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Chapter 9: Execution of the audit – performing substantive procedures 1.

Control risk is assessed to be low when there are no internal controls tested or relied upon by the auditor. a. *b.

True False

Correct answer: b Learning Objective 9.1 ~ describe substantive audit procedures

2.

A significant account is one that could contain material misstatements based upon their materiality and/or relationship to identified inherent and financial report risks. *a. b.

True False

Correct answer: a Learning Objective 9.1 ~ describe substantive audit procedures

3.

Normally, it is more efficient to carry out substantive procedures than to test and rely on controls. a. *b.

True False

Correct answer: b Learning Objective 9.1 ~ describe substantive audit procedures

4.

Roll-forward procedures are performed during the period between the end of the financial year and the date of the audit report. a. *b.

True False

Correct answer: b Learning Objective 9.2 ~ explain the link between the audit risk model and the nature, timing and extent of substantive procedures 5.

The timing of substantive procedures is directly influenced by the level of control risk. *a. b.

True False

Correct answer: a Learning Objective 9.2 ~ explain the link between the audit risk model and the nature, timing and extent of substantive procedures

6.

Key item testing is an example of a technique used when conducting substantive procedures. *a. b.

True False

Correct answer: a Learning Objective 9.3 ~ produce examples of different substantive audit procedures

7.

Audit sampling is the application of audit procedures to less than 100 per cent of items within a population. *a. b.

True False

Correct answer: a Learning Objective 9.3 ~ produce examples of different substantive audit procedures

8.

Vouching involves tracking a source document back to the underlying accounting records. a. *b.

True False

Correct answer: b Learning Objective 9.3 ~ produce examples of different substantive audit procedures

9.

Analytical procedures may not be useful when they are used on a company with significantly diverse operations and geographical segments. *a. b.

True False

Correct answer: a Learning Objective 9.3 ~ produce examples of different substantive audit procedures

10.

Comparing the number of day’s purchases in trade payable with prior years would provide persuasive evidence of accounts payable. a. *b.

True False

Correct answer: b Learning Objective 9.4 ~ discriminate between the various levels of audit evidence obtained when performing substantive procedures

11.

Analytical procedures that provide persuasive or corroborative evidence contribute minimal support for the audit conclusion. a. *b.

True False

Correct answer: b Learning Objective 9.4 ~ discriminate between the various levels of audit evidence obtained when performing substantive procedures

12.

Corroborative evidence confirms audit findings from other procedures. *a. b.

True False

Correct answer: a Learning Objective 9.4 ~ discriminate between the various levels of audit evidence obtained when performing substantive procedures

13.

Misstatements can only arise from fraud. a. *b.

True False

Correct answer: b Learning Objective 9.5 ~ explain the documentation of the conclusions reached as a result of performing substantive procedures

14.

The lack of significant change in an account balance from one year to the next does not necessarily mean that the auditor can assume the balance is reasonable. *a. b.

True False

Correct answer: a Learning Objective 9.5 ~ explain the documentation of the conclusions reached as a result of performing substantive procedures

15.

The audit program serves as the instructions for the audit team members to complete the required testing. *a. b.

True False

Correct answer: a Learning Objective 9.5 ~ explain the documentation of the conclusions reached as a result of performing substantive procedures

Multiple-choice questions 16.

Substantive testing can be conducted using which of the following procedures? a. b. c. *d.

Analytical review Enquiry Confirmation All of the above

Correct answer: d

Learning Objective 9.1 ~ define substantive audit procedures 17.

Which of the following statements is correct? a. b. *c. d.

There is no relation between the auditor's assessed risk of material misstatement and detection risk. If detection risk is high, significant substantive procedures are necessary to reduce detection risk. There is an inverse relation between the auditor's assessed risk of material misstatement and detection risk. If detection risk is low, only a small number of substantive procedures are necessary to reduce the detection risk.

Correct answer: c Learning Objective 9.2 ~ discuss the link between the audit risk model and the nature, timing and extent of substantive procedures

18.

Inherent risk is: *a. b. c. d.

the risk of a misstatement occurring irrespective of any internal controls put in place by management. assessed as high when there are no internal controls tested or relied upon by the auditor. assessed as low when there are good internal controls in place. the risk that the auditor's testing procedures will not detect a material misstatement.

Correct answer: a Learning Objective 9.2 ~ discuss the link between the audit risk model and the nature, timing and extent of substantive procedures

19.

Performing substantive procedures prior to year-end, in the absence of specific effective controls, may be acceptable when: a. b. c. *d.

the likelihood of errors or fraud is high. the likelihood of errors or fraud is low. the auditor is able to conclude overall that the client's control environment is effective. Both a and c

Correct answer: d Learning Objective 9.2 ~ discuss the link between the audit risk model and the nature, timing and extent of substantive procedures

20.

Performing substantive procedures prior to year-end, in the absence of specific effective controls, may be acceptable when: a. b. c. *d.

the likelihood of errors or fraud is low. the auditor is able to conclude overall that the client's control environment is effective. the likelihood of errors or fraud is high. Both a and c

Correct answer: d Learning Objective 9.2 ~ discuss the link between the audit risk model and the nature, timing and extent of substantive procedures

21.

Typically, substantive testing tends to be performed: a. b. *c. d.

half way through the financial year. at the start of the financial year. at or near year-end. only when the client's management allows the auditor to conduct the tests.

Correct answer: c Learning Objective 9.2 ~ discuss the link between the audit risk model and the nature, timing and extent of substantive procedures

22.

The nature of substantive procedures normally consists of one or a combination of which of the following techniques? a. b. c. *d.

Key item testing Analytical procedures Representative sampling All of the above

Correct answer: d Learning Objective 9.3 ~ produce examples of different substantive audit procedures

23.

Vouching involves: a. b. *c. d.

the application of audit procedures to less than 100 per cent of items within a population. tracking a source document through to the underlying accounting records. agreeing the details of a transaction to supporting evidence outside of the company's accounting records. None of the above

Correct answer: c Learning Objective 9.3 ~ produce examples of different substantive audit procedures

24.

Roll-forward procedures are performed: a. *b. c. d.

after the end of the financial year. to update the audit findings from the time of the interim procedures through to year-end. to detect fraud in various balance sheet accounts. None of the above

Correct answer: b Learning Objective 9.3 ~ produce examples of different substantive audit procedures

25.

The primary purpose of vouching is to ensure that: *a. b. c. d.

the balances or transactions are not overstated. the balances or transactions are not understated. sufficient information is disclosed in the notes to the financial statements. all transactions have been recorded.

Correct answer: a Learning Objective 9.3 ~ produce examples of different substantive audit procedures

26.

Tracing is primarily directed towards verifying which of the following assertions? a. *b. c. d.

Occurrence Completeness Existence Valuation

Correct answer: b Learning Objective 9.3 ~ produce examples of different substantive audit procedures

27.

Analytical procedures may not be used: a. b. *c. d.

to provide at least some minimal level of support for the conclusion. as primary tests of an account balance. in testing internal controls. as corroborative tests in combination with other procedures.

Correct answer: c Learning Objective 9.3 ~ produce examples of different substantive audit procedures

28.

Variables estimation sampling is used: a. b. c. *d.

when the auditor conducts tests of controls. when the auditor does not expect any errors in an account balance. to obtain a level of confidence that key attributes for the sample tested can be inferred to be in existence for the entire population. if the auditor expects more than a few errors in an account balance.

Correct answer: d Learning Objective 9.3 ~ produce examples of different substantive audit procedures

29.

Which of the following is the first step an auditor performs when performing analytical procedures? *a. Identify the computation, comparison or relationship to be made or investigated b. Determine appropriate procedures for investigating the reasons for differences if they are significant c. Draw conclusions d. Assess the reliability of any data to be used

Correct answer: a Learning Objective 9.3 ~ produce examples of different substantive audit procedures

30.

Which of the following is not a type of analytical procedure? a. *b. c. d.

Break-even analysis Confirmation analysis Ratio analysis Trend analysis

Correct answer: b Learning Objective 9.3 ~ produce examples of different substantive audit procedures

31.

Comparing sales commissions or bonuses with related sales provides what level of evidence? a. *b. c. d.

Minimal Corroborative Absolute Persuasive

Correct answer: b Learning Objective 9.4 ~ differentiate the various levels of audit evidence obtained when performing substantive procedures

32.

Analytical procedures that provide persuasive evidence include: a. b. *c. d.

comparing the number of days purchases in trade payables with prior years. reviewing the cash accounts in the general ledger for unusual items. relating average amounts invested to an average interest rate. reviewing the property, plant and equipment account in the general ledger for unusual items.

Correct answer: c Learning Objective 9.4 ~ differentiate the various levels of audit evidence obtained when performing substantive procedures 33.

The levels of evidence obtained when performing substantive procedures includes: a. b. c. *d.

general minimal persuasive All of the above

Correct answer: d Learning Objective 9.4 ~ differentiate the various levels of audit evidence obtained when performing substantive procedures

34.

Overall significant account conclusion statements are captured on: a. b. *c. d.

confirmation requests. audit programs. lead sheets. minutes of board of directors' meetings.

Correct answer: c Learning Objective 9.5 ~ outline the documentation of the conclusions reached as a result of performing substantive procedures

Chapter 10: Substantive testing and balance sheet accounts True/False 1.

The timing of substantive testing is dependent on the risk assessment of the significant account in question. *a. b.

True False

Correct answer: a Learning Objective 10.1 ~ explain the relationship between the risk of material misstatement for a significant account and the extent and timing of substantive procedures

2.

When the assessment of inherent risk and control risk is low, the amount of substantive testing required to reduce the detection risk to an acceptable level is significant. a. *b.

True False

Correct answer: b Learning Objective 10.1 ~ explain the relationship between the risk of material misstatement for a significant account and the extent and timing of substantive procedures 3.

Testing the mathematical accuracy of the cash payment ledger relates to the existence assertion. a. *b.

True False

Correct answer: b Learning Objective 10.2 ~ design and explain how to execute substantive procedures to address audit risk related to cash

4.

A pledge is something delivered as security for the payment of a debt or the fulfilment of a promise. *a. b.

True False

Correct answer: a Learning Objective 10.2 ~ design and explain how to execute substantive procedures to address audit risk related to cash

5.

Evaluating the adequacy of the allowance for doubtful debts account is an example of a substantive test of trade receivables that is always performed. *a. b.

True False

Correct answer: a Learning Objective 10.3 ~ design and explain how to execute substantive procedures to address audit risk related to trade receivables

6.

When trade receivables is a significant account in an entity's balance sheet, the two audit assertions that are considered most important are existence and valuation and allocation. *a. b.

True False

Correct answer: a Learning Objective 10.3 ~ design and explain how to execute substantive procedures to address audit risk related to trade receivables

7.

Accounting for the numerical sequence of cheques issued during a specific period is a substantive test relating to the purchases process. a. *b.

True False

Correct answer: b Learning Objective 10.4 ~ design and explain how to execute substantive procedures to address audit risk related to inventory

8.

The two key assertions for inventory are completeness and rights and obligations. a. *b.

True False

Correct answer: b Learning Objective 10.4 ~ design and explain how to execute substantive procedures to address audit risk related to inventory

9.

Physically sighting fixed assets enables the auditor to test the rights and obligations assertion. a. *b.

True False

Correct answer: b Learning Objective 10.5 ~ design and explain how to execute substantive procedures to address audit risk related to property, plant and equipment

10.

A fixed assets register is used to capture additions and disposals of fixed assets, as well as calculating depreciation charges. *a. b.

True False

Correct answer: a Learning Objective 10.5 ~ design and explain how to execute substantive procedures to address audit risk related to property, plant and equipment

11.

The typical procedures performed to search for unrecorded payables are referred to as subsequent payments testing and cut-off testing. *a. b.

True False

Correct answer: a Learning Objective 10.6 ~ design and explain how to execute substantive procedures to address audit risk related to payables

12.

Ensuring that accounts payable are stated at the amounts owed at year-end relates to the rights and obligations assertion. a. *b.

True False

Correct answer: b Learning Objective 10.6 ~ design and explain how to execute substantive procedures to address audit risk related to payables

13.

Provisions can be easily audited by controls testing alone. a. *b.

True False

Correct answer: b Learning Objective 10.7 ~ explain how substantive testing is used for other balance sheet accounts

14.

Prepayments are audited by vouching the balance to the supporting invoices. *a. b.

True False

Correct answer: a Learning Objective 10.7 ~ explain how substantive testing is used for other balance sheet accounts

15.

The key objective when performing substantive procedures is to determine whether there are material misstatements within an account balance. *a. b.

True False

Correct answer: a Learning Objective 10.8 ~ explain how to assess the results of substantive procedures to determine whether additional substantive tests are necessary

Multiple-choice questions 16.

The additional opportunities for influencing the timing of the work include: a. b. c. *d.

auditing activity in the period to date. auditing events occurring prior to year-end. leveraging off the activities of the internal audit function. All of the above

Correct answer: d Learning Objective 10.1 ~ discuss the relationship between the risk of material misstatement for a significant account and the extent and timing of substantive procedures

17.

When the assessment of inherent and control risk is low: a. b. *c. d.

there are lots of controls that have been tested and found to be effective. the level of substantive procedures is limited. Both a and b None of the above

Correct answer: c Learning Objective 10.1 ~ discuss the relationship between the risk of material misstatement for a significant account and the extent and timing of substantive procedures

18.

Accounts that are clearly trivial or immaterial are usually ignored or only subjected to: a. b. *c. d.

confirmations. tests of controls. analytical procedures. observations.

Correct answer: c Learning Objective 10.1 ~ discuss the relationship between the risk of material misstatement for a significant account and the extent and timing of substantive procedures

19.

Which of the following substantive tests of cash account balances are always performed? a. b. c. *d.

Examine the client's bank reconciliations Test cut-off of cash receipts, cash payments and transfers at year-end Confirm cash held by others All of the above

Correct answer: d Learning Objective 10.2 ~ design and discuss how to execute substantive procedures to address audit risk related to cash

20.

Which of the following is not an example of a substantive test of cash payments transactions? *a. b. c. d.

Test the mathematical accuracy of the cash receipts ledger Test the account classifications of cash payments Account for the numerical ...