Deck 11: Substantive Testing and Income Statement Accounts

Question 1

Occurrence is not typically a significant assertion as the primary objective in testing for
occurrence is to ensure that costs and expenses are not overstated.

Answer 1

True

Question 2

Which type of substantive procedure do auditors ordinarily use when testing income statement accounts?

A) confirmations
B) recalculations
C) analytical procedures
D) observations

Answer 2

C

Question 3

Substantive procedures are also known as:

A) tests of details.
B) compliance tests.
C) tests of subsequent events.
D) tests of controls.

Answer 3

A

Question 4

The auditor uses their professional judgment, knowledge of the client and risk assessment
for each significant account to determine the timing and extent of testing.

Question 5

The completeness assertion relates to the audit objective that sales and other revenues are
stated in the profit and loss at the appropriate amounts.

Question 6

Testing the account classification of credit memos tests the accuracy assertion for the sales
returns process.

Question 7

The classification assertion relates to ensuring that all costs and expenses in the income
statement are properly supported as charges against the entity.

Question 8

An example of a substantive test always performed for costs and expenses is obtaining
detailed analysis of selected accounts and tracing the details to the source data.

Question 9

Control risk is:

A) the susceptibility of an assertion to a misstatement that could be material assuming there are no related controls.
B) the risk that a client's system of internal controls will not prevent or detect a material misstatement.
C) the risk that the auditor's testing procedures will not be effective in detecting a material misstatement.\
D) the risk that fraud has occurred.

Question 10

The key audit assertions for cost of sales and expenses are rights and obligations and
occurrence

Question 11

Analytical procedures involve:

A) the investigation of identified fluctuations and relationships that are inconsistent with other information.
B) evaluations of financial information made by a study of plausible relationships among financial and non-financial data.
C) both a and b.
D) none of the above.

Question 12

Sales revenue is typically not significant due to its size.

Question 13

Substantive procedures are designed to detect material misstatements at the assertion level.

Question 14

Purchases testing is performed most efficiently by the use of controls testing.

Question 15

When inherent risk and control risk are assessed to be low, the level of substantive
procedures required to address any remaining detection risk is limited.

Question 16

The key objective when performing substantive testing is determining whether the client's
internal controls are effective at preventing and detecting material misstatements.

Question 17

Testing the balance sheet substantively will provide reasonable assurance on the income
statement accounts.

Question 18

Testing the pricing and mathematical accuracy of sales invoices is an example of a
substantive test of transactions in the sales process.

Question 19

Control risk is the risk that an auditor expresses an inappropriate audit opinion when a
financial statement is materially misstated.

Question 20

The risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated is known as:

A) engagement risk.
B) audit risk.
C) client business risk.
D) detection risk.

Question 21

When the inherent risk and control risk assessment is high:

A) there are no controls tested or relied upon.
B) minimal substantive tests are performed.
C) the amount of substantive testing is significant.
D) both a and c.

Question 22

Which of the following are examples of substantive procedures in auditing revenue that are always performed?

A) testing the cut-off of revenues
B) comparing the monthly income statements to budget and investigating any unexpected fluctuations
C) both a and b
D) none of the above

Question 23

The accuracy of cost of sales and expenses is verified by:

A) vouching recorded amounts to supporting documentation.
B) sending confirmation requests to the client's creditors.
C) tracing supporting documentation to the accounting records.
D) all of the above.

Question 24

Substantive tests of costs and expenses that are always performed include:

A) reviewing interim financial statements and investigating fluctuations or the absence of expected changes.
B) comparing the current year's expenses to the prior year's actual and the current year's budgeted amounts.
C) obtaining detailed analysis of selected costs and expense accounts and tracing the details to the source data.
D) all of the above.

Question 25

The key audit assertions when auditing cost of sales and expenses include:

A) cut-off.
B) completeness.
C) accuracy.
D) all of the above.

Question 26

The two important types of transactions that impact on the costs and expenses balances are:

A) interest and dividends.
B) sales and interest.
C) purchases and payroll.
D) depreciation and purchases.

Question 27

Comparing supplier/creditor invoices to the initial record of entry relates to which assertion?

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

Question 28

Which of the following substantive tests of payroll transactions does not relate to the accuracy assertion?

A) reconciling the accrued payroll balance to the amount in the payroll ledger for the corresponding balance
B) testing the postings of totals in the payroll ledger to the general ledger
C) testing the extensions of wage rates times the hours worked
D) comparing the hours paid with the record of hours worked

Question 29

A simple way of testing which period a sale should be recorded in is to:

A) trace the sale through to the accounting records.
B) observe the account receivable clerk record the sale.
C) vouch the sale to the delivery documentation for the sale of goods.
D) none of the above.

Question 30

The audit objective that costs and expenses are stated in the income statement at the appropriate amounts relates to which assertion?

A) completeness
B) occurrence
C) classification
D) accuracy

Question 31

Bad debts expense is ordinarily tested as part of the testing of the valuation of:

A) trade payables.
B) trade receivables.
C) cash at bank.
D) inventory.

Question 32

Which assertion is generally not significant for sales revenue?

A) completeness
B) accuracy
C) occurrence
D) cut-off

Question 33

Testing the postings of the sales ledger to the general ledger and the trade receivables sub- ledger relates to which assertion?

A) occurrence
B) completeness
C) accuracy
D) none of the above

Question 34

The level of substantive procedures will be limited when:

A) the inherent and control risk assessment is low.
B) there are no controls tested or relied upon.
C) the inherent and control risk assessment is high.
D) the client requests the auditor to perform limited procedures.

Question 35

The occurrence assertion for sales relates to which of the following audit objectives?

A) Sales and other revenues are properly classified, described and disclosed in the financial statements.
B) Sales and other revenues are stated in the profit and loss at the appropriate amounts.
C) All sales and other revenues that accrued to the entity during the period are included in the income statement.
D) All sales included in the income statement represent the exchange of goods or services with customers during the period.

Question 36

Sales revenue is typically significant due to:

A) the overall inherent risk associated with revenue.
B) the volume of transactions that flow through the account.
C) its size.
D) all of the above.

Question 37

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

A) qualify the audit report.
B) report the client to CPA Canada.
C) understand why the exception or error has arisen.
D) none of the above.
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Question 38

Which of the following assertions relates to the audit objective that all sales and other revenues that accrued to the entity during the period are included in the income statement?

A) classification
B) occurrence
C) completeness
D) accuracy

Question 39

The three audit assertions that are important to ensure the auditor has gained sufficient and appropriate audit evidence for sales revenue are:

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

Question 40

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

A) leveraging off internal audit.
B) performing general audit procedures prior to year-end.
C) performing procedures on activities in the period to date.
D) all of the above.

Question 41

Explain the principal objectives in auditing costs and expenses.

Question 42

Explain the various components of risk in the audit risk model and the interrelationship between the various components.

Question 43

Explain the key objective of substantive testing and the responses from auditors when errors or exceptions are identified during testing.

Question 44

Discuss the importance of the completeness assertion as it relates to auditing sales revenue.

Question 45

What are the three audit assertions that are important to ensuring that the auditor has gained sufficient and appropriate audit evidence for sales revenue?