Question 1

This is your first audit of XYZ Ltd. During the initial planning you have discovered that the client lacks receiving reports and a policy as to the timing within which to record purchases. You have also observed that there are many adjusting entries to accounts payable, which is a material balance. The audit assertion most at risk when auditing accounts payable is:
A) existence.
B) valuation and allocation.
C) completeness.
D) rights and obligations.

Accepted Answer

The completeness assertion is the most at risk when auditing accounts payable because the lack of receiving reports and a policy for timing purchases could lead to unrecorded liabilities. Additionally, the high number of adjusting entries suggests that there may be errors or omissions in the accounts payable balance, which could impact the completeness assertion.

Question 2

Which of the following does NOT assist in the achievement of the audit assertion of existence in relation to an investment in listed shares?
A) A confirmation of shares held on the client's behalf.
B) A review of share prices quoted at the financial year-end.
C) A test of details of transactions of share purchases and sales during the year.
D) An analytical review of rate of return on investments.

Accepted Answer

B

Question 3

As part of accounts payable testing, an auditor reviews cash payments made post balance date. This is done mainly to gain evidence about the:
A) valuation and allocation assertion.
B) rights and obligations assertion.
C) completeness assertion.
D) existence assertion.

Accepted Answer

By reviewing cash payments made post balance date, the auditor is looking to ensure that all payments have been recorded correctly and that there are no material omissions or understatements. This relates to the completeness assertion, which states that all transactions and account balances that should have been recorded have been included in the financial statements.

Question 4

Who is responsible for the preparation of the financial report?
A) Auditor.
B) Management.
C) Both auditor and management.
D) None of the answers given are correct.

Accepted Answer

It is the responsibility of the management to prepare the financial report. However, the auditor is responsible for reviewing and providing an opinion on the financial report's accuracy and completeness.

Question 5

Auditors are most likely to use focused audit procedures to examine:
A) routine transactions.
B) low-risk assertions.
C) only the rights and obligations assertion.
D) high-risk assertions.

Accepted Answer

Focused audit procedures are typically used to examine high-risk assertions, as these are the areas where the risk of material misstatement is greatest. By focusing on these areas, auditors can ensure that their audit procedures are sufficient to uncover material misstatements and assess the risk of fraud or error.

Question 6

Which of the following procedures would an auditor most likely rely on to verify management's assertion of completeness?
A) Comparing a sample of shipping documents to related sales invoices.
B) Reviewing a standard bank confirmation.
C) Confirming a sample of recorded receivables by direct communication with the debtors.
D) Observing the client's distribution of payroll cheques.

Accepted Answer

Comparing a sample of shipping documents to related sales invoices helps ensure that all goods shipped are invoiced and recorded as sales, thus verifying the completeness of revenue recognition.

Question 7

Which audit assertion relates to ensuring that all recorded sales are valid?
A) Existence.
B) Completeness.
C) Occurrence.
D) Valuation and allocation.

Accepted Answer

The assertion of occurrence relates to ensuring that all recorded transactions actually occurred and pertain to the company. In the case of sales, this means ensuring that all recorded sales are valid and actually took place. Therefore, choice C is the best option.

Question 8

While undertaking the audit of the inventory balance, you use your audit software to extract, from the inventory master file, a report that shows those with a negative gross margin. The financial report assertion at which such
A report is aimed is:
A) existence.
B) valuation and allocation.
C) occurrence.
D) completeness.

Accepted Answer

The report aimed at identifying negative gross margin items is primarily aimed at the valuation and allocation assertion. This assertion is concerned with ensuring that inventory is appropriately valued and allocated in the financial statements. Negative gross margin items may indicate that inventory is being undervalued or that costs are being misallocated, which could affect the accuracy of the financial statements.

Question 9

Which of the following audit objectives does not relate primarily to the financial report assertion of completeness?
A) Inventories are reduced, when appropriate, to net realisable value.
B) Inventory quantities include all products, materials and supplies on hand.
C) Inventory listings are accurately compiled and the totals are properly included in the inventory accounts.
D) Inventory quantities include products and materials owned by the company that are in transit or stored at outside locations.

Accepted Answer

The objective of reducing inventories to net realizable value relates to the valuation assertion, not completeness.

Question 10

Which of the following audit objectives relates primarily to the financial report assertion of presentation and disclosure-classification and understandability?
A) Inventories are included in the statement of financial position as current assets.
B) Inventories exclude items billed to customers or owned by others.
C) Inventories are included in the statement of financial position at the lower of cost and net realisable value.
D) Inventory quantities include all products, materials and supplies owned by the company that are in transit.

Accepted Answer

The audit objective of presentation and disclosure-classification and understandability requires that financial information is presented in a clear and understandable manner. This objective relates to ensuring that inventories (and other items) are properly classified and disclosed in the financial statements. Option A specifically addresses the inclusion of inventories as current assets in the statement of financial position, which is a key aspect of presentation and disclosure. Options B, C, and D relate to other audit objectives such as existence, valuation, and completeness of inventory, but not specifically related to presentation and disclosure.

Question 11

Your audit client is under intense pressure to meet an earnings target. Which transaction assertion for purchases are you most concerned with?
A) Occurrence.
B) Completeness.
C) Classification.
D) Accuracy.

Accepted Answer

When a client is under pressure to meet earnings targets, there is a risk of incomplete reporting of purchases to inflate earnings. Therefore, the completeness assertion is the most concerning as it ensures that all purchases are recorded and included in the financial statements.

Question 12

Your audit client is a shop that sells some of its own merchandise and some merchandise held on consignment.Which account balance assertion for inventory would you be most concerned about verifying?
A) Existence.
B) Completeness.
C) Rights and obligations.
D) Valuation and allocation.

Accepted Answer

The rights and obligations assertion is crucial here because the auditor needs to verify that the inventory held on consignment is not recorded as the client's own inventory, ensuring that the client has the rights to the inventory they claim to own.

Question 13

Selecting a sample of quantities of inventory in the warehouse and tracing each item to the final stock sheets helps address which of the following assertions in respect of inventory?
A) Completeness.
B) Valuation and allocation.
C) Existence.
D) Rights and obligations.

Accepted Answer

The answer of Selecting a sample of quantities of inventory...

Question 14

Which of the following audit objectives relates primarily to the financial report assertion, rights and obligations?
A) Inventories are properly classified in the statement of financial position as current assets.
B) Inventories exclude items billed to customers or owned by others.
C) Slow-moving, excess, defective and obsolete items included in inventories are properly identified.
D) Inventory quantities include all products, materials and supplies owned by the company.

Accepted Answer

The audit objective related primarily to the financial report assertion, rights and obligations is to ensure that inventories exclude items billed to customers or owned by others. This is because this audit objective relates to the company's ownership of its inventory and whether the financial statements accurately reflect this ownership. Choices A, C and D relate to other financial report assertions such as completeness, valuation and accuracy.

Question 15

When reviewing a loan agreement to ascertain whether the bank's security over any of the client's assets has been included in the financial report, the audit assertion being achieved is:
A) valuation and allocation.
B) completeness.
C) presentation and disclosure- accuracy and valuation.
D) presentation and disclosure -completeness.

Accepted Answer

The audit assertion being achieved is presentation and disclosure - completeness, as the auditor is checking if all relevant information regarding the bank's security over the client's assets has been disclosed in the financial report.

Question 16

Which of the following audit objectives relates primarily to the financial report assertion, valuation and allocation?
A) Inventory listings are accurately compiled and the totals are properly included in the inventory accounts.
B) Inventory quantities include all products, materials and supplies owned by the company that are in transit.
C) Slow-moving, excess, defective and obsolete items included in inventories are properly identified.
D) Inventories exclude items billed to customers or owned by others.

Accepted Answer

Valuation and allocation relate to ensuring that inventory is recorded at the correct value, including adjustments for slow-moving, excess, defective, and obsolete items.

Question 17

Your audit client is under intense pressure to meet an earnings target. Which audit procedure are you most likely to use when auditing purchases?
A) Vouching.
B) Tracing.
C) Recalculation.
D) Confirmation.

Accepted Answer

The answer of Your audit client is under intense pressure...

Question 18

Which of the following is not a financial report assertion?
A) Inspection.
B) Rights and obligations.
C) Valuation and allocation.
D) Existence.

Accepted Answer

Inspection is not a financial report assertion. The four financial report assertions are: 1) Existence, which asserts that the reported balances and transactions of assets, liabilities, and equity interests actually exist and occurred; 2) Rights and Obligations, which asserts that the entity has the rights to its assets and the obligations for its liabilities; 3) Valuation and Allocation, which asserts that the balances and transactions are recorded at appropriate amounts and in the appropriate accounts; 4) Completeness, which asserts that all transactions and accounts that should have been recorded have been recorded.

Question 19

In testing the existence assertion for an asset, an auditor ordinarily works from the:
A) potentially unrecorded items to the financial report.
B) financial report to the potentially unrecorded items.
C) supporting evidence to the accounting records.
D) accounting records to the supporting evidence.

Accepted Answer

In testing the existence assertion for an asset, an auditor ordinarily works from the accounting records to the supporting evidence. This is because the auditor first needs to confirm that the asset is recorded in the accounting records, and then obtain supporting evidence such as physical observation, correspondence with third parties or documents to confirm that the asset actually exists.

Question 20

In the context of an audit of a financial report, substantive tests are audit procedures that:
A) may be eliminated under certain conditions.
B) are designed to discover significant subsequent events.
C) may be either tests of details of transactions, tests of details of account balances, tests of disclosure, or analytical procedures.
D) will increase proportionately with the auditor's reliance on internal control.

Accepted Answer

Substantive tests can be tests of details of transactions, tests of details of account balances, tests of disclosure, or analytical procedures. They are designed to obtain evidence about the completeness, accuracy, and validity of the financial statement balances and disclosures. They cannot be eliminated under any conditions, as they are a necessary part of the audit process. The auditor's reliance on internal control may affect the nature, timing, and extent of substantive tests, but it will not increase them proportionately. Subsequent events are considered through other audit procedures, such as inquiry and review of subsequent events.

Quiz 5: Overview of Elements of the Financial Report Audit Process

Which of the following does NOT assist in the achievement of the audit assertion of existence in relation to an investment in listed shares?

As part of accounts payable testing, an auditor reviews cash payments made post balance date. This is done mainly to gain evidence about the:

Who is responsible for the preparation of the financial report?

Auditors are most likely to use focused audit procedures to examine:

Which of the following procedures would an auditor most likely rely on to verify management's assertion of completeness?

Which audit assertion relates to ensuring that all recorded sales are valid?

While undertaking the audit of the inventory balance, you use your audit software to extract, from the inventory master file, a report that shows those with a negative gross margin. The financial report assertion at which such A report is aimed is:

Which of the following audit objectives does not relate primarily to the financial report assertion of completeness?

Which of the following audit objectives relates primarily to the financial report assertion of presentation and disclosure-classification and understandability?

Your audit client is under intense pressure to meet an earnings target. Which transaction assertion for purchases are you most concerned with?

Your audit client is a shop that sells some of its own merchandise and some merchandise held on consignment.Which account balance assertion for inventory would you be most concerned about verifying?

Selecting a sample of quantities of inventory in the warehouse and tracing each item to the final stock sheets helps address which of the following assertions in respect of inventory?

Which of the following audit objectives relates primarily to the financial report assertion, rights and obligations?

When reviewing a loan agreement to ascertain whether the bank's security over any of the client's assets has been included in the financial report, the audit assertion being achieved is:

Which of the following audit objectives relates primarily to the financial report assertion, valuation and allocation?

Your audit client is under intense pressure to meet an earnings target. Which audit procedure are you most likely to use when auditing purchases?

Which of the following is not a financial report assertion?

In testing the existence assertion for an asset, an auditor ordinarily works from the:

In the context of an audit of a financial report, substantive tests are audit procedures that: