The Multiple Choice Questions Blog

Alex Manufacturing Ltd has a head office and several branches.

The head office operates a continuous inventory counting system.

The system ensures that all items are counted at least twice a year and checked against inventory records.

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 higher than book inventory.

Which one of the following explains this difference?

Select ONE answer:

1. Unrecorded write offs of scrapped inventory
2. Unrecorded branch requisitions
3. Unrecorded purchase returns
4. Unrecorded branch returns

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 2

1. Not correct
2. Correct – Actual inventory levels at branches are higher than book inventory – ie, there must be unrecorded goods inwards. Only unrecorded branch requisitions (goods coming in from head office) would explain this. Al the others would lean to book inventory higher than actual inventory.
3. Not correct
4. Not correct

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Tick and Bash is the auditor of Alex Manufacturing Ltd and has set materiality thresholds such that items under £40,000 are not generally considered material.

For each of the following items in Alex Manufacturing Ltd’s financial statements, select whether the auditor would usually test it for overstatement, for understatement, whether the item would not be tested at all, or whether it should be referred to a senior colleague.

• Sundry income £35,000

Select ONE answer:

1. Not Test
2. Consult a senior colleague
3. Understatement
4. Overstatement

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 1

1. Correct – the amount is below the materiality threshold. The likelihood of material fraud or misstatement within the balance is very low.
2. Not correct
3. Not correct
4. Not correct

This work is licensed under a Creative Commons Attribution 4.0 International License.

Tick and Bash is the auditor of Alex Manufacturing Ltd and has set materiality thresholds such that items under £40,000 are not generally considered material.

For each of the following items in Alex Manufacturing Ltd’s financial statements, select whether the auditor would usually test it for overstatement, for understatement, whether the item would not be tested at all, or whether it should be referred to a senior colleague.

• £1,000 due from Jonny, a director of Alex Manufacturing Ltd.

Select ONE answer:

1. Not Test
2. Consult a senior colleague
3. Understatement
4. Overstatement

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 4

1. Not correct
2. Not correct
3. Not correct
4. Correct – the amount is an asset, so we test primarily for overstatement. The amount owed is considered irrespective of the materiality threshold due to the nature of the item (i.e. a director’s loan).

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Tick and Bash are the auditors of Alex Manufacturing Ltd and have carried out a direct confirmation at year-end to verify the accuracy of the total trade receivables in the statement of financial position at that date.

One of the replies to the circularisation disagreed with the balance.

For this disagreement, select whether the disagreement would be considered a misstatement for the purpose of evaluating the accuracy of total trade receivables, not a misstatement, it depends on the size of the business, or one should consult a senior colleague for a final decision

• Arthur Imports plc disagreed with the balance because its records indicated it had paid it two weeks before year-end. The auditor’s enquiries revealed that the amount had been received and credited to another customer’s account before the year-end.

Select ONE answer:

1. Misstatement
2. Depends on the size of the business
3. Not a misstatement
4. Consult a senior colleague

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 3

1. Not correct
2. Not correct
3. Correct – this disagreement stems from a mis-posting which does not affect the total receivables balance in the financial statements.
4. Not correct

This work is licensed under a Creative Commons Attribution 4.0 International License.

Tick and Bash are the auditors of Alex Manufacturing Ltd and have carried out a direct confirmation at year-end to verify the accuracy of the total trade receivables in the statement of financial position at that date.

One of the replies to the circularisation disagreed with the balance.

For this disagreement, select whether the disagreement would be considered a misstatement for the purpose of evaluating the accuracy of total trade receivables, not a misstatement, it depends on the size of the business, or one should consult a senior colleague for a final decision

• Lucy Trading Ltd disagreed with the balance because their records indicated that the amount had been paid a few days before the year-end. Tick and Bash’s enquiries revealed that the cheque was cleared shortly after the year-end.

Select ONE answer:

1. Misstatement
2. Not a misstatement
3. Depends on the size of the business
4. Consult a senior colleague

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 2

1. Not correct
2. Correct – this disagreement stems from a timing difference and, as such, does not indicate a misstatement in the receivables balance.
3. Not correct
4. Not correct

This work is licensed under a Creative Commons Attribution 4.0 International License.