Tag: Accounting

Two types of procedures used in gathering evidence are tests of controls and substantive procedures.

For the following example, select the type of procedure that is illustrated below.

• Examining the instructions issued for a year-end physical inventory count

Select ONE answer:

1. Depends on the size of the business
2. Consult a senior colleague
3. Substantive procedure
4. Test of control

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 – Test of control – that the instructions are likely to lead to an accurate count

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

Tick and Bash LLP is considering the preliminary audit strategy for the following new audit client, whose principal characteristics are set out below.

For the new client, select whether Tick and Bash LLP would be likely to rely on internal controls, rely completely on substantive procedures, or it depends on the size of the business, or it should be referred to a more senior auditor.

• Lucy Trading Ltd is an established company with well-documented systems and controls. It has an internal audit function whose principal activity is to monitor the implementation and effectiveness of existing controls.

Select ONE answer:

1. Depends on the size of the business
2. Consult a senior colleague
3. Rely on internal controls
4. Rely completely on substantive procedures

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 – If the auditor cannot rely on the internal controls in place, because they are deficient, he will need to rely completely on substantive procedures. Alex Manufacturing Ltd, a newly formed company without a financial controller, will be unlikely to have effective internal controls therefore the auditor will need to rely completely on substantive procedures. Lucy Trading Ltd is an established company with apparent controls in place so the auditor should be able to test and rely on those controls.
4. Not correct

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

Tick and Bash LLP is considering the preliminary audit strategy for the following new audit client, whose principal characteristics are set out below.

For the new client, select whether Tick and Bash LLP would be likely to rely on internal controls, rely completely on substantive procedures, or it depends on the size of the business, or it should be referred to a more senior auditor.

• Alex Manufacturing Ltd has recently been incorporated and is experiencing rapid growth. It is in the process of recruiting a financial controller.

Select ONE answer:

1. Rely on internal controls
2. Rely completely on substantive procedures
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 – If the auditor cannot rely on the internal controls in place, because they are deficient, he will need to rely completely on substantive procedures. Alex Manufacturing Ltd, a newly formed company without a financial controller, will be unlikely to have effective internal controls therefore the auditor will need to rely completely on substantive procedures. Lucy Trading Ltd is an established company with apparent controls in place so the auditor should be able to test and rely on those controls.
3. Not correct
4. Not correct

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

Which ONE of the following is the most reliable evidence of the VALUATION of trade receivables?

Select ONE answer:

1. Analysis of after-date receipts
2. A comparison of current year-end total with previous year
3. Reconciliation of receivables ledger and receivables ledger control account
4. Reconstruction of receivables balance by tracing individual amounts invoiced to despatch notes

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 – Whereas the other procedures described are helpful with respect to the valuation assertion, subsequent receipt of cash confirms absolutely that the balance was recoverable at the year end.
2. Not correct
3. Not correct
4. Not correct

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

The following statement applies to the use of the positive or negative method of direct confirmation of receivables.

For this statement, select whether it applies to a situation where the positive method should be used, to a situation where the negative method could be used, it depends on the size of the business, or it should be referred to a more senior auditor.

• There is no reason to believe that respondents will disregard the requests.

Select ONE answer:

1. Depends on the size of the business
2. Consult a senior colleague
3. Positive method
4. Negative method

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 negative method of direct confirmation of receivables (i.e., only receiving responses by exception) could be used when a substantial number of misstatements is not expected and there is no need to believe that respondents will disregard these requests. In other circumstances the positive method should be used.

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