Audit procedures – Collecting Audit Evidence MCQs

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Audit procedures are the processes and methods that the auditor performs in order to obtain audit evidence which enables him to make a conclusion
Audit procedures - Collecting Audit Evidence MCQs

Audit procedures – Collecting Audit Evidence

Audit procedures are the processes and methods that the auditor performs in order to obtain audit evidence which enables him to make a conclusion on the set audit objective and express his opinion. Here on MCQs.club we have prepared easily understandable Multiple-Choice Questions (MCQs) on Audit procedure that cover the audit procedures examples, steps, types and how to perform audit procedures MCQs. These MCQ on audit procedures are useful for Business management exams, Competitive exams and Professional accountancy exams.

  1. Directional testing – The concept of directional testing derives from the principle of double-entry bookkeeping, i.e. for every debit there should be a corresponding credit. Therefore, any misstatement of a debit entry will also result in a misstatement of a credit entry.
    1. The above statement is correct
    2. The above statement is incorrect
  1. Auditors primarily test debit entries (assets and expenses) for overstatement and credit entries (liabilities and income) for understatement. Which of the following statement is correct?
    1. Testing for understatement tests completeness.
    2. Testing for overstatement tests valuation, existence, rights and obligations, and occurrence.
    3. Both A&B
    4. None
  1. The key assertions for bank and cash are:
    1. Existence
    2. Valuation
    3. Both A&B
    4. None
  1. In case of Bank and cash the auditor relies mainly on:
    1. the bank confirmation letter
    2. the bank reconciliation.
    3. Both A&B
    4. None
  1. The principal risks of misstatement of the bank and cash balances in the financial statements are that:
    1. not all bank balances owned by the client are disclosed
    2. reconciliation differences between bank statements and the client’s cash book balances are incorrectly dealt with.
    3. material cash balances are omitted.
    4. All of the above
  1. The possible approaches the auditor can use for the confirmation of bank balances include:
    1. The auditor lists information about the bank balances from the client’s accounting records and asks each bank to confirm that the balances are correct.
    2. The auditor requests confirmation of the relevant bank balance(s) without providing any details to the bank.
    3. Both A&B
    4. None
  1. Typical areas covered by the confirmation letter to banks include:
    1. Confirmation of balances on all bank accounts at the end of the reporting period.
    2. Details of any unpaid bank charges, assets of the client entity held by the bank as security for lending.
    3. Details of any other client bank accounts that are known to the bank but not listed in the request to the bank for confirmation of balances.
    4. All of the above

  1. The Audit procedures in respect of cash balances include:
    1. The auditor should count cash at all locations simultaneously and in the presence of a company official.
    2. The auditor should check the cash balance obtained from the count against the client’s cash records and cash balance in the draft financial statements.
    3. The auditor should also investigate the treatment of any money advances to employees (for example, against wages or salary).
    4. All of the above
  1. Non-current liabilities –
    1. The key assertion for liabilities is completeness.
    2. Allocation must also be assessed as there is a need to split the liability into its current and noncurrent elements.
    3. Both A&B
    4. None
  1. For Non-current liabilities the bank confirmation letter will provide details of loans held, the amounts outstanding, accrued interest and any security provided in relation to those loans.
    1. True
    2. False
  1. Procedures that the auditor will need to perform in relation to loan payables include:
    1. Agree the balance outstanding to the bank confirmation letter: accuracy & valuation, rights & obligations.
    2. Inspect bank confirmation letters for any loans listed that have not been included in the financial statements: completeness.
    3. Recalculate the split between current and non-current liabilities: allocation, classification, and presentation.
    4. All of the above
  1. The key assertions for non-current assets are:
    1. existence, valuation
    2. completeness and rights and obligations.
    3. Both A&B
    4. None
  1. For Non-current assets the auditor needs to obtain sufficient appropriate evidence over many areas such as:
    1. Existing assets, Additions, Disposals and the related profit/loss in the statement of profit or loss
    2. Depreciation, Revaluations, Related disclosures
    3. Both A&B
    4. None
  1. Which of the following is correct for Development costs?
    1. The key assertion for development costs is existence.
    2. Development costs should only be capitalised as an intangible asset if the recognition criteria of IAS 38 Intangible Assets have been met.
    3. Both A&B
    4. None

  1. Tests of detail for development costs include:
    1. inspect development contracts and records supporting and safeguarding patents.
    2. test controls around the documentation and safekeeping of scientists’ notes, discoveries and conclusions.
    3. test a sample of development costs for appropriate capitalisation.
    4. obtain written representation from management as to their commitment to complete the project and either use or sell the asset(s).
    5. All of the above
  1. The tests of detail for the valuation of purchased goodwill include:
    1. Confirm that a business was acquired and confirm the consideration paid for the business acquired.
    2. Review the reasonableness of the valuation placed on the net assets acquired.
    3. Check the calculation of the purchased goodwill.
    4. Review for the possibility of an impairment having arisen.
    5. All of the above
  1. The audit procedures that the auditor will need to perform in relation to Amortisation include:
    1. Recalculate the amortisation charge to verify arithmetical accuracy: accuracy, valuation.
    2. For intangibles such as licences, inspect the licence agreement to confirm the amortisation period corresponds to the licence period: valuation.
    3. Inspect the financial statement disclosure in the draft financial statements to ensure compliance with IAS 38: presentation.
    4. All of the above
  1. The key assertions for inventory are:
    1. existence, valuation
    2. completeness and rights and obligations.
    3. Both A&B
    4. None
  1. The principal risks of inventory being misstated are due to:
    1. Not all inventory that is owned by the reporting entity being included in the financial statements (the completeness assertion).
    2. Inventory in the financial statements not actually existing (the existence assertion).
    3. Inventory being included in the financial statements which actually belongs to third parties (the rights and obligations assertion).
    4. All of the above
  1. The audit procedures that the auditor will need to perform in relation to Inventory held by third parties include:
    1. If the goods held by the third party are material the auditor should attend the inventory count to verify existence of the inventory.
    2. The auditor can also obtain a report from the third party’s auditors confirming the reliability of the internal controls at the third party.
    3. Both A&B
    4. None
  1. Where the client uses a perpetual system, the auditor should:
    1. Attend at least one count to ensure that adequate controls are applied during the counts
    2. If the system balance for inventory is deemed reliable as a result of these procedures, further procedures to verify valuation and rights will still be required.
    3. Inspection of purchase invoices for the name of the client will enable rights to be confirmed.
    4. NRV testing and comparison of inventory days with prior year will be performed to identify issues with valuation.
    5. All of the above

  1. Advantages of perpetual counts include:
    1. Reduces time constraints for the auditor, and enables them to attend counts relating to lines at greater risk of material misstatement.
    2. Slow-moving and damaged inventory is identified and adjusted for in the client’s records on a continuous basis meaning the year-end valuation should therefore be more accurate.
    3. Both A&B
    4. None
  1. Disadvantages of perpetual counts include:
    1. The auditor will need to obtain sufficient appropriate evidence that the system operates effectively at all times, not just at the time of the count.
    2. Additional procedures will be necessary to ensure that the amount included for inventory in the financial statements is appropriate, particularly with regard to cut-off and year-end allowances.
    3. Both A&B
    4. None
  1. The reasons for the importance of closing inventory for the auditor include:
    1. Inventory may suffer from deterioration, loss or theft that may not be recognised in the client company’s financial statements.
    2. Inventory may be highly technical in nature. Where inventory is complex, the auditor may need to consider whether to rely on the work of an expert.
    3. Establishing a closing inventory figure may be a lengthy and complex process for the client, with a high risk of error.
    4. All of the above
  1. The focus of testing for receivables is:
    1. Valuation
    2. Existance
    3. Both A&B
    4. None
  1. The principal risks of misstatement of the trade receivables balance are due to:
    1. receivables being irrecoverable (the valuation assertion)
    2. receivables being contested by customers (the existence and rights and obligations assertions)
    3. cut-off between goods outwards and receivables recording being incorrect
    4. All of the above
  1. Which assertions a direct confirmation of receivables is intended to check?
    1. Existence, Rights and obligations, Cut-off
    2. Accuracy, valuation and allocation
    3. Both A&B
    4. None
  1. Prepayments are services or goods which a company has paid for in advance. The audit procedures that the auditor will need to perform include:
    1. Inspect bank statements to ensure payment has been made: existence.
    2. Recalculate the amount prepaid to confirm mathematical accuracy: valuation.
    3. Compare prepayments with the prior year to identify any missing items or any new prepayments which require further testing: existence, valuation, and completeness. (Analytical procedure).
    4. All of the above

  1. The focus of testing for liabilities is:
    1. Completeness
    2. Valuation
    3. Existence
    4. All of the above
  1. The audit procedures that the auditor will need to perform in relation to payables include:
    1. Obtain a list of trade payables, cast to verify arithmetical accuracy and agree to the general ledger and the financial statements: verifies completeness, classification, presentation.
    2. Compare the list of trade payables and accruals against the prior year list to identify any significant omissions: completeness. (Analytical procedure)
    3. Inspect after date payments, if they relate to the current year then follow through to the payable’s ledger or accrual listing: completeness.
    4. All of the above
  1. For the Assurance about the completeness of trade payables balances, the auditor should carry out procedures such as:
    1. Review the list of account balances for any suppliers who are not in the listing of trade payables, but who would be expected to be in the listing.
    2. Compare the list of trade payables balances with the listing that was prepared for the previous year’s audit.
    3. Apply analytical procedures and obtain explanations for any significant differences identified with this method of testing.
    4. All of the above
  1. The audit procedures that the auditor will need to perform in relation to accruals include:
    1. Obtain the list of accruals from the client, cast it to confirm mathematical accuracy and agree to the general ledger and the financial statements: completeness, classification.
    2. Inspect invoices received post year-end to confirm the actual amount and assess whether the accrual is reasonable: valuation.
    3. Compare the accruals this year to last year to identify any missing items or unusual fluctuation in amount and discuss this with management: completeness and valuation. (Analytical procedure)
    4. All of the above
  1. Accrued wages and salaries may be more material than other items and may require a higher level of audit attention:
    1. Consider what items should be accrued for at the end of the reporting period, such as unpaid wages, overtime, holiday pay, bonuses.
    2. Check the amounts for accrued wages and salaries by comparing them with personnel records and payroll records and to payments made after the year end.
    3. Confirm that any additional costs (such as employer’s payroll taxes) have been accounted for.
    4. All of the above
  1. The audit procedures that the auditor will need to perform in relation to provisions include:
    1. Obtain a breakdown of the items to be provided, cast it and agree the figure to the financial statements: accuracy and presentation.
    2. Inspect relevant board minutes to ascertain whether payment is probable: existence.
    3. Obtain confirmation from client’s lawyer about the likely outcome and chances of payment (e.g. for a legal provision): existence and rights and obligations.
    4. All of the above
  1. The audit approach to gathering evidence on contingencies may be as follows:
    1. Ascertain the approach taken by the client’s management to identifying contingencies.
    2. Review relevant sections of the business press and trade journals for areas in which possible industry-wide contingencies may arise.
    3. Consider whether expert advice may be required from outside sources other than lawyers.
    4. All of the above

  1. The audit procedures that the auditor will need to perform in relation to Share capital include:
    1. Agree authorised share capital and nominal value disclosures to underlying shareholding agreements/statutory constitution documents.
    2. Inspect cash book for evidence of cash receipts from share issues and ensure amounts not yet received are correctly disclosed as share capital called-up not paid in the financial statements.
    3. Inspect board minutes to verify the amount of share capital issued during the year.
    4. All of the above
  1. The audit procedures that the auditor will need to perform in relation to Dividends include:
    1. Inspect board minutes to agree dividends declared before the year-end.
    2. Inspect bank statements to agree dividends paid before the year-end.
    3. Inspect dividend warrants to agree dividend payment.
    4. All of the above
  1. The audit procedures that the auditor will need to perform in relation to Director’s emoluments include:
    1. Obtain and cast a schedule of director’s remuneration split between wages, bonuses, benefits, pension contributions and other remuneration, and agree to the financial statement disclosures.
    2. Obtain a written representation from directors that they have disclosed director’s remuneration to the auditor.
    3. Inspect board minutes for discussion and approval of directors’ bonus announcements or other additional remuneration.
    4. All of the above
  1. The audit procedures that the auditor will need to perform in relation to Reserves include:
    1. Agree opening reserves to prior year closing reserves and reconcile movements.
    2. Agree movements in reserves to supporting documentation
    3. Both A&B
    4. None

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