Question 1

In order to efficiently test the purchases/accounts payable cut-off, an auditor will be most likely to:

Accepted Answer

Coordinating the cut-off tests with physical inventory observation allows the auditor to ensure that all inventory purchases have been recorded in the correct period. This helps in testing the purchases/accounts payable cut-off. Comparing cut-off reports with purchase orders, mailing of confirmations with cut-off tests, and comparing vendors' invoices with vendors' statements may be part of the overall testing strategy, but they do not directly address the cut-off issue.

Question 2

All of the following evidence-gathering procedures can assist the auditor in testing the existence assertion for investment securities except:

Accepted Answer

Comparing fair value to the original cost would not necessarily assist the auditor in testing the existence assertion for investment securities. This procedure would only be relevant in testing the valuation assertion. Physical examination, confirmation with the issuer of the securities, and confirmation with the custodian are all relevant procedures for testing the existence assertion.

Question 3

To determine whether accounts payable are complete, an auditor commonly performs sampling procedures to test whether all merchandise received is recorded.The population of documents for this test consists of all:

Accepted Answer

Receiving reports document the receipt of goods from vendors and are used to ensure that all received goods are recorded in the accounts payable ledger. This makes them the appropriate population for testing the completeness of accounts payable.

Question 4

The physical count of inventory of Clyers Pty Ltd, a medium-sized retailer, was higher than shown by the perpetual records.Which of the following could explain the difference?

Accepted Answer

The credit memos for returned items not being recorded would mean the perpetual records still show these items as sold, leading to a higher physical count than the records.

Question 5

A normal audit procedure is to analyse the current year's repairs and maintenance accounts to provide evidence in support of the audit proposition that:

Accepted Answer

The answer of A normal audit procedure is to analyse...

Question 6

The auditor is least likely to learn of retirements of equipment through which of the following?

Accepted Answer

Review of the purchase returns and allowance account would not provide information about retirements of equipment as it is only used to record returns or allowances granted to customers for goods sold to them. The other options (A, C, D) are all potential sources of information about equipment retirements.

Question 7

Which of the following explanations might satisfy an auditor who discovers significant debits to an accumulated depreciation account?

Accepted Answer

Debits to accumulated depreciation typically occur when fixed assets are retired, as the accumulated depreciation associated with those assets is removed from the account.

Question 8

A client maintains perpetual inventory records in both quantities and dollars.If the assessed level of control risk is high, an auditor would probably:

Accepted Answer

When control risk is high, the auditor would likely request the client to schedule the physical inventory count at the end of the year to ensure the accuracy of the inventory records and to perform substantive testing.

Question 9

When auditing Steel Ltd, a large manufacturer of building supplies, which one of the following audit procedures would give the least assurance with regards to the valuation and allocation assertion for inventory?

Accepted Answer

Obtaining confirmation of inventories pledged under loan agreements provides the least assurance regarding the valuation and allocation assertion for inventory because it primarily relates to the disclosure and existence of inventory rather than directly addressing its valuation and allocation.

Question 10

An auditor would be least likely to use external confirmation procedures in connection with the examination of:

Accepted Answer

External confirmation procedures are less likely to be used for property, plant, and equipment because these assets are physical in nature and their existence and condition are usually verified through inspection rather than through external confirmation. External confirmations are more commonly used for verifying the existence and terms of long-term debt, the existence and rights to inventories, and the details of issued share capital with external parties like creditors, suppliers, or registrars.

Question 11

The auditor will most likely perform extensive tests for possible understatement of:

Accepted Answer

Auditors perform extensive tests for possible understatement of accounts payable to ensure that all liabilities are recorded. Understating accounts payable can make a company's financial position appear stronger than it actually is, which is why auditors focus on this area to ensure completeness of recorded liabilities.

Question 12

In auditing intangible assets, an auditor would determine whether the amortisation amount is reasonable in support of management's financial statement assertion of:

Accepted Answer

The assertion of valuation and allocation relates to whether the recorded amount of intangible assets is accurate and in accordance with generally accepted accounting principles. Determining the reasonableness of amortization amount helps to support this assertion by ensuring that the asset's value is being properly allocated over its useful life. The other assertions (existence, completeness, and occurrence) are not directly related to the amortization amount.

Question 13

Which assertion for ending inventory is most likely at risk of material misstatement if the gross profit percentage is much greater than last year?

Accepted Answer

A higher gross profit percentage than last year may indicate that ending inventory is overstated, which affects the existence assertion. This could mean that inventory that does not exist is being reported, inflating profits.

Question 14

'While auditing James Ltd, you find that their inventory turnover has decreased from 7.8 times to 5.4 times during the year.Based on this decrease, which financial report assertion would you be least concerned with?

Accepted Answer

The answer of 'While auditing James Ltd, you find that...

Question 15

Which of the following is the best audit procedure for determining the completeness of the accrued liabilities listing?

Accepted Answer

Examining a sample of cash disbursements in the period subsequent to year-end helps in identifying liabilities that were incurred before year-end but paid after, ensuring that all liabilities are recorded and the completeness assertion for accrued liabilities is addressed.

Question 16

The auditor may conclude that depreciation charges are insufficient by noting:

Accepted Answer

Excessive recurring profits on assets retired may indicate that the depreciation charges were insufficient, as the assets were not depreciated enough to reflect their true value at the time of retirement.

Question 17

In violation of company policy, Morley Ltd (Morley) erroneously capitalised the cost of painting its warehouse.The auditor examining 'Morley's financial report would most likely detect this when:

Accepted Answer

The auditor would most likely detect the erroneous capitalisation by examining the construction work orders supporting items capitalised during the year, as this would reveal that the painting costs were incorrectly recorded as capital expenditures.

Question 18

All of the following can assist the auditor in testing the existence assertion for investment securities except:

Accepted Answer

Comparing fair value to cost may help the auditor test the valuation assertion but does not directly assist with testing the existence assertion, which focuses on whether the investment securities actually exist and are owned by the entity. Physical examination, confirmation with the issuer and custodian can provide evidence of the existence of the investment securities.

Question 19

Which of the following is one of the auditor's primary objectives when externally confirming holdings of marketable securities?

Accepted Answer

One of the primary objectives of an auditor when externally confirming holdings of marketable securities is to verify that the securities are indeed the property of the client. This helps ensure the accuracy of the financial statements by confirming ownership.

Question 20

An auditor usually examines receiving reports to support entries in the:

Accepted Answer

Receiving reports are documents that provide evidence of the receipt of goods purchased. They support entries in the voucher register, which records liabilities and purchases, and the sales returns journal, which records the return of goods sold.

Quiz 9: Substantive Tests of Transactions and Balances