Question 1

During the current financial year, the client company began dealing with certain distributors on a consignment basis (goods were delivered to the distributor but not deemed sold until the distributor had on-sold them).Which of the following audit procedures is least likely to bring this new fact to the auditor's attention?

Accepted Answer

Observation of physical inventory at the client company's premises is least likely to bring the new fact of dealing with distributors on a consignment basis to the auditor's attention, as this method primarily focuses on the physical count and condition of inventory, rather than the terms of sale or distribution arrangements.

Question 2

From the auditor's point of view, inventory counts are more acceptable prior to the year-end when:

Accepted Answer

Accurate perpetual inventory records allow the auditor to rely on the client's records and reduce the need for extensive physical inventory counts. In contrast, if control risk is high, increased testing would be required regardless of when the inventory counts occur. Consignment inventory and inventory turnover rates do not directly impact the timing or acceptability of inventory counts.

Question 3

An auditor, having accounted for a sequence of inventory tags, traces information on a representative number of tags to the physical inventory sheets.The purpose of this procedure is to obtain assurance that:

Accepted Answer

The purpose of tracing information from a representative number of tags to physical inventory sheets is to ensure that the inventory listed on the inventory sheets is complete. This procedure helps to ensure that all items that should be included in the inventory are actually listed on the inventory sheets. Option A is not the purpose of this procedure, as it is concerned with untagged inventory items, which are not relevant to the procedure. Option B is related to the valuation of the inventory, which is not the focus of this procedure. Option D is also not the purpose of this procedure, as it is concerned with the authenticity of the inventory items, which is not relevant to the procedure.

Question 4

An auditor would be most likely to learn of slow-moving inventory through:

Accepted Answer

Review of perpetual inventory records is the best option to learn about slow-moving inventory as it would provide information about the quantity and age of inventory, helping the auditor identify slow-moving inventory items. Reviewing the cash payments journal or enquiring sales personnel would not provide specific information about slow-moving inventory, and physical observation of inventory could be time-consuming and may not provide accurate information.

Question 5

When perpetual inventory records are maintained, and control risk for inventory is high, the auditor would probably:

Accepted Answer

The answer of When perpetual inventory records are maintained, and...

Question 6

In auditing accounts receivable the negative form of confirmation request most likely would be used when:

Accepted Answer

The negative form of confirmation request is typically used when the risk of material misstatement is low (i.e., when inherent and control risks are low), because it is less efficient than positive confirmation (where recipients are asked to respond whether they agree or disagree with the information). Negative confirmation only asks recipients to respond if they disagree with the information provided. This approach is considered sufficient when the likelihood of errors or fraud in accounts receivable is assessed to be low.

Question 7

When outside firms of non-accountants specialising in the taking of physical inventories are used to count, list, price and subsequently compute the total dollar amount of inventory on hand at the date of the physical count, the auditor will ordinarily:

Accepted Answer

Even if an outside firm of non-accountants specialising in the taking of physical inventories is used, the auditor is responsible for obtaining sufficient appropriate audit evidence about the existence and condition of inventory. The auditor would therefore typically make or observe physical counts of the inventory, re-compute certain inventory calculations and test certain inventory transactions. This is consistent with the auditing standards, which require auditors to obtain sufficient appropriate audit evidence to support their opinion on the financial statements. Therefore, choice A is the best choice.

Option B is incorrect as it is not a suitable alternative to the auditor's physical count. Option C is also incorrect as a reduction in audit effort is not a scope limitation but rather a judgement made by the auditor. Finally, option D is not suitable as the auditor is required to obtain sufficient appropriate audit evidence regardless of the use of an outside firm.

Question 8

An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account, as at 30 June 2015.By this procedure, the auditor would be most likely to learn of which of the following?

Accepted Answer

Reconciling the accounts receivable subsidiary ledger to the general ledger control account ensures that all transactions have been properly recorded and that any errors or discrepancies are identified. In this case, the auditor would most likely learn of an error in the opening balance of a subsidiary ledger account which was carried forward incorrectly from the previous accounting period. This is because reconciling the accounts requires comparing the closing balance of the previous period to the opening balance of the current period. Other types of errors, such as those related to individual transactions, would not necessarily be identified through this reconciliation process alone.

Question 9

An auditor will usually trace the details of the test counts of inventory items selected from the factory floor while observing the inventory stocktake through to a final inventory schedule.This audit procedure is undertaken to provide evidence of which assertion(s)?

Accepted Answer

The answer of An auditor will usually trace the details...

Question 10

Which of the following procedures would best detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10, and a few items selling for hundreds of dollars?

Accepted Answer

Maintaining perpetual inventory records with frequent verification helps detect discrepancies and theft by ensuring that inventory records are consistently accurate and up-to-date.

Question 11

In determining the adequacy of the allowance for uncollectible accounts, the least reliance should be placed upon which of the following?

Accepted Answer

The credit manager's opinion may be biased or subject to manipulation, as they have a vested interest in presenting a positive picture of the company's financial position. The other options provide more objective and reliable information for determining the adequacy of the allowance for uncollectible accounts.

Question 12

Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's assertion of valuation and allocation of inventory?

Accepted Answer

Testing the entity's computation of standard overhead rates helps ensure that the costs allocated to inventory are accurate, which directly relates to the valuation and allocation assertion.

Question 13

An auditor selected items that are on the store floor for test counts while observing a client's physical inventory.The auditor then traced the test counts to the client's inventory listing.This procedure most likely obtained evidence concerning management's assertion of:

Accepted Answer

The answer of An auditor selected items that are on...

Question 14

Procedures related to the purchases cut-off assertion should be designed to test whether or not all inventory:

Accepted Answer

The purchases cut-off assertion deals with ensuring that all inventory purchased and received before the year-end is recorded in the correct period. Therefore, the procedures should be designed to test whether or not all inventory purchased and received immediately before year-end was recorded in the correct period. Options B, C, and D are not directly related to the purchases cut-off assertion.

Question 15

During a client's stocktake you select a sample of items from the floor, count them and trace the quantities to the inventory summary sheet.Which financial report assertion is this audit procedure related to?

Accepted Answer

This audit procedure is related to the completeness assertion because it is designed to ensure that all of the items that should be included in the inventory summary sheet are actually included.

Question 16

Your client sells a high-technology product which is subject to frequent technological improvements and design changes in order to keep current with the market.Based on this information, for the inventory account, the assertion upon which you should concentrate your audit procedures is:

Accepted Answer

The technological improvements and design changes affecting the high-technology product can have an impact on its valuation and allocation within the inventory account. Therefore, the assertion upon which audit procedures should concentrate is the valuation and allocation of inventory. This will include verifying the accounting methods used to value inventory, reviewing the product cost calculations to ensure they are accurate, and assessing whether any write-downs or write-offs have been appropriately accounted for.

Question 17

Tests designed to detect purchases made just before year-end that have been recorded in the subsequent year would provide assurance about management's assertion of:

Accepted Answer

Tests designed to detect purchases made just before year-end that have been recorded in the subsequent year would provide assurance about the cut-off assertion, which relates to ensuring that transactions are recorded in the correct period.

Question 18

Hoang is engaged in the audit of a power company that supplies power to a residential community.All accounts receivable balances are small and the internal control structure is effective.Customers are billed twice monthly.In order to obtain evidence with regards the valuation and allocation assertion of the accounts receivable balances as at balance date, Hoang would most likely:

Accepted Answer

Since the accounts receivable balances are small and the internal control structure is effective, it would be more cost-effective to examine evidence of subsequent cash receipts to obtain evidence with regards to the valuation and allocation assertion of the accounts receivable balances. This would also provide a more direct and reliable way of testing the balances. Sending positive confirmation requests or using statistical sampling may not be necessary in this case. Sending negative confirmation requests is not appropriate as it assumes that the balances are accurate unless notified otherwise.

Question 19

When evaluating the risk of material misstatement with regards to defalcations involving receivables (a credit entry to accounts receivable for amounts not received), the auditor would expect an experienced bookkeeper to most likely debit which of the following accounts?

Accepted Answer

When defalcations (fraudulent removal of funds) involving receivables occur, an experienced bookkeeper might attempt to cover up the fraud by debiting Sales returns. This action would reduce the receivables without affecting cash, making it appear as if a customer returned goods or declined services, thus concealing the missing funds.

Question 20

A client's physical count of inventory was higher than the inventory per the perpetual records.This situation could be the result of the failure to record:

Accepted Answer

Failure to record purchases would result in inventory being understated on the perpetual records, causing the physical count to be higher. Sales discounts, sales, and purchase returns would not directly affect the inventory count.

Quiz 9: Substantive Tests of Transactions and Balances