Deck 10: Substantive Testing and Balance Sheet Accounts

Question 1

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

Answer 1

D

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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 5

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

Question 6

Testing the mathematical accuracy of the cash payment ledger relates to the existence assertion.

Question 7

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

Question 8

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

Question 9

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 10

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

Question 11

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 authorised

Question 12

Evaluating the adequacy of the allowance for doubtful debts account is an example of a substantive test of trade receivables that is always performed.

Question 13

Provisions can be easily audited by controls testing alone.

Question 14

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 15

When the assessment of inherent and control risk is low:

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

Question 16

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

Question 17

Existence of trade receivables is usually verified by:

A) examining copies of sales invoice 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 debts.

Question 18

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

Question 19

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 20

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

Question 21

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

A) Inventory is properly classified, described and disclosed in the financial report
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 report
D) All inventory owned by the entity at year-end is included on the balance sheet

Question 22

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 debts
D) None of the above

Question 23

Investments can be vouched to supporting external documentation such as:

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

Question 24

Identify and explain the key audit assertions relating to cash.

Question 25

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 26

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 27

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

A) All accounts payable on the balance sheet are real debts 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 report

Question 28

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

Question 29

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 30

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

Question 31

The collapse of Worldcom in 2002 caused commentators to question the company's financial reporting practices. Explain the major problems with the company's financial reporting that contributed to the company's collapse.

Question 32

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 33

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

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

Question 34

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 35

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 36

Observing the client's stocktake 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 stocktakes.
C) items belonging to the client are accurately counted and recorded.
D) All of the above

Question 37

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

A) Perform a search for unrecorded liabilities
B) Examine the client's bank reconciliations
C) Test the cut-off by inspecting the payments ledger and supporting documents to determine that transactions are recorded in the period
D) All of the above

Question 38

What are the principal objectives in auditing trade receivables?

Question 39

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

Question 40

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 ASIC.
D) perform additional substantive testing.

Question 41

Explain how auditors evaluate the results of substantive procedures and describe the procedures employed by auditors when the procedures identify errors or exceptions.

Question 42

Discuss why valuation and allocation is a key assertion for property, plant and equipment and explain how auditors verify the reliability of the valuations of such assets.