Question 1

Original accounting data comprises:
A)the basic data related to entity transactions.
B)information contained in the financial report.
C)depreciation and amortisation of the entity's assets.
D)all entries made in an entity's general ledger.

Accepted Answer

Original accounting data comprises the basic data related to entity transactions, such as invoices, receipts, bank statements, and other source documents. It is the starting point for accounting records and financial reports. The other options, such as information contained in the financial report or depreciation and amortization, derive from these original data.

Question 2

Tracing is used primarily to test which of the following assertions about classes of transactions?
A)Occurrence.
B)Completeness.
C)Cut-off.
D)Classification.

Accepted Answer

Tracing is primarily used to test the completeness assertion, ensuring that all transactions that should have been recorded are indeed recorded.

Question 3

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

Accepted Answer

When a company is under pressure to meet earnings targets, there is a risk that management may attempt to manipulate reported expenses. This increases the risk of incomplete recording of purchases, which means that some purchases may be left out of the financial statements. Therefore, completeness assertion for purchases is most at risk in this scenario.

Question 4

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 would typically work from the accounting records (where the asset is expected to be recorded) to the supporting evidence (where the asset can be physically verified). The objective is to determine whether the asset actually exists and is owned by the company, which can be done by verifying the information in the accounting records through physical observation and other means. Working from the financial report to potentially unrecorded items or vice versa may not necessarily help in testing the existence of the asset.

Question 5

Which of the following items is an example of professional scepticism?
A)Determining a low level of materiality.
B)Determining a high level of risk.
C)Being alert to conditions that may indicate risks of fraud.
D)All of the answers given are correct.

Accepted Answer

Professional skepticism involves being alert to conditions that may indicate possible misstatement due to error or fraud, including risks of fraud.

Question 6

Which of the following audit objectives relates primarily to the financial report assertion of 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 and obsolete items included in inventories are properly identified.
D)Inventories exclude items billed to customers or owned by others.

Accepted Answer

The objective of ensuring that slow-moving and obsolete items included in inventories are properly identified directly relates to the valuation and allocation assertion. This is because it affects the accuracy of inventory valuation by ensuring that inventory is not overvalued due to the inclusion of items that may not be sellable at their recorded cost.

Question 7

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

This type of review is specifically focused on ensuring that all relevant information, including the bank's security over the client's assets, has been accurately disclosed in the financial report. As such, the assertion being achieved is presentation and disclosure-completeness.

Question 8

Your audit client is a retailer that sells some of its own merchandise and a large proportion of merchandise held on consignment from suppliers.Which account balance assertion for inventory would this cause to be most at risk?
A)Existence.
B)Completeness.
C)Rights and obligations.
D)Valuation and allocation.

Accepted Answer

Rights and obligations are most at risk because the retailer does not own the consigned goods, thus they do not have the same rights as they do to the merchandise they own. This assertion addresses whether the entity has rights to the inventory it reports, which is crucial when goods are held on consignment.

Question 9

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 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 that relates primarily to the financial report assertion of rights and obligations is the one that ensures that inventories exclude items that are billed to customers or owned by others. This is because the assertion of rights and obligations deals with whether the assets and liabilities reported in the financial statements are properly owned or owed by the company. By ensuring that only items that are owned by the company are included in inventories, the auditor is fulfilling this objective. The other objectives listed in the question relate to different financial report assertions.

Question 10

Vouching is used primarily to test which of the following assertions about classes of transaction?
A)Occurrence.
B)Completeness.
C)Authorisation.
D)Classification.

Accepted Answer

Vouching involves reviewing individual transactions and supporting documents to test whether they match with the accounting records. This is primarily done to test the occurrence of transactions, i.e., whether the recorded transactions actually happened and are verifiable. Vouching is not used to test completeness, authorization, or classification of transactions.

Question 11

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 other options (B, C, and D) are valid financial report assertions.

Question 12

This is your first audit of Storm 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 most at risk when auditing accounts payable due to the lack of receiving reports and a policy for recording purchases, as well as the numerous adjusting entries. This raises concerns about whether all liabilities have been recorded, including any potential unrecorded liabilities. The existence assertion deals with whether the accounts payable actually exist and relate to the entity, which is not necessarily at risk in this scenario. The valuation and allocation assertion pertains to the accuracy of amounts assigned to accounts, which may be affected by the lack of policies, but is not the primary concern. The rights and obligations assertion deals with whether the entity has legal or beneficial ownership of the accounts payable, which is also not necessarily at risk in this scenario.

Question 13

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 14

As part of accounts payable testing, an auditor reviews cash payments made post balance date.This is done mainly to gain evidence about which assertion?
A)Valuation and allocation.
B)Rights and obligations.
C)Completeness.
D)Existence.

Accepted Answer

Reviewing cash payments made post balance date helps the auditor ensure that all liabilities that existed at the balance date are recorded, which relates to the completeness assertion. This process helps in verifying that all obligations of the company as of the balance sheet date are accounted for in the financial statements.

Question 15

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

Accepted Answer

The audit assertion that relates to ensuring that all recorded sales are valid is occurrence. This assertion focuses on whether the transactions recorded in the financial statements actually occurred and relates to the assets, liabilities, revenues, and expenses of the entity. In the case of sales, this assertion is concerned with whether the recorded sales actually took place and whether the revenue recognized from those sales is accurate.

Question 16

You are concerned about whether all sales have occurred.The procedure that will be most effective in verifying this assertion is:
A)selecting a sample of invoices and vouching them to delivery dockets.
B)selecting a sample of customers' orders and tracing them to delivery dockets.
C)checking the sequence of delivery dockets.
D)selecting a sample of delivery dockets and tracing them to invoices.

Accepted Answer

The answer of You are concerned about whether all sales...

Question 17

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 18

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

Tracing inventory items from the warehouse to the final stock sheets ensures that all inventory items are recorded, addressing the completeness assertion.

Question 19

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 objective of presentation and disclosure-classification and understandability focuses on ensuring that financial statements are properly organized, classified and presented in a clear, understandable and informative manner. Option A specifically addresses the presentation of inventories in the statement of financial position, making it the most relevant objective. Options B, C and D relate to other financial statement assertions such as completeness, valuation and rights and obligations.

Question 20

Which of the following tests would involve the exercising of professional judgment?
A)Assessing the appropriateness of the estimate of the provision for doubtful debts.
B)Obtaining a bank confirmation to support the cash at bank figure.
C)Checking the calculations on a sales invoice.
D)All of the answers given are correct.

Accepted Answer

Assessing the appropriateness of the estimate of the provision for doubtful debts requires professional judgment as it involves analyzing the company's historical data, market trends, and economic conditions. The auditor needs to exercise their judgment to decide whether the estimate is reasonable or not. Obtaining a bank confirmation and checking calculations on a sales invoice are more routine tasks that may not involve as much professional judgment.

Quiz 4: Overview of Elements of the Financial Report Audit Process

Original accounting data comprises:

Tracing is used primarily to test which of the following assertions about classes of transactions?

Your audit client is under intense pressure to meet an earnings target.Which transaction assertion for purchases is most at risk?

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

Which of the following items is an example of professional scepticism?

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

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:

Your audit client is a retailer that sells some of its own merchandise and a large proportion of merchandise held on consignment from suppliers.Which account balance assertion for inventory would this cause to be most at risk?

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

Vouching is used primarily to test which of the following assertions about classes of transaction?

Which of the following is not a financial report assertion?

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

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

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

You are concerned about whether all sales have occurred.The procedure that will be most effective in verifying this assertion is:

Who is responsible for the preparation of the financial report?

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 of presentation and disclosure-classification and understandability?

Which of the following tests would involve the exercising of professional judgment?