Deck 10: Substantive Testing and Balance Sheet Accounts

Question 1

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

Answer 1

False

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.

Answer 2

True

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.

Answer 3

A

Question 4

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

Question 5

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

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.

Question 7

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

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.

Question 9

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

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.

Question 11

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

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.

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

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.

Question 19

Provisions can be easily audited by controls testing alone.

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

Question 21

George Malinowski was trying to check whether the receivables of Cosentino Distributors were being carried at their net realizable value. His objective was to fulfill which assertion?

A) completeness
B) valuation and allocation
C) existence
D) none of the above

Question 22

Celestino Minotti tested the posting of individual credit memos to the sales returns and allowances ledger and to the trade receivables sub-ledger. Which assertion was he fulfilling?

A) classification
B) existence
C) completeness
D) cutoff

Question 23

Which of the following statements regarding a share register is incorrect?

A) It is a list of all the items of inventory that a company has.
B) It is used to capture purchases and sales of shares.
C) It is essentially the sub-ledger reconciled to the general ledger account for share capital.
D) It is prepared by the auditor.

Question 24

Can you help Rosa Chaput determine why there is some effort put into testing cash when the cash account is not material?

A) because cash can be stolen easily
B) because cash has to be valued properly at year-end
C) because so many transactions flow through cash
D) none of the above

Question 25

When the assessment of inherent and control risk is low:

A) the level of substantive procedures is limited.
B)
B) there are lots of controls that have been tested and found to be effective.
C) both a and
D) none of the above.

Question 26

The three audit assertions particularly important to enable the auditor to conclude that there are no material misstatements in cash as at year-end are:

A) existence, completeness and classification.
B) rights and obligations, cut-off and occurrence.
C) occurrence, completeness and accuracy.
D) classification, occurrence and valuation.

Question 27

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

A) Test cut-off of cash receipts, cash payments and transfers at year-end
B) Confirm cash held by others
C) Examine the client's bank reconciliations
D) All of the above

Question 28

Which are the two audit assertions considered most important to the auditor concluding there are no material misstatements in trade receivables at year-end?

A) valuation and allocation, and rights and obligations
B) existence and occurrence
C) occurrence and rights and obligations
D) existence and valuation and allocation

Question 29

Existence of trade receivables is usually verified by:

A) examining copies of sales invoices sent to the client's customers.
B) sending confirmations to the client's customers.
C) calculating changes in the receivables balance from one year to the next.
D) evaluating the adequacy of the provision for doubtful accounts.

Question 30

Accounts that are clearly trivial or immaterial are usually ignored or only subjected to:

A) tests of controls.
B) analytical procedures.
C) confirmations.
D) observations.

Question 31

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

A) test the account classifications of cash payments
B) account for the numerical sequence of cheques issued during a specified period
C) test the mathematical accuracy of the cash receipts ledger
D) determine whether the signatures on paid cheques are authorized

Question 32

Theresa Bamboukian started her sales process audit and was accounting for the numerical sequence of sales invoices, sales orders and shipping documents. In addition she performed a reconciliation of billings with shipping documents. Which assertions was she fulfilling?

A) existence, accuracy
B) completeness, cutoff
C) existence, valuation and allocation
D) none of the above

Question 33

Anna Monticello tested the postings of the totals in the cash receipts journal to the general ledger, trade receivables sub-ledger and other subsidiary ledgers. Which assertion(s) was she fulfilling?

A) completeness
B) valuation and allocation
C) accuracy
D) none of the above

Question 34

Which of the following is a substantive test of the trade receivables balance that is always performed?

A) testing the accounting classification of sales transactions
B) testing the mathematical accuracy of the cash receipts ledger
C) evaluating the adequacy of the provision for doubtful accounts
D) none of the above

Question 35

The additional opportunities for influencing the timing of the work include:

A) reviewing provisions prior to year-end.
B) leveraging off the activities of the internal audit function.
C) reviewing activity in the period to date.
D) all of the above.

Question 36

Lynn Kevorkian was not sure which customers of her client to send confirmations. Who should she send confirmations to?

A) to the customers who will be most likely to reply
B) to the customers with the largest balances
C) to the customers with the oldest balances
D) both b and c

Question 37

Observing the client's inventory taking enables the auditor to establish that:

A) count tags, sheets or cards are properly controlled.
B) the client's personnel are complying with the instructions for inventory counts.
C) items belonging to the client are accurately counted and recorded.
D) all of the above.

Question 38

When Silvana Mathews reviewed the physical inventory compilation she performed a procedure that included tracing the cut-off information obtained during the physical inventory observation to the accounting records of sales and purchases. Which assertion did this procedure satisfy?

A) valuation and accuracy
B) completeness
C) existence
D) all of the above

Question 39

When Costa Zimbalist observes the inventory count at a client to establish that the client's personnel are complying with inventory count instructions, which assertions are in play?

A) completeness, cutoff, rights and obligations
B) completeness, cutoff
C) existence, classification
D) existence, completeness, valuation and accuracy

Question 40

The rights and obligations assertion for inventory relates to which of the following audit objectives?

A) Inventory is properly classified, described and disclosed in the financial statements.
B) The entity owns, or has the legal right to, all of the inventory on the balance sheet.
C) All inventory on the inventory listing is included in the financial statements.
D) All inventory owned by the entity at year-end is included on the balance sheet.

Question 41

Which of the following statements is incorrect?

A) Equity typically does not move much in any given year.
B) Retained earnings is a complex calculation.
C) Provisions are difficult to audit via controls testing alone.
D) Intercompany balances are vouched to the related entity or to intercompany confirmations.

Question 42

Explain examples of substantive tests of inventory that are always performed.

Question 43

Explain how substantive testing is used for prepayments, investments and intercompany balances.

Question 44

When substantive tests performed identify errors or exceptions, the first response is to:

A) qualify the audit report.
B) understand why the exception or error has arisen.
C) report the client to CRA.
D) perform additional substantive testing.

Question 45

Which of the following account balances are typically audited fully or substantially with limited or no controls testing?

A) Investments
B) Intercompany balances
C) Prepayments
D) All of the above

Question 46

Indicate whether you agree or disagree with the following statements and explain your reasoning.
a) Paula Padgett was performing substantive tests of trade receivables at Neu Lion. She indicated to her staff member, Leona Marshall: "At this client accounts receivable are material in amount. The two assertions that are the most important are the occurrence and accuracy assertions."
b) Emilio Boulrice, CGA was returning from an audit conference where he had entertained his many friends with his musical talents. As he sat in his aisle in the Air Canada flight back home to Montreal, he turned to his friend and said: "Although there is no specific requirement for us to confirm receivables anymore, existence of trade receivables is usually verified by sending confirmations to the client's customers."
c) Mike Gallagher was preparing his staff for the audit of inventory at a major client. He said to his staff: " The two key assertions for inventory are proper cutoff and accuracy."
d) Mona Lincolnshire was assessing the results of her staff's substantive testing procedures. She said: "When performing substantive procedures, the key objective is to determine whether there are material misstatements within the balance being investigated and to quantify the amount of any errors if they exist."

Question 47

Identify and explain the key audit assertions relating to cash.

Question 48

What are the key assertions for payables?

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

Question 49

Which type of leases are not recorded on the balance sheet?

A) operating
B) finance
C) direct financing
D) sale and leaseback

Question 50

Which of the following are substantive tests of payables balances that are always performed?

A) performing a search for unrecorded liabilities
B) examining the client's bank reconciliations
C) testing the cut-off by inspecting the payments ledger and supporting documents to determine that transactions are recorded in the correct period
D) all of the above.

Question 51

Investments can be vouched to supporting external documentation such as:

A) shares prices on the stock exchange.
B)
B) investment statements from a bank.
C) both a and
D) none of the above.

Question 52

Ensuring that all property, plant and equipment owned by the entity at year-end are included on the balance sheet relates to which assertion?

A) rights and obligations
B) completeness
C) classification
D) existence

Question 53

Completeness of property, plant and equipment is usually not a major issue for most entities because:

A) completeness tests tend to focus on the potential understatement of fixed assets.
B)
B) the auditor is typically most concerned with the overstatement of assets.
C) both a and
D) none of the above.

Question 54

When performing substantive procedures, the key objective is to determine whether:

A) there are immaterial misstatements within the balance being investigated.
B) the client's internal controls are operating effectively.
C) there are material misstatements within the balance being investigated.
D) none of the above.

Question 55

The valuation and allocation assertion relates to which of the following audit objectives?

A) All accounts payable on the balance sheet are real accounts payable for goods received or services performed.
B) All accounts payable owed by the entity at year-end are included on the balance sheet.
C) Accounts payable are stated at the amounts owed at year-end.
D) Accounts payable are properly classified, described and disclosed in the financial statements.

Question 56

Auditors usually test for the existence of property, plant and equipment by:

A) physically sighting the assets on the fixed assets register in the first year the client is audited.
B) vouching to supporting documentation.
C) re-performing depreciation calculations.
D) performing analytical review procedures.

Question 57

Moore Packaging is a manufacturer of corrugated products servicing all of Ontario. It's annual audit was in progress and the senior on the audit, Ray Radcliffe, was reviewing procedures over accounts receivable, inventory, property plant and equipment and accounts payable.
The accounts receivable accounts were deemed to be key when it came to possible material misstatements. The preliminary work on test of controls had indicated higher than usual exceptions of shipments of goods to customers without the appropriate credit checks being performed.
The property plant and equipment account had not changed significantly over the last 5 years, and it was anticipated that there would be little extra effort required to audit this account. Last year's balance - net of amortization was $7,600,000. The preliminary amount - net of amortization for this year was $7,700,000.
Total accounts payable was $2,200.000. The accounts payable amounts seemed to be all zero balances or relatively low balances. The exceptions consisted of two major suppliers to whom the company owed $1,800,000.
The inventory taking was missed this year at two of the three locations as local flooding had prevented the auditors from attending the annual inventory. The company keeps perpetual records for 90% of its inventory values. Year-end inventory balances tend to be in the $10,000,000-$12,000,000 range.
Materiality has been set at $2,000,000 for the Moore Packaging audit.
Required:
a) What are the key assertions that Ray Radcliffe will need to focus on for accounts receivable?
b) What work will Ray Radcliffe's audit team be doing to substantiate the accounts receivable valuation at Moore Packaging?
c) What procedures can be taken for the substantive tests of inventory, given the fact the company keeps perpetual records.
d) What work will the auditors have to perform to substantiate the inventory valuation at Moore Packaging?
e) What are the two key assertions for payables? Discuss their importance and the techniques used to ensure they are fulfilled.
f) Where should the auditors focus their confirmation procedures for accounts payable at Moore Packaging?
g) What substantive procedures will Ray Radcliffe's team have to consider for Property Plant & Equipment accounts?

Question 58

The typical procedures performed to verify that the client has not omitted any amounts from the payables balance include:

A) vouching recorded payables to supporting documentation.
B) performing analytical review procedures.
C) performing confirmations of payables accounts.
D) subsequent payments testing.

Question 59

What are the principal objectives in auditing trade receivables?

Question 60

Discuss the specific issues that auditors should consider when designing substantive procedures.