Question 1

The tests of details of balances procedure which requires the auditor to review transactions near the balance sheet date for the proper period satisfies the audit objective of:
A) existence.
B) cutoff.
C) classification.
D) completeness.

Accepted Answer

The tests of details of balances procedure which requires the auditor to review transactions near the balance sheet date for the proper period satisfies the audit objective of cutoff. Cutoff refers to the proper recording of transactions in the correct accounting period. By reviewing transactions near the balance sheet date, the auditor can ensure that transactions are recorded in the correct period and therefore satisfies the cutoff objective. This procedure, however, does not directly satisfy the other objectives of existence, classification, or completeness.

Question 2

In the audit of loans payable, it is common to include tests of principal and interest payments as a part of the audit of the acquisitions and payment cycle because the payments are in the cash payments journal that is being sampled. It is also normal to test these transactions as part of the capital acquisitions and repayment cycle because:
A) due to the infrequency of these transactions, in many cases no transactions involving loans payable are included in the sample tests of acquisitions and payments.
B) replicating the evidence will provide the auditor with a higher level of assurance.
C) it is not unusual for the auditor to duplicate a process, thereby, gathering a larger quantity of evidence.
D) the tests done in the acquisitions and payments cycle will look only at the cash credit side so the tests done in the capital acquisitions and repayment cycle will look at the debit side of the transaction.

Accepted Answer

Due to the infrequency of loan transactions, they may not be included in the sample tests of acquisitions and payments, necessitating separate testing in the capital acquisitions and repayment cycle.

Question 3

The audit procedure which requires the auditor to record the last cheque number used on the last day of the year and subsequently trace to the outstanding cheques and the cash payments journal is performed to satisfy the audit objective of:
A) detail tie- in.
B) completeness.
C) existence.
D) cutoff.

Accepted Answer

This procedure is performed to ensure that transactions are recorded in the correct accounting period, which relates to the cutoff objective.

Question 4

Client business risk relating to cash may arise from:
A) handling of funds held in trust for others.
B) inappropriate cash management policies.
C) cash being more susceptible to theft than other types of investments.
D) all of the above

Accepted Answer

All three options listed (handling of funds held in trust, inappropriate cash management policies, and susceptibility to theft) can create business risk for a client related to their cash. Therefore, the correct answer is D.

Question 5

A major consideration in the audit of the general cash balance is the possibility of fraud. The auditor must extend his or her procedures in the audit of year- end cash to determine the possibility of a material fraud when there are:
A) large cash balances at the end of the year.
B) large cash receipts and disbursements during the year.
C) inadequate internal controls.
D) no imprest accounts used for payroll.

Accepted Answer

Inadequate internal controls increase the risk of fraud, so auditors must extend their procedures to assess the possibility of material fraud when internal controls are lacking.

Question 6

The starting point for the verification of the balance in the general bank account is to obtain:
A) client's cash account from the general ledger.
B) a bank reconciliation from the client.
C) the client's June bank statement and reconcile it.
D) a cutoff bank statement directly from the bank.

Accepted Answer

The starting point for verifying the balance in the general bank account is to obtain a bank reconciliation from the client, as it provides a summary of the differences between the bank statement and the company's records.

Question 7

If the client fails to record disposals of property, plant and equipment, both the original cost of the asset account and the net book value will be incorrect.
A) The original cost will be overstated indefinitely, and the net book value will be overstated until the asset is fully depreciated.
B) The original cost will be overstated indefinitely, and the net book value will be understated until the asset is fully depreciated.
C) Both will be overstated indefinitely.
D) The original cost will be overstated indefinitely, and the net book value will be understated indefinitely.

Accepted Answer

If a client fails to record disposals of property, plant, and equipment, the original cost of the asset will remain on the books, leading to an overstatement. The net book value will also be overstated until the asset is fully depreciated, after which it would correctly drop to zero if no disposal is recorded.

Question 8

Information typically confirmed on liabilities to the bank includes:
A) interest rate.
B) amount of loan.
C) the existence of security.
D) all of the above

Accepted Answer

All of the above options are typically confirmed on liabilities to the bank. Interest rate, amount of loan, and the existence of security are all crucial information for the bank to know when evaluating a liability.

Question 9

Which of the following transaction- related objectives is NOT important when auditing dividends?
A) Existence
B) Accuracy
C) Completeness
D) Posting and summarisation

Accepted Answer

Posting and summarisation is not a significant transaction-related objective when auditing dividends because dividends are typically recorded in one account and do not require extensive summarisation or posting to different accounts. The other three objectives (existence, accuracy, and completeness) are important in ensuring that dividends are properly recorded and disclosed in the financial statements.

Question 10

A major consideration in verifying the ending balance in permanent assets is the possibility of existing legal encumbrances. Tests to identify possible legal encumbrances would satisfy the audit objective for:
A) existence.
B) classification.
C) detail tie- in.
D) disclosure.

Accepted Answer

The audit objective for verifying the ending balance in permanent assets with regards to possible legal encumbrances is related to disclosure, as the existence of such encumbrances needs to be properly disclosed in the financial statements. Therefore, tests to identify possible legal encumbrances would satisfy the disclosure audit objective.

Question 11

Because cash is the most desirable asset for people to steal, it has a higher:
A) control risk.
B) detection risk.
C) inherent risk.
D) all of the above

Accepted Answer

Inherent risk refers to the risk that exists in an organization or business process before any internal control or corrective actions are taken, and the inherent risk associated with cash is higher due to its liquidity and desirability for theft. Control risk and detection risk, on the other hand, can be mitigated through the implementation of internal controls and detection procedures.

Question 12

The general cash account is considered significant in almost all audits:
A) where either the beginning or ending balance is material.
B) even when the ending balance is immaterial.
C) except those of not- for- profit organisations.
D) where the ending balance is material.

Accepted Answer

The general cash account is significant in almost all audits because cash transactions occur frequently and can affect many areas of the financial statements, even if the ending balance is immaterial.

Question 13

The test of details of balances procedure for PPE which requires 'examination of vendor's invoices and land titles and deeds' is done to satisfy the audit objective of:
A) rights.
B) classification.
C) accuracy.
D) existence.

Accepted Answer

The examination of vendor's invoices and land titles and deeds is done to verify the ownership rights of the company over the PPE. Therefore, the audit objective being satisfied by this procedure is the objective of rights.

Question 14

Usually dividends are audited:
A) on a 100% basis.
B) using block sampling.
C) using variables sampling.
D) using attributes sampling.

Accepted Answer

Dividends are typically audited on a 100% basis to ensure accuracy and completeness. This means that auditors will review every dividend transaction to verify that it was properly authorized, calculated, recorded, and disbursed. While other sampling methods could be used, such as variables sampling or attributes sampling, these methods may not provide enough assurance for such a critical area of the financial statements. Therefore, auditors typically opt for a 100% audit approach to dividends.

Question 15

When auditing the balance of the general cash account, which of the following is NOT one of the most important objectives?
A) Completeness
B) Accuracy
C) Classification
D) Existence

Accepted Answer

While classification is important in many aspects of financial reporting, it is not a primary objective when auditing the balance of the general cash account. The main objectives are to ensure that the cash balance actually exists, is accurate, and includes all transactions that should be recorded (completeness).

Question 16

The emphasis in auditing property, plant and equipment is on the verification of:
A) current period acquisitions and retirements.
B) the balance in the account after the current year's activities are considered (ending balance).
C) the balance carried forward in the account from the previous period.
D) all of the above

Accepted Answer

The answer of The emphasis in auditing property, plant and...

Question 17

Information typically confirmed on liabilities to the bank includes:
A) amount of loan.
B) the loan due date.
C) date of the loan.
D) all of the above

Accepted Answer

All of the above information is typically confirmed on liabilities to the bank. The amount of loan, loan due date, and date of the loan are all important details that need to be verified by the bank to ensure accurate record-keeping and timely repayment.

Question 18

Which of the following types of owners' equity transactions would NOT require authorisation by the board of directors?
A) Share issues
B) Share redemptions
C) Declaration of dividends
D) All of the above would require authorisation.

Accepted Answer

All of the listed transactions typically require board approval as they involve significant changes to the company's capital structure or distribution of profits.

Question 19

Cash account is primarily affected by which transactions in the capital acquisition and repayment cycle?
A) Issue of shares
B) Payment of dividends
C) Both A and B
D) None of the above

Accepted Answer

Cash account is primarily affected by both issue of shares and payment of dividends in the capital acquisition and repayment cycle. Issue of shares results in inflow of cash into the company's account while payment of dividends results in outflow of cash from the company's account. Both these transactions impact the cash balance in the company's account and therefore affect the cash account in the capital acquisition and repayment cycle.

Question 20

A set of records for each piece of equipment that includes descriptive information, date of acquisition, original cost, current year depreciation and accumulated depreciation is:
A) the depreciation schedule.
B) the acquisitions journal.
C) the fixed asset master file.
D) the file of purchase requisitions.

Accepted Answer

The fixed asset master file is a database that contains detailed information about each fixed asset, including the date of acquisition, original cost, current year depreciation, and accumulated depreciation. This information is used to prepare the depreciation schedule, but the schedule itself is not a set of records for each piece of equipment. The acquisitions journal and file of purchase requisitions are both used to document the acquisition of new assets, but they do not include information about depreciation or provide a complete record of each asset. Therefore, C is the best choice.

Quiz 16: Audit of Transaction Cycles and Financial Statement Balances II

The tests of details of balances procedure which requires the auditor to review transactions near the balance sheet date for the proper period satisfies the audit objective of:

The audit procedure which requires the auditor to record the last cheque number used on the last day of the year and subsequently trace to the outstanding cheques and the cash payments journal is performed to satisfy the audit objective of:

Client business risk relating to cash may arise from:

A major consideration in the audit of the general cash balance is the possibility of fraud. The auditor must extend his or her procedures in the audit of year- end cash to determine the possibility of a material fraud when there are:

The starting point for the verification of the balance in the general bank account is to obtain:

If the client fails to record disposals of property, plant and equipment, both the original cost of the asset account and the net book value will be incorrect.

Information typically confirmed on liabilities to the bank includes:

Which of the following transaction- related objectives is NOT important when auditing dividends?

A major consideration in verifying the ending balance in permanent assets is the possibility of existing legal encumbrances. Tests to identify possible legal encumbrances would satisfy the audit objective for:

Because cash is the most desirable asset for people to steal, it has a higher:

The general cash account is considered significant in almost all audits:

The test of details of balances procedure for PPE which requires 'examination of vendor's invoices and land titles and deeds' is done to satisfy the audit objective of:

Usually dividends are audited:

When auditing the balance of the general cash account, which of the following is NOT one of the most important objectives?

The emphasis in auditing property, plant and equipment is on the verification of:

Information typically confirmed on liabilities to the bank includes:

Which of the following types of owners' equity transactions would NOT require authorisation by the board of directors?

Cash account is primarily affected by which transactions in the capital acquisition and repayment cycle?

A set of records for each piece of equipment that includes descriptive information, date of acquisition, original cost, current year depreciation and accumulated depreciation is: