Deck 11: Substantive Testing and Income Statement Accounts

Question 1

Substantive procedures are also known as:

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

Answer 1

B

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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.

Question 8

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

A)Analytical procedures
B)Confirmations
C)recalculations
D)Observations

Question 9

Testing the balance sheet substantively will not provide reasonable assurance on the income statement accounts.

Question 10

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

Question 11

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

Question 12

Analytical procedures involve:

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

Question 13

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

Question 14

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 15

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

Question 16

The risk that an auditor expresses an inappropriate audit opinion when a financial report is materially misstated is known as:

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

Question 17

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

Question 18

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 19

Sales revenue is typically not significant due to its size.

Question 20

When the inherent risk and control risk assessment is high:

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

Question 21

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

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

Question 22

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

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

Question 23

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

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

Question 24

Sales revenue is typically significant due to:

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

Question 25

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

A)Comparing the monthly income statements to budget and investigating any unexpected fluctuations
B)Testing the cut-off of revenues
C)Both a and b
D)None of the above

Question 26

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

A)Classification
B)Completeness
C)Occurrence
D)Accuracy

Question 27

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

Question 28

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

A)Accuracy
B)Occurrence
C)Completeness
D)None of the above

Question 29

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

A)Cut-off
B)Completeness
C)Accuracy
D)Existence

Question 30

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

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

Question 31

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

Question 32

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

A)understand why the exception or error has arisen.
B)qualify the audit report.
C)report the client to ASIC.
D)None of the above

Question 33

The level of substantive procedures will be limited when:

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

Question 34

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

Question 35

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

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

Question 36

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

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

Question 37

Control risk is:

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

Question 38

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

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

Question 39

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

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

Question 40

Explain the principal objectives in auditing costs and expenses.

Question 41

Explain the nature of and motivations for various approaches for companies to manipulate their profits through the use of expenses.

Question 42

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

Question 43

Identify situations where the understatement of sales can be a risk for certain clients and how auditors should react to such risk.

Question 44

Explain the nature of the accounting fraud that was committed by the Sunbeam Corporation in the 1990s.What procedures can auditors use to detect such fraud?