Deck 9: Substantive Tests of Transactions and Balances

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.

Answer 1

A

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.

Answer 2

B

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.

Answer 3

C

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

Question 21

During the current financial year, the client company began dealing with certain distributors on a consignment basis (goods were delivered to the distributor but not deemed sold until the distributor had on-sold them).Which of the following audit procedures is least likely to bring this new fact to the auditor's attention?

A)Test of cash receipts transactions.
B)Tracing of shipping documents to the sales journal.
C)Observation of physical inventory at the client company's premises.
D)Confirmation of accounts receivable.

Question 22

From the auditor's point of view, inventory counts are more acceptable prior to the year-end when:

A)accurate perpetual inventory records are maintained.
B)control risk is high.
C)significant amounts of inventory are held on a consignment basis.
D)inventory turnover has decreased from the prior year.

Question 23

An auditor, having accounted for a sequence of inventory tags, traces information on a representative number of tags to the physical inventory sheets.The purpose of this procedure is to obtain assurance that:

A)inventory sheets do not include untagged inventory items.
B)the final inventory is valued at cost.
C)the inventory listed on the inventory sheets is complete.
D)all inventory represented by an inventory tag is bona fide.

Question 24

An auditor would be most likely to learn of slow-moving inventory through:

A)review of the cash payments journal.
B)enquiry of sales personnel.
C)review of perpetual inventory records.
D)physical observation of inventory.

Question 25

When perpetual inventory records are maintained, and control risk for inventory is high, the auditor would probably:

A)insist that the client perform physical counts of inventory items several times during the year.
B)want the client to schedule the physical inventory count at the end of the year.
C)increase tests of controls around sales and purchases.
D)increase the extent of tests for unrecorded liabilities at the end of the year.

Question 26

In auditing accounts receivable the negative form of confirmation request most likely would be used when:

A)recipients are likely to return positive confirmation requests without verifying the accuracy of the information.
B)the combined assessed level of inherent and control risk relative to accounts receivable is low.
C)a small number of accounts receivable is involved but a relatively large number of errors are expected.
D)the auditor performs a dual purpose test that assesses control risk and obtains substantive evidence.

Question 27

When outside firms of non-accountants specialising in the taking of physical inventories are used to count, list, price and subsequently compute the total dollar amount of inventory on hand at the date of the physical count, the auditor will ordinarily:

A)make or observe some physical counts of the inventory, re-compute certain inventory calculations and test certain inventory transactions.
B)consider the report of the outside inventory-taking firm to be an acceptable alternative procedure to the observation of physical inventories.
C)consider the reduced audit effort with respect to the physical count of inventory as a scope limitation.
D)not reduce the extent of work on the physical count of inventory.

Question 28

An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account, as at 30 June 2015.By this procedure, the auditor would be most likely to learn of which of the following?

A)An April cheque from a customer was posted in error to the account of another customer with a similar name.
B)An April invoice was improperly computed.
C)An account balance is past due and should be written off.
D)An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period.

Question 29

An auditor will usually trace the details of the test counts of inventory items selected from the factory floor while observing the inventory stocktake through to a final inventory schedule.This audit procedure is undertaken to provide evidence of which assertion(s)?

A)Valuation and allocation.
B)Existence.
C)Completeness.
D)Cut-off.

Question 30

Which of the following procedures would best detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10, and a few items selling for hundreds of dollars?

A)Have an independent audit firm prepare an internal control structure report on the effectiveness of the controls over inventory.
B)Maintain perpetual inventory records with frequent periodic verification of the accuracy of these records.
C)Require an authorised officer's signature on all requisitions for the more valuable items.
D)Have separate warehouse space for the more valuable items with sequentially numbered tags.

Question 31

In determining the adequacy of the allowance for uncollectible accounts, the least reliance should be placed upon which of the following?

A)The credit manager's opinion.
B)An ageing schedule of past due accounts.
C)Collection experience of the client's collection agency.
D)Ratios calculated showing the past relationship of accounts receivable to net credit sales.

Question 32

Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's assertion of valuation and allocation of inventory?

A)Testing the entity's computation of standard overhead rates.
B)Obtaining confirmation of inventories pledged under loan agreements.
C)Reviewing shipping and receiving cut-off procedures for inventories.
D)Tracing test counts to the entity's inventory listing.

Question 33

An auditor selected items that are on the store floor for test counts while observing a client's physical inventory.The auditor then traced the test counts to the client's inventory listing.This procedure most likely obtained evidence concerning management's assertion of:

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

Question 34

Procedures related to the purchases cut-off assertion should be designed to test whether or not all inventory:

A)purchased and received immediately before year-end was recorded in the correct period.
B)on the year-end statement of financial position was recorded at lower of cost or market.
C)on the year-end statement of financial position was paid for by the company.
D)owned by the company is in the possession of the company.

Question 35

During a client's stocktake you select a sample of items from the floor, count them and trace the quantities to the inventory summary sheet.Which financial report assertion is this audit procedure related to?

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

Question 36

Your client sells a high-technology product which is subject to frequent technological improvements and design changes in order to keep current with the market.Based on this information, for the inventory account, the assertion upon which you should concentrate your audit procedures is:

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

Question 37

Tests designed to detect purchases made just before year-end that have been recorded in the subsequent year would provide assurance about management's assertion of:

A)accuracy.
B)occurrence.
C)cut-off.
D)classification.

Question 38

Hoang is engaged in the audit of a power company that supplies power to a residential community.All accounts receivable balances are small and the internal control structure is effective.Customers are billed twice monthly.In order to obtain evidence with regards the valuation and allocation assertion of the accounts receivable balances as at balance date, Hoang would most likely:

A)send positive confirmation requests.
B)examine evidence of subsequent cash receipts.
C)use statistical sampling instead of sending confirmation requests.
D)send negative confirmation requests.

Question 39

When evaluating the risk of material misstatement with regards to defalcations involving receivables (a credit entry to accounts receivable for amounts not received), the auditor would expect an experienced bookkeeper to most likely debit which of the following accounts?

A)Cash.
B)Sales returns.
C)Miscellaneous income.
D)Accounts payable.

Question 40

A client's physical count of inventory was higher than the inventory per the perpetual records.This situation could be the result of the failure to record:

A)sales discounts.
B)sales.
C)purchase returns.
D)purchases.

Question 41

In order to efficiently test the purchases/accounts payable cut-off, an auditor will be most likely to:

A)compare cut-off reports with purchase orders.
B)coordinate cut-off tests with physical inventory observation.
C)coordinate mailing of confirmations with cut-off tests.
D)compare vendors' invoices with vendors' statements.

Question 42

All of the following evidence-gathering procedures can assist the auditor in testing the existence assertion for investment securities except:

A)physical examination.
B)comparing fair value to the original cost.
C)confirmation with the issuer of the securities.
D)confirmation with the custodian.

Question 43

To determine whether accounts payable are complete, an auditor commonly performs sampling procedures to test whether all merchandise received is recorded.The population of documents for this test consists of all:

A)payment vouchers.
B)receiving reports.
C)purchase requisitions.
D)vendor's invoices.

Question 44

The physical count of inventory of Clyers Pty Ltd, a medium-sized retailer, was higher than shown by the perpetual records.Which of the following could explain the difference?

A)Credit memos for several items returned by customers had not been recorded.
B)Inventory items had been counted but the tags placed on the items had not been taken off the items and added to the inventory accumulation sheets.
C)An item purchased 'FOB shipping point' had not arrived at the date of the inventory count and had not been reflected in the perpetual records.
D)No journal entry had been made on the retailer's books for several items that the retailer returned to its suppliers.

Question 45

A normal audit procedure is to analyse the current year's repairs and maintenance accounts to provide evidence in support of the audit proposition that:

A)expenditures for fixed assets have been recorded in the proper period.
B)capital expenditures have been properly authorised.
C)non-capitalisable expenditures have been properly expensed.
D)the listing of fixed assets is complete.

Question 46

The auditor is least likely to learn of retirements of equipment through which of the following?

A)Review of depreciation calculations.
B)Review of the purchase returns and allowance account.
C)Review of insurance policy correspondence.
D)Analysis of the debits to the accumulated depreciation account.

Question 47

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

A)The prior year's 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.

Question 48

A client maintains perpetual inventory records in both quantities and dollars.If the assessed level of control risk is high, an auditor would probably:

A)insist that the client perform physical counts of inventory items several times during the year.
B)apply gross profit tests to ascertain the reasonableness of the physical accounts.
C)increase the extent of tests of controls of the inventory cycle.
D)request the client to schedule the physical inventory count at the end of the year.

Question 49

When auditing Steel Ltd, a large manufacturer of building supplies, which one of the following audit procedures would give the least assurance with regards to the valuation and allocation assertion for inventory?

A)Examining paid vendors' invoices.
B)Testing the computation of standard overhead rates.
C)Obtaining confirmation of inventories pledged under loan agreements.
D)Reviewing direct labour rates.

Question 50

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.

Question 51

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

A)accounts payable.
B)sales.
C)accounts receivable.
D)inventory.

Question 52

In auditing intangible assets, an auditor would determine whether the amortisation amount is reasonable in support of management's financial statement assertion of:

A)valuation and allocation.
B)existence.
C)completeness.
D)occurrence.

Question 53

Which assertion for ending inventory is most likely at risk of material misstatement if the gross profit percentage is much greater than last year?

A)Existence.
B)Completeness.
C)Rights and obligations.
D)Accuracy.

Question 54

'While auditing James Ltd, you find that their inventory turnover has decreased from 7.8 times to 5.4 times during the year.Based on this decrease, which financial report assertion would you be least concerned with?

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

Question 55

Which of the following is the best audit procedure for determining the completeness of the accrued liabilities listing?

A)Examine unusual relationships between monthly accounts payable balances and recorded purchases.
B)Examine confirmation requests returned by creditors whose accounts appear on a subsidiary trial balance of accounts payable.
C)Examine a sample of cash disbursements in the period subsequent to year-end.
D)Examine a sample of invoices a few days prior to and subsequent to year-end to ascertain whether they have been properly recorded.

Question 56

The auditor may conclude that depreciation charges are insufficient by noting:

A)large amounts of fully depreciated assets.
B)insured values greatly in excess of book values.
C)excessive recurring profits on assets retired.
D)continuous trade-ins of relatively new assets.

Question 57

In violation of company policy, Morley Ltd (Morley) erroneously capitalised the cost of painting its warehouse.The auditor examining 'Morley'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 'Morley's financial controller.

Question 58

All of the following can assist the auditor in testing the existence assertion for investment securities except:

A)physical examination.
B)comparing fair value to cost.
C)confirmation with the issuer of the securities.
D)confirmation with the custodian.

Question 59

Which of the following is one of the auditor's primary objectives when externally confirming holdings of marketable securities?

A)To determine whether recorded securities are properly classified on the statement of financial position.
B)To determine whether recorded securities are the property of the client.
C)To determine whether recorded securities are appropriately valued in accordance with accounting standards
D)To determine whether the internal control system for recorded securities is functioning effectively for the period of the audit.

Question 60

An auditor usually examines receiving reports to support entries in the:

A)sales journal and sales returns journal.
B)voucher register and sales returns journal.
C)cheque register and sales journal.
D)voucher register and sales journal.

Question 61

An auditor analyses the repairs and maintenance expense account primarily to obtain evidence that:

A)expenditures for property, plant and equipment have been recorded in the proper period.
B)non-capitalisable expenditures for repairs and maintenance have been recorded in the proper period.
C)expenditures for property, plant and equipment have not been charged to expenses.
D)non-capitalisable expenditures for repairs and maintenance have been properly charged to expenses.

Question 62

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.

Question 63

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.

Question 64

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.

Question 65

The auditor is most likely to verify the liability account 'accrued comissions payable' in conjunction with the:

A)verification of contingent liabilities.
B)review of sales transactions.
C)examination of trade accounts payable.
D)review of disbursements after year-end.

Question 66

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)identify weaknesses in the client's IT controls.

Question 67

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.

Question 68

When a client company does not maintain its own share records, the auditor should obtain written confirmation from the share 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.

Question 69

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.

Question 70

In the audit of Cassie Ltd, a medium-sized manufacturing company, 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.

Question 71

Which of the following is the most effective audit procedure for verification of dividends earned on investments in marketable equity securities?

A)Tracing deposits of dividend cheques to the cash receipts book.
B)Comparing the amounts received with dividends received in the preceding year.
C)Reconciling amounts received with published dividend records.
D)Re-computing selected extensions and footings of dividend schedules and comparing totals to the general ledger.

Question 72

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.

Question 73

An auditor using audit software would probably be least interested in which of the following fields in a computerised perpetual inventory file?

A)Quantity sold.
B)Date of last purchase.
C)Warehouse location.
D)Economic order quantity.

Question 74

Which of the following is necessary to audit balances in an on-line IT system in an environment where updated information is written over existing information?

A)A utility program which reconciles the subsidiary ledgers with the general ledger.
B)Periodic dumping of transaction files.
C)A well-documented audit trail.
D)An integrated test facility.

Question 75

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)existence.
B)completeness.
C)cut-off.
D)accuracy.

Question 76

For which of the following tests would the auditor use generalised audit softwareto 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.

Question 77

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.

Question 78

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.

Question 79

While undertaking the audit of the debtors' balance, you use your audit software to extract from the accounts receivable master file a report that shows those debtors with a positive balance owing that is overdue by more than 30 days.At which of the following account balance assertions is this report aimed?
A)

A)Completeness.
B)Valuation and allocation.
C)Occurrence.
D)Existence.

Question 80

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.