ch13 - questions

During the audit of Gaga Co, an audit junior selects a sample of machines from the non-current asset register and physically inspects them in the factory. The audit junior also selects a sample of machines from the factory and traces them to the non-current asset register to ensure that they are recorded. Whilst performing this test, they also actively inspect the machinery for signs of damage.

Which of the following assertions is NOT being tested by this set of procedures?

 Existence

 Completeness

 Rights and Obligations

 Valuation

• Rights and Obligations

Selecting assets from the register and inspecting them in the factory tests existence.

Selecting assets from the factory and tracing them to the register tests completeness.

Signs of damage would be an indication of impairment. Therefore, inspecting the machines for damage provides evidence over valuation.

For each of the following audit tests on inventory select which financial statement assertion would be supported.

1. Enquiries about possible obsolete or slow-moving inventory. 

• Completeness

• Valuation

• Cut-off

2. Taking the last 10 goods received notes of the period and the first 10 goods received notes of the next period and checking that they have been allocated to the correct period. 

• Completeness

• Valuation

• Cut-off

1) Valuation

2) Cut-off

For each of the following audit procedures on trade receivables, select which financial statement assertion would be supported.

Comparing the method of calculating the provision against trade receivables with other entities in the same industry.	Completeness Valuation Existence
Obtain and review an analysis of aged receivables at the period end for amounts outstanding for more than the allowed credit period.	Completeness Valuation Existence

1) Valuations

2) Valuation

For each of the following risks of misstatement in respect of the bank and cash balance select the financial statement assertion to which they relate.

Not all the client's bank balances being disclosed.	Completeness Existence Valuation
Reconciliation differences between the bank balance and the cash book balance are not investigated and resolved by management.	Completeness Existence Valuation

 

1) completeness

2) valuation

Which of the following is the key assertion with which auditors are concerned in relation to trade payables?

 Valuation and allocation

 Completeness

 Rights and obligations

 Occurrence

completeness

Which TWO of the following audit procedures would best confirm the existence and valuation of property, plant, and equipment?

✓Tracing additions to property, plant, and equipment to purchase invoices.

✓Reperforming depreciation calculations on a sample of assets.

✓Examining title deeds and registration documents for ownership verification.

✓Physically inspecting a sample of assets and reconciling to the asset register.

• Reperforming depreciation calculations on a sample of assets. (Correct)

• Physically inspecting a sample of assets and reconciling to the asset register. (Correct)

Which of the following financial statement assertions is NOT relevant when designing audit procedures to test a client's revenue balance?

 Cut-off

 Accuracy

 Existence

 Completeness

Completeness

An audit junior has identified several issues during an audit engagement.

Which TWO of the following situations require referral to more senior staff.

1) The audit junior identifies a transaction that is unusual in nature and appears to be significantly above market rates. 

• Requires referral

• Does not require referral

2) The audit junior is asked by a colleague for an update on the progress of a specific audit section. 

• Requires referral

• Does not require referral

3) The audit junior notices an accounting entry that is unusual and does not seem to have a clear business purpose, potentially indicating a misstatement.

• Requires referral

• Does not require referral

4) The audit junior observes an arithmetical error in a client's calculation that does not impact the financial statements materially. - - Requires referral

Does not require referral

1) The audit junior identifies a transaction that is unusual in nature and appears to be significantly above market rates.

3) The audit junior notices an accounting entry that is unusual and does not seem to have a clear business purpose, potentially indicating a misstatement.

which three of the following providence evidence to support the rights and obligations assertion in relation to property, plants and equipment?

• A) title deeds

• B) purchase invoices

• C) vehicle registration documents

• D) sales invoices

A, B, C

which of the following assertions is the assurance provider least concerned with when testing a non-current asset balance?

• A) existence

• B) rights and obligations

• C) completeness

• D) cut-off

D

which two of the following constitute the best quality evidence concerning the net realisable value of inventories?

• A) company’s controls over inventory counting

• B) post year-end sales invoices

• C) post year-end sales orders

• D) post year-end sales price list

B,C

• D) gives evidence of management intention in relation to inventories but not evidence of the price that the customers are genuinely prepared to pay ( in the way that invoices and orders do)

which of the following procedures is most appropriate to confirm the valuation of trade receivables?

• A) review of the receivables ledger

• B) direct confirmations with customers

• C) review of cash paid after date

• D) review of sales invoices

C

which of the following is the key assertion with which auditors are concerned in relation to trade payables?

• A) completeness

• B) existence

• C) accuracy

• D) classification

A

which three of the following are reasons why the auditor might seek direct confirmation from suppliers of balances owed to them?

• A) auditor suspects that the client is deliberately understating payables

• B) the internal controls relating to purchases are weak

• C) supplier statements are unavailable

• D) to find out of the audit client has the ability to pay its suppliers

A,B,C

which two of the following are reasons why sales are often verified by testing internal controls in place over sales?

• A) there are usually too many individual transactions to test them individually

• B) sales constitute high volume of similar transactions which are suitable for controls testing

• C) controls over sales in a company are often strong

• D) because there are so many individual transactions, there is a significant risk that sales are misstated

B,C

• A) wrong because not reasons for testing controls over sales

• D) is wrong because where high risk of misstatement, substantive procedures should be used

which three of the following relationships/ ratios are reasons why analytical procedures can give strong evidence in relation ot the accuracy of purchases?

• A) oeprating margin

• B) purchases and trade payables

• C) purchases and inventories

• D) gross margin

B,C,D - applying analytical procedures to operating margin which contains the effect of all expenses, not just purchases, will not provide evidence as to the accuracy of purchases

results of substantive on trade payables as Frisa Ltd are set out below. The materiality threshold set for these tests was £17000.

which action should be taken by the audit senior?

1) three goods inwards records dated before the year end relating to goods worth £16000 were traced to purchase invoices which have been included in the subsequent year and not provided for this year?

• draw conclusion

• refer to senior colleague

• extend sample

2) in a sample of 20 supplier statement reconciliations, statements were unavailable for 10 suppliers. Statements were available for seven of these 10 suppliers in the previous year

• draw conclusion

• refer to a senior colleague

• extend sample

1) extend sample - for the misstatement in cut-off, should be extended to measure the full extent of the cut-off misstatement

2) refer to a senior colleague - missing supplier statements ( which should make auditor suspicious) should be referred

for each of the disagreements, select whether the disagreement would or would not be considered a misstatement for the purpose of evaluating the accuracy of total trade receivables in the statement of financial position at the year end.

1) Watford Ltd disagreed with the balance because they had made a payment the day before the year end. The auditor has confirmed that the payment was reflected on the bank statement the day after year end.

• misstatement

• not misstatement

2) radlet Ltd disagreed with the balance because their records did not contain invoice number SI 00492. This invoice and associated goods were despatched by Barnett pls on the last day of the year. the auditor has verified that the despatch record and cut-off with inventories are correct.

• misstatement

• not misstatement

1) not misstatement

2) not misstatement

both due to timing differences so don’t constitute to accuracy of total trade receivables

in each case select whether the test proves the assertion of valuation or not.

1) attending the inventory count and carrying out sample counts on a number of items

• proves valuations

• doesn’t prove valuations

2) comparing costs on a number of inventory items to sales invoices subsequent to the year end

• proves valuation

• doesn’t prove valuations

1) doesn’t prove valuations

3) proves valuation

sharmillia has obtained a list of items which make up cash and cash equivalents balance (£4123) in the financial statements of Bowl Ltd. Materiality has been set at £5000. for each item select whether or not Sharmilla should test the item.

1) new director’s cash account £3274

• test

• test not test

2) current account balance (overdrawn) £6105

• test

• not test

1) test - director’s cash account should be test whatever its monetary value

2) test - over materiality threshold . but regardless of materiality, should be tested due to nature of a bank current account

which two of the following assertions is the auditor most concerned with when testing property, plan and equipment?

• A) occurrence

• B) existence

• C) rights and obligations

• D) cut-off

B,C

auditor of Cups Ltd is performing a test to ensure that there are no omissions from the asset register. in respect of which of the following assertions will this procedure provide audit evidence?

• A) cut-off

• B) accuracy, valuation and allocations

• C) completeness

• D) existence

• E) classification

C

which two of the following procedures would provide evidence of rights and obligations of motor vehicles?

• A) vouching a sample of motor vehicles in the asset register to registration documents

• B) physical inspection of motor vehicles

• C) review of purchase invoices for motor vehicles acquires in the period

• D) confirmation that calculations on the asset schedule are correct in respect of motor vehicles

A,C

for each of the following circumstances in respect of inventories, select which financial statement assertion would be affected.

1) inventory items which has been sold by the end of the period have been included in inventories?

• completeness

• accuracy, valuation and allocation

• cut-off

2) damaged items of inventory have not been written down to net realisable value

• completeness

• accuracy, valuation and allocation

• cut-off

1) cut-off

2) accuracy, valuation and allocation

for each of the following circumstances in respect of inventories, select which financial statement assertion would be affected.

1) due to the miscalculation of costs, some period end inventory items were not included at cost when net realisable value was lower

• completeness

• accuracy, valuation and allocation

• cut-off

2) inventory items were excluded from the inventories total included in the financial statements in error

• completeness

• accuracy, valuation and allocation

• cut-off

1) accuracy, valuation and allocation

2) completeness

1) inventory count is performed by warehouse staff and supervised by warehouse manager - strength/ deficiency

2) inventory sheets are completed in pencil - strength/ deficiency

3) there are two teams of counters, one counting and one checking - strength/ deficiency

1) deficiency

2) deficiency

3) strength

1) adequate inventory records must be kept up to date - true/false

2) all inventory lines must be counted at least once per month - true/ false

3) material differences between recorded inventories and actual inventories must be investigated and corrected - true/ false

1) true

2) false

3) true

which three of the following circumstances could result in net realisable value being lower than cost?

• a) an increase in the cost of raw materials which cannot be passed on to the customer

• b) an increase in selling price

• c) errors in production

• d) an increase in production overheads

• e) trade discounts from suppliers

A,C,D

Direct confirmation of trade receivables provides evidence in respect of which two of the following assertions?

• A) existence

• B) accuracy, valuations and allocation

• C) rights and obligations

• D) completeness

• E) occurrence

A,C - (occurrence only assertion for transactions and not account balances)

which the following is the most reliable evidence of the valuation of trade receivables?

• A) comparison of current year-end total with previous year

• B) analysis of after-date receipts

• C) checking a sample of customer list against the receivables ledger accounts

• D) reconstruction of the trade receivables balance by tracing individual amounts invoices to despatch records

B

for each of the following examples, select the type of procedure illustrated

1) examining the instructions issued for a year-end physical inventory count

• test of control

• substantive procedure

2) observing despatch procedures

• test of control

• substantive procedure

3) comparing this year’s sales figures to those of previous years

• test of control

• substantive procedure

1) test of control - instructions likely to lead to an accurate count

2) test of control - despatch procedures are being properly followed

3) substantive procedure

for each example select the type of procedure which that test illustrates.

1) using automated tools and techniques (ATTs) to check the ageing of the year-end aged trade-receivables report.

• confirmation

• recalculation

• reperformance

2) adding up the list of year-end trade receivables

• confirmation

• recalculation

• reperformance

1) reperformance

2) recalculation

which of the following financial statement assertions will be supported by a sample check on the numerical sequence of despatch records and invoices?

• A) cut-off

• B) occurrence

• C) completeness

• D) accuracy, valuation and allocation

C

which of the following procedures should be undertaken to confirm the existence of cash at bank?

• A) inspecting the bank reconciliation statement prepared by the client

• B) agreeing the figures on the bank reconciliation to the cash at bank nominal ledger account

• C) obtaining direct confirmation of the bank balance from the client’s bank

• D) reperforming the additions on the bank reconciliation

C

for each of the disagreements, select whether it would be considered a misstatement for the purpose of evaluating the accuracy of total trade receivables.

1) sand plc disagreed with the balance because its records indicated that it had paid the balance two weeks before the year end. the auditor enquiries revealed that the amount has been received and credited to another customer’s account before the year end.

• misstatement

• not a misstatement

2) moon ltd disagreed with the balance because their records indicated that the amount paid a few days before the year end. auditor’s enquiries revealed that the payment was reflected on the bank statement shortly after the year end.

• misstatement

• not a misstatement

1) not a misstatement - disagreement stems from mis-posting which doesn’t affect the total trade receivables balance in the financial statements

2) not a misstatement - timing difference

materiality thresholds such items under £38000 generally not considered material. for Pipe ltd

for each of the following choose test for overstatement, understatement, not test

1) £38050 due from Nail Ltd , a credit customer of Pipe ltd

• overstatement

• understatement

• not test

2) other income of £27639

• overstatement

• understatement

• not test

1) overstatement - amount is an asset + above materiality threshold

2) not test

tape ltd has a head office and several branches. head office operates a continious inventory counting system. The system ensures that all items are counted at least twice a year and checked against inventory items.

During the interim audit, an examination of the counts undertaken by head office staff showed that differences between inventory records and the physical count frequently arise. usually, actual inventory levels at branches are found to be higher than recorded inventory levels.

which of the following explains this difference?

• A) unrecorded write-offs of scrapped inventories

• B) unrecorded purchase returns

• C) unrecorded branch requisitions

• D) unrecorded branch returns

C - unrecorded goods inwards , other options = higher recorded inventories than actual inventories

for each of the following results, select the action which should by taken by the audit senior?

1) no misstatements found

• A) draw conclusion

• B) refer to a senior colleague

• C) extend sample

2) an arithmetical misstatement of £5000 found

• draw conclusion

• refer to a senior colleague

• extend sample

3) a misstatement of £10 found, sanctioned by the finance director

• draw conclusion

• refer to a senior colleague

• extend sample

1) draw conclusion

2) extend sample

3) refer to senior colleague - due to sanction

which of the following describes how the auditor would check the existence for a material addition to property, plant and equipment?

• A) trace the physical items to the asset register

• B) trace the physical item to the general ledger entries

• C) trace the general ledger entries to the financial statements

• D) trace an entry in the asset register to the physical item

• C) trace an entry in the financial statement to the physical item

D

which two of the following statements identify an appropriate source of information for audit work directed towards the stated risk associated with property, plant and equipment?

• A) purchase invoices for assets purchases within the year may contain evidence in relation to the risk of omission of assets owned by the company

• B) physical inspection of the assets themselves by the auditor may generate evidence in relation to the risk of the company not actually owning the assets

• C) valuations carried out by third-party valuers may contain evidence in relation to the risk of the assets being incorrectly presented in the financial statements

• D) sales invoices for assets sold within the year may contain evidence in relation to the risk of the company not actually owning the assets

A,D

• B = tells us they exist but nothing in relation the the fact the company doesn’t own them or not

• C = assets may be valued properly but could not be compliant with IFRS Accounting Standards

1) a major risk of misstatement of the trade receivables balance in the financial statements is of debts not being complete - true/false

2) principal risk of misstatement of borrowings in the financial statements is of non-existent liabilities being declared - true/false

3) a major risk of misstatement of the inventories balance in the financial statements is of inventory being included in the financial statement at full value when it is obsolete or damaged - true/false

1) false

2) false - risk but not principal risk

3) true - incorrect valuation

at which two of the following business locations should auditors be particularly altern to the risk of money laundering?

• A) car wash

• B) manufacturer of upholstery

• C) surveryor’s offices

• D) pawn shop

A,D = large number of cash transactions

1) when determining the cost of inventories the costs of bringing the inventory to its present location and condition should be included - true/false

2) the use of inventory count sheets, which include inventory quantities based on the inventory records as at the close of business the previous day, is a deficiency in internal control. - true/ false

1) true - costs include bringing inventory to its present location and condition

2) true - inclusion of the inventory quantity on the count sheets may deter the inventory counters from performing the count accurately because they already have a suggested quantity for each inventory item , could be out of date

an audit assistant has been asking to obtain written representation from management at a client. audit manager had previously discussed the written representations with the finance director who had agreed they would provide signed written representations. When asked by the audit assistant for the signed document the finance director stated that the board member had changed their mind about signing it because they believe some responsibilities listed as management responsibilities are auditor responsibilities.

which of the following is the most appropriate form of action for the audit assistant to take in respect of the board’s refusal to provide signed representations?

• A) refer matter to a senior colleague

• B) inform the finance director that unless signed representations are obtained, they will not receive an unmodified opinion in the auditor’s report

• C) inform the finance director that the firm will need to resign if the written representations are not provided in a timely manner

• D) seek alternative evidence that management has accepted its responsibilities

A

an audit assistant is performing procedures over material development costs within intangible assets. all the costs have been incurred during the financial year under review. when the audit assistant asks for an analysis of the costs and details of the development project the director operations refuses to give out any details due to fear that information on new products may be leader to competitors. the audit assistant explains the firm’s duty of confidentiality to its clients, but the director still states they will not disclose the details.

which of the following should the audit assistant refer this matter to?

• A) money laundering reporting officer (MRLO)

• B) audit manager

• C) ICAEW

• D) CEO at client

B