Question 1

The audit objective to determine that loans payable in the schedule exist is verified by the tests of balances procedure to:

Accepted Answer

Examining the duplicate copy of loans for authorisation ensures that the loans payable in the schedule are legitimate and exist. Recalculating interest expense, footing the loans payable list, and examining the balance sheet for proper disclosure of noncurrent portions do not provide direct evidence that loans payable in the schedule exist.

Question 2

The test of details of balance procedure which requires the auditor to foot the loans payable list for loans payable and accrued interest satisfies which audit objective?

Accepted Answer

The procedure of foot the loans payable list for loans payable and accrued interest is used to ensure that the ending balance of loans payable and accrued interest included in the financial statements agrees with the total of the detailed list of individual loan balances. This procedure helps to satisfy the audit objective of detail tie-in which requires that the ledger balances are reconciled with the related master file or supporting documentation.

Question 3

The amount of time spent verifying owners' equity is frequently minimal for private companies because:

Accepted Answer

Private companies typically have fewer owners, and thus fewer transactions related to owners' equity. The auditor may focus their attention on accounts that have more impact on outsiders, such as liabilities. Furthermore, auditing the capital section may not be necessary for small or closely-held companies.

Question 4

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

Accepted Answer

All listed transactions typically require board authorization as they significantly affect the company's financial structure and shareholder equity.

Question 5

The auditor recalculates approximate interest expense, using overall monthly instalments payable and average interest rates, to test for:

Accepted Answer

Recalculating interest expense helps in identifying both omitted loans payable (by revealing discrepancies in expected interest payments) and misstatements in the recorded interest expense, ensuring the accuracy of financial statements.

Question 6

Usually dividends are audited:

Accepted Answer

Dividends are typically audited on a 100% basis, as dividends are a significant component of a company's financial statements and errors or fraud in dividend payments can have a material impact on financial performance. Auditing on a 100% basis ensures a high level of assurance that dividend payments are accurate and reliable. Using sampling methods such as variables sampling or attributes sampling may not be appropriate for dividend audits. Block sampling may be used in some cases, but it would not be the best choice for dividend audits due to the importance of accuracy in dividend payments.

Question 7

Analytical procedures are essential for borrowings because:

Accepted Answer

Analytical procedures can help auditors assess the reasonableness of interest expense and accrued interest, potentially reducing the need for detailed testing if the results align with expectations.

Question 8

The audit objective to determine that existing loans payable are included in the loans payable schedule (completeness)is accomplished by the following test of balances procedure:

Accepted Answer

Reviewing the bank reconciliation for new loans credited directly to the bank account by the bank helps ensure that all loans are recorded and included in the loans payable schedule, addressing the completeness assertion.

Question 9

To prevent the improper or incorrect issue of share certificates, it is common practice for publicly listed companies to engage:

Accepted Answer

Publicly listed companies engage independent share registrars to ensure that share certificates are properly and correctly issued, preventing any potential fraud or errors. The share registrar maintains a record of all shareholders, records changes in ownership of shares, and verifies the validity of share transfers. This independent oversight helps to maintain the integrity of the share issuance process.

Question 10

Which one of the general tests of details of balance objectives is NOT considered vital in the audit of borrowings?

Accepted Answer

Realisable value is not considered a vital test in the audit of borrowings. The other three tests - existence, completeness, and valuation - are generally regarded as important in the audit of borrowings to ensure that the amounts disclosed in the financial statements are accurate, complete, and supported by appropriate evidence. Realisable value is more relevant to the audit of assets, such as inventory or property, plant, and equipment, where the auditor may need to assess whether these assets are recoverable or have been impaired.

Question 11

To prevent the payment of a larger amount of dividends than was authorised, the corporation should use:

Accepted Answer

A separate imprest dividend account ensures that only the authorized amount is available for dividend payments, preventing overpayment.

Question 12

Which of the following concerns in auditing issued and paid-up capital involves tests of balances?

Accepted Answer

The answer of Which of the following concerns in auditing...

Question 13

The audit objective which requires the auditor to determine that loans payable on the loans payable schedule are properly classified can be tested with the following procedure:

Accepted Answer

The classification of loans payable involves determining whether they are with related parties, which can be assessed by reviewing the notes for related party transactions.

Question 14

Examples of cash equivalents include time deposits, certificates of deposit, and marketable securities.

Accepted Answer

The answer of Examples of cash equivalents include time deposits,...

Question 15

Which of the following is a balance-related audit objective for owners' equity?

Accepted Answer

The answer of Which of the following is a balance-related...

Question 16

The general cash account is considered insignificant in the audit when the ending balance is immaterial.

Accepted Answer

The general cash account is considered significant in the audit process regardless of the ending balance because it is highly liquid and susceptible to misappropriation or fraud, making it a key area of focus for auditors to ensure accurate financial reporting.

Question 17

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:

Accepted Answer

Even though loans payable are included in the acquisitions and payment cycle, due to their infrequency, they may not always be present in the sample tests. Therefore, it is necessary to test these transactions separately as part of the capital acquisitions and repayment cycle. This is because this cycle will focus on significant loan transactions in detail, such as analyzing the principal and interest payments.

Question 18

The record of the issuance and transfer of shares for the life of the corporation is maintained in the:

Accepted Answer

The share register is the official record of the issuance and transfer of shares for the life of the corporation. It contains the names and addresses of all shareholders, the number and class of shares owned, and the dates of issuance and transfer. The shareholders' master file, schedule of shareholders, and corporate directory may contain similar information, but they are not the official record and may not be as comprehensive or up-to-date as the share register.

Question 19

The tests of details of balances procedure which requires the auditor to examine duplicate copies of loans for authorisation is an attempt to satisfy which audit objective?

Accepted Answer

The tests of details of balances procedure involves examining duplicate copies of loans for authorisation in order to ensure that the loans actually exist and have been authorised. Therefore, the objective being satisfied by this procedure is existence. The other objectives (accuracy, classification, completeness) are not directly addressed by this procedure.

Question 20

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

Accepted Answer

Posting and summarisation are not important objectives when auditing dividends because they are not accounting transactions that require posting or summarisation. The other objectives, accuracy, completeness, and existence, are important to ensure that all dividends have been properly recorded, are accurate, and actually exist or have been paid out.

Quiz 16: Audit of transaction cycles and financial statement balances II