of payment of the invoice.
D) Send a confirmation request to Washpot Co to confirm the outstanding balance.

Question 8

You are an audit senior of Auditron & Co and are currently conducting the audit of Winterking for the year ended 30 June 2019. Materiality has been set at $100,000, and you are carrying out the detailed substantive testing on the year-end Payables Ledger balances. Understatement of the Trade Payables balances was identified as a significant audit risk during the planning process.
This is an extract from the list of supplier statements as at 30 June 2019 held by the company and corresponding Payables Ledger balances at the same date along with some commentary on the noted differences:
Screwport
The difference in the balance is due to an invoice which is under dispute due to faulty goods which were returned on 29 June 2019.
Washpot
The difference in the balance is due to the supplier statement showing an invoice dated 28 June 2019 for $140,000 which was not recorded in the financial statements until after the year end. The payables clerk has advised the audit team that the invoice was not received until 2 July 2019.
Which of the following audit procedures should be carried out to confirm the balance owing to Screwport?
(1) Review post year-end credit notes for evidence of acceptance of return
(2) Inspect pre year-end goods returned note in respect of the items sent back to the supplier
(3) Inspect post year-end cash book for evidence that the amount has been settled

A) 1, 2 and 3
B) 1 and 3 only
C) 1 and 2 only
D) 2 and 3 only