QB Chapter 13 Substantive procedures: key financial statement figures

Question 1

Which three of the following provide evidence to support the rights and obligations
assertion in relation to non-current assets?
A Title deeds
B Purchase invoices
C Vehicle registration documents
D Sales invoices

Answer 1

A,B,C
The rights and obligations assertion means that the entity holds or controls the rights
to assets. Although vehicle registration documents show registered keeper, not owner,
the keeper is likely to have control of the asset. Both title deeds and purchase invoices
give evidence of ownership (which gives control). Sales invoices give evidence of no
longer having ownership of something and do not therefore support the rights and
obligations assertion

Question 2

Which one 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-of

Answer 2

D Cut-off is a financial statement assertion that affects classes of transactions, not account
balances.

Question 3

Which three of the following are the more significant risks in relation to an inventory
balance in the financial statements?
A Inventory exists but has not been included in the financial statements
B Inventory has been valued at cost when net realisable value is lower
C Inventory has been valued when it is obsolete and has no value
D Inventory has not been disclosed properly in the financial statements

Answer 3

A,B,C
Inventory has not been disclosed properly in the financial statements constitutes the
lowest risk, as the disclosure requirements in relation to inventory are not onerous. In
contrast, inventory is often easy to conceal or omit from records or count wrongly, and,
as it usually consists of a large number of items, valuation can be tricky also.

Question 4

Which two of the following constitute the best quality evidence concerning the net
realisable value of inventory?
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

Answer 4

B,C Post year-end sales invoices and orders. The controls over counting relate to existence,
not valuation. A post year-end sales price list gives evidence of management intention
in relation to inventory, but not evidence of the price that customers are genuinely
prepared to pay (in the way that invoices and orders do).

Question 5

Which one of the following is the reason why the positive method of confirming receivables
balances with customers is generally preferred?
A It is carried out in the auditor’s name
B It requires the customer to reply giving or confirming or disagreeing with the balance
C It only requires the customer to reply if he disagrees with the balance
D It requires replies to be sent to the client

Answer 5

B The fact that a positive confirmation requires the customer to reply to confirm or deny
the balance (or to reply giving the balance) is the reason why this method is generally
preferred in preference to a negative confirmation. This is because a negative
confirmation only requires a reply if the balance is not agreed – thereby giving poorer
quality evidence as if there is no reply the auditor cannot be sure that the customer has
not just ignored the letter (or whether he has even received it). The answer is not
option A as negative confirmations are also carried out in the auditor’s name. Option C
describes a negative confirmation and so is not correct. Option D does not apply to
any type of confirmation.

Question 6

Which two of the following procedures are 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

Answer 6

B,C Direct confirmations with customers and review of cash paid after date are most
appropriate as these provide independent confirmation of the year-end trade
receivables balance, whereas the receivables ledger and sales invoices are part of the
client’s own records.

Question 7

Which one of the following procedures which could be undertaken to confirm the valuation
of a client’s bank balance is the most reliable?
A Inspection of the bank reconciliation
B Inspection of the bank statement
C Inspection of the bank letter
D Inspection of the cash book

Answer 7

C Inspection of the bank letter gives the most reliable evidence as this is received by the
auditor directly from the bank. Bank statements have been sent via the client, so there
is scope for them to have been tampered with in some way. Bank reconciliations and
the cash book are client-generated documents and are, therefore, less reliable.

Question 8

In which two of the following situations should an auditor carry out a cash count?
A An individual cash float is material
B A client has a large number of cash floats, which are immaterial in total
C A client has poor controls over cash floats, which are immaterial in total
D The auditor suspects that a fraud has been committed in relation to immaterial cash
floats

Answer 8

A,D The auditor should count an individual cash float which is material because he should
test all material items. He should also count immaterial cash floats where he suspects
that a fraud has been committed as although the individual floats are immaterial, the
overall impact of such a fraud could be material to the financial statements if repeated
over time.

Question 9

Which one of the following is the key assertion with which auditors are concerned in
relation to payables?
A Completeness
B Existence
C Accuracy
D Classification

Answer 9

A Completeness (ie, understatement): liabilities are generally tested for understatement,
as they are more likely to be understated than overstated.
Existence (overstatement): a higher-risk assertion for assets, as opposed to liabilities.
Presentation and classification are generally less risky assertions in this case.

Question 10

Which three of the following are reasons why the auditors might seek direct confirmation of
balances due from suppliers?
A To obtain third party evidence
B The auditors suspect that the client is deliberately understating payables
C The internal controls relating to purchases are weak
D Supplier statements are unavailable

Answer 10

B,C,D
Although a payables circularisation does provide third party evidence, it is unnecessary
on those grounds alone, because supplier statements provide third party evidence as
well. Therefore a payables circularisation will only be needed where there is some
problem, such as those described in options B, C and D

Question 11

Which two of the following are reasons why sales are often verified by testing the internal
controls in place over sales?
A There are usually too many individual transactions to test them individually
B Sales constitute a 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

Answer 11

B,C Option B is correct – that sales constitute a high volume of similar transactions and are
hence suitable to controls testing. Regarding option C – where controls are expected
to be strong, ISA 330 requires that the auditors test them so this is also correct. Option
A cannot be used as a reason for testing internal controls over sales – however many
transactions there are, if controls appear to be deficient, then those transactions will
need to be subjected to tests of detail. Option D is incorrect as where there is a high
risk of misstatement, substantive procedures should be used.

Question 12

Which three of the following relationships/ratios are reasons why analytical procedures can
give strong evidence in relation to the accuracy of purchases?
A Operating margin
B Purchases and payables
C Purchases and inventories
D Gross margin

Answer 12

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

Question 13

The results of substantive tests in relation to non-current assets at Hammersmith plc are set
out below. The materiality threshold set for these tests was £5,000.
For each of the following results, select the action which should be taken by the audit
senior.
A sample of three assets worth £2,000 in total had been excluded from the non-current
asset register and the financial statements.
A Draw conclusion
B Refer to senior colleague
C Extend sample
A building revalued to £100,000 during the year was vouched to an expert valuation carried
out by a firm of chartered surveyors.
D Draw conclusion
E Refer to senior colleague
F Extend sample

Answer 13

C,D Extending the sample of assets inspected will test if the misstatement found to date is
an anomaly or represents a larger misstatement. Vouching the revalued building to a valuer’s report is sufficient to enable a conclusion
to be drawn.

Question 14

The results of substantive tests on trade payables at Fulham Ltd are set out below. The
materiality threshold set for these tests was £17,000.
For each of the following results, select the action which should be taken by the audit
senior.
Three goods inwards records dated before the year end relating to goods worth £16,000
were traced to purchase invoices which have been included in the subsequent year and not
provided for this year.
A Draw conclusion
B Refer to senior colleague
C Extend sample
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.
D Draw conclusion
E Refer to senior colleague
F Extend sample

Answer 14

C,E For the misstatement in cut-off, the sample should be extended to measure the full
extent of the cut-off misstatement.
Missing supplier statements (which should make the auditor suspicious) should be
referred to a senior colleague, so that this is investigated and alternative procedures
designed if necessary

Question 15

The auditor of Barnett plc carried out an external confirmation of receivables at the year end
to confirm the accuracy of total trade receivables in the statement of financial position at
that date. Two of the replies to the confirmations disagreed with the balance.
For each of these two disagreements, select whether the disagreement would or would not
be considered a misstatement for the purposes of evaluating the accuracy of total trade
receivables in the statement of financial position at the year end.
Watford Ltd disagreed with the balance because they had made a payment two days
before the year end. The auditor has confirmed that the cheque cleared the bank two days
after the year end.
A Misstatement
B Not misstatement
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 plc on
the last day of the year. The auditor has verified that the despatch record and cut-off with
inventory are correct.
C Misstatement
D Not misstatement

Answer 15

B,D Both disagreements are due to timing differences and hence do not constitute
misstatements in the accuracy of total trade receivables.

Question 16

Hayley, an audit junior, has carried out the following tests to verify the valuation of inventory
in the financial statements of Cobham plc.
In each case, select whether the test proves the assertion of valuation or not.
Attending the inventory count and carrying out sample counts on a number of items
A Proves valuation
B Does not prove valuation
Comparing cost on a number of inventory items to sales invoices subsequent to the year
end
C Proves valuation
D Does not prove valuation

Answer 16

B,C The first statement represents a test of control over inventory counting procedures and
therefore the completeness or existence of the quantity of inventory. It is not a test of
valuation. Checking inventory items against sales invoices tests for net realisable value
(NRV) and hence valuation of the inventory.

Question 17

Lisa has obtained a list of items which make up the cash and cash equivalents balance
(£3,556) in the financial statements of Baker Ltd. Materiality has been set at £4,000.
For each item, select whether or not Lisa should test the item.
Current account balance (overdrawn) £5,600
A Test
B Not test
Petty cash float £750
C Test
D Not test
Special directors’ cash account £1,294
E Test
F Not test

Answer 17

A,D,E
The current account balance should be tested as it is over the materiality threshold.
The petty cash float is not material and hence need not be tested.
The special directors’ cash account should be tested whatever its monetary value. Strict
materiality thresholds do not apply to directors’ emoluments which need to be
disclosed whatever their amount. In any case the auditor needs to ascertain what this
balance represents.

Question 18

Kamran, an audit junior, has been asked to test the completeness of certain items in the
income statement. He has carried out the following tests.
For each test carried out, select whether that test proves the assertion of completeness or
not.
Analytical procedures on revenue figures, budget v actual and actual current year v actual
previous year
A Proves completeness
B Does not prove completeness
Tracing a sample of goods received records to payables ledger and financial statements
C Proves completeness
D Does not prove completeness
Tracing a sample of entries on the payroll to individual HR records
E Proves completeness
F Does not prove completeness

Answer 18

A,C,F
Analytical procedures are useful for detecting incomplete figures (ie, the auditor can
calculate what figure he expects and then compare the actual to it).
Tracing from goods received records to the payables ledger and financial statements
proves the completeness of purchases/payables (ie, that all goods received have been
recorded as purchase/payables).
Tracing a sample of entries on the payroll to human resources records does not test
completeness as the direction of testing is from the payroll balance to the source
documentation.

Question 19

Which two of the following assertions is the auditor most concerned with when testing
property, plant and equipment?
A Occurrence
B Existence
C Rights and obligations
D Cut-off

Answer 19

B,C Only existence and rights and obligations are assertions about account balances.
Occurrence and cut-off are assertions in respect of classes of transactions and events
for the period.

Question 20

The auditor of Mondays Ltd is performing a test to ensure that there are no omissions from
the non-current asset register.
In respect of which one of the following assertions will this procedure provide audit
evidence?
A Cut-off
B Accuracy, valuation and allocation
C Completeness
D Existence
E Classification

Answer 20

C Testing for omissions is the same as testing for completeness (ie, saying that nothing
has been omitted from the register means the same as saying the register is complete).

Question 21

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 acquired in the period
D Confirmation that calculations on the non-current asset schedule are correct in respect
of motor vehicles

Answer 21

A,C Physical inspection and confirmation of calculations provide evidence of existence and
valuation respectively as opposed to rights and obligations.
The rights and obligations assertion means that the entity holds or controls the rights
to assets. Although registration documents show registered keeper, not owner, the
keeper is likely to have control of the asset. Purchase invoices give evidence of
ownership (which gives control)

Question 22

For each of the following circumstances in respect of inventory, select which financial
statement assertion would be affected.
Inventory which had been sold by the end of the period has been included in inventory.
A Completeness
B Accuracy, valuation and allocation
C Cut-off
Damaged items of inventory have not been written down to net realisable value.
D Completeness
E Accuracy, valuation and allocation
F Cut-off

Answer 22

C,E The cut-off assertion is affected by including inventory sold in inventory at the end of the
period (ie, cut-off is incorrect). Where damaged items have not been written down to NRV,
then the accuracy, valuation and allocation assertion is directly affected (ie, inventory is
incorrectly valued).

Question 23

For each of the following circumstances in respect of inventory, select which financial
statement assertion would be affected.
Inventory items were excluded from the total in the financial statements in error.
A Completeness
B Accuracy, valuation and allocation
C Cut-off
Due to the miscalculation of cost, some inventory items have been included at cost when
net realisable value is lower.
D Completeness
E Accuracy, valuation and allocation
F Cut-off

Answer 23

A,E The completeness assertion is affected by the omission of inventory items (ie, inventory
is not complete).
The accuracy, valuation and allocation assertion is affected by miscalculations of cost
and the not writing down of damaged items (ie, inventory is incorrectly valued)

Question 24

The following describes a number of features of the inventory count instructions of
Sydney Ltd.
For each feature, select whether it represents a strength or a deficiency.
The inventory count is performed by warehouse staff and supervised by the warehouse
manager.
A Strength
B Deficiency
Inventory sheets are completed in pencil.
C Strength
D Deficiency
There are two teams of counters, one counting and one checking.
E Strength
F Deficiency

Answer 24

B,D,E
The inventory count should involve personnel who are independent of the warehouse
staff. Count sheets should be completed in pen so that there is a permanent record. By
having two teams of counters involved in the inventory count, there is a check within
the inventory counting process that the count is being carried out correctly.

Question 25

For each of the following statements concerning perpetual inventory counts, select whether
they are true or false.
Adequate inventory records must be kept up to date.
A True
B False
All inventory lines must be counted at least once per month.
C True
D False
Material differences between book inventory and actual inventory must be investigated and
corrected.
E True
F False

Answer 25

A,D,E

All inventory lines must be counted at least once per year, not once per month.

Question 26

Management should compare cost and net realisable value for each item of inventory.
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

Answer 26

A,C,D
An increase in selling price increases net realisable value. Trade discounts from
suppliers reduce cost.

Question 27

Direct confirmation of trade receivables provides evidence in respect of which two of the
following assertions?
A Existence
B Accuracy, valuation and allocation
C Rights and obligations
D Completeness
E Occurrence

Answer 27

A,C Accuracy, valuation and allocation is not supported as we have no evidence that these
receivables intend to pay. Completeness is not supported as it is the list of receivables
provided by the client that is subject to direct confirmation (ie, the test is for existence
and ownership (= rights and obligations) from that list). Occurrence is a financial
statement assertion that affects classes of transactions and not account balances.

Question 28

The following statements apply to the use of the positive or negative method of direct
confirmation of receivables.
For each statement, select whether it applies to a situation where the positive method
should be used or to a situation where the negative method could be used.
The assessed risk of material misstatement is high.
A Positive method
B Negative method
A small number of large balances is involved.
C Positive method
D Negative method
A substantial number of misstatements is not expected.
E Positive method
F Negative method
There is no reason to believe that respondents will disregard the requests.
G Positive method
H Negative method

Answer 28

A,C,F,H
The negative method of direct confirmation of receivables (ie, only receiving responses
by exception) could be used when a substantial amount 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.

Question 29

Which one of the following is the most reliable evidence of the valuation of trade
receivables?
A A comparison of current year-end total with previous year
B Analysis of after-date receipts
C Reconciliation of receivables ledger and receivables ledger control account
D Reconstruction of receivables balance by tracing individual amounts invoiced to
despatch records

Answer 29

B Whereas the procedures described in A, C and D are helpful with respect to the
valuation assertion, subsequent receipt of cash confirms absolutely that the balance
was recoverable at the year end.

Question 30

Smith LLP is considering the preliminary audit strategy for the following two new audit
clients whose principal characteristics are set out below.
For each client, select whether Smith LLP would be likely to rely on internal controls or to
rely completely on substantive procedures.
Client AX has recently been incorporated and is experiencing rapid growth. It is in the
process of recruiting a financial controller.
A Rely on internal controls
B Rely completely on substantive procedures
Client BF 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.
C Rely on internal controls
D Rely completely on substantive procedures

Answer 30

B,C If the auditor cannot rely on the internal controls in place, because they are deficient,
he will need to rely completely on substantive procedures. Client AX, 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.
Client BF is an established company with apparent controls in place so the auditor
should be able to test and rely on those controls.

Question 31

Two types of procedures used in gathering evidence are tests of controls and substantive
procedures.
For each of the following examples, select the type of procedure illustrated.
Examining the instructions issued for a year-end physical inventory count
A Test of control
B Substantive procedure
Observing despatch procedures
C Test of control
D Substantive procedure
Comparing this year’s sales figures to those of previous years
E Test of control
F Substantive procedure

Answer 31

A,C,F
Test of control – that the instructions are likely to lead to an accurate count
Test of control – that despatch procedures are being properly followed
Substantive procedure – remembering that substantive procedures include analytical
procedures, which is what this describes SAMPLE PAPE

Question 32

The following are examples of tests which an assurance firm might use at the gathering
evidence stage of an assignment.
For each example, select the type of procedure that test illustrates.
Adding the list of year-end receivables
A Confirmation
B Recalculation
C Reperformance
Using computer–assisted audit techniques (CAATs) to check the ageing of the year-end list
of aged receivables
D Confirmation
E Recalculation
F Reperformance

Answer 32

B,F Recalculation consists of checking the mathematical accuracy of documents or records,
therefore casting the list of year-end receivables is a recalculation procedure.
SAMPLE PAPER
Reperformance is the auditor’s independent execution of procedures or controls which
were originally performed as part of the entity’s internal control, therefore using CAATs
to check the ageing of the year-end list of aged receivables is a reperformance of that
ageing analysis, which is itself a control over the recoverability of receivables.
SAMPLE PAPER

Question 33

In order to gather sufficient, appropriate evidence, the auditor may make use of external
confirmation requests.
For each of the following statements, select true or false.
A positive confirmation request always asks the respondents to reply to the auditor
indicating whether or not they agree with the information provided.
A True
B False
A sample of confirmation requests drawn from the client’s list of balances is more
appropriate for receivables balances than for payables balances.
C True
D False
A positive confirmation request usually provides more reliable audit evidence than a
negative confirmation request.
E True
F False

Answer 33

B,C,E
False – a positive confirmation may take two forms: requesting a response indicating
whether they agree or disagree with the information provided, or requesting the
recipient to state the amount owed by/to them.
True – receivables are tested for overstatement therefore it is acceptable to select the
sample from the client’s list of balances. The direct confirmation would be likely to elicit
a response (even if negative confirmation is used) if the balance is indeed overstated.
However, payables are tested for understatement and the auditor is looking for
balances which are not on the client’s list, but should be. Therefore this sample should
be drawn from a list of all possible payables, not from the client’s list, which may
already be understated.
True – with a positive confirmation, a response is expected whether there is agreement
or disagreement. With a negative confirmation, there is an element of uncertainty as to
the reasons for non-response. Hence the former is ordinarily more reliable than the
latter. SAMPLE PAPE

Question 34

Which one 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

Answer 34

C Completeness – a sequence check will highlight missing documents which may
indicate unrecorded transactions – ie, test the completeness of sales. SAMPLE PAPER

Question 35

Which one 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 bank column in the cash book
C Obtaining direct confirmation of the bank balance from the client’s bank
D Reperforming the additions on the bank reconciliation

Answer 35

C Obtaining direct confirmation of the bank balance from the client’s bank will confirm
the existence of the cash at bank with a third party (ie, the bank). SAMPLE PAPER

Question 36

The auditor of Raindrop Ltd carried out a direct confirmation at the year end to confirm the
accuracy of total trade receivables in the statement of financial position at that date. Two of
the replies to the circularisation disagreed with the balance.
For each of these two disagreements, select whether the disagreement would be
considered a misstatement for the purpose of evaluating the accuracy of total trade
receivables.
Jones LLP disagreed with the balance because their records indicated that the amount had
been paid a few days before the year end. The auditor’s enquiries revealed that the cheque
was cleared shortly after the year end.
A Misstatement
B Not a misstatement
Sunny plc disagreed with the balance because its records indicated that it had paid the
balance two weeks before the year end. The auditor’s enquiries revealed that the amount
had been received and credited to another customer’s account before the year end.
C Misstatement
D Not a misstatement

Answer 36

B,D Not misstatement – this disagreement stems from a timing difference and, as such,
does not indicate a misstatement in the receivables balance.
Not misstatement – this disagreement stems from a misposting which does not affect
the total receivables balance in the financial statements. SAMPLE PAPER

Question 37

The external auditor of Aaron Ltd has set materiality thresholds such that items under
£40,000 are not generally considered material.
For each of the following items in Aaron Ltd’s financial statements select whether the
auditor would usually test it for overstatement or for understatement, or whether the item
would not be tested at all.
£1,000 due from Harry, a director of Aaron Ltd
A Overstatement
B Understatement
C Not test
Sundry income £35,000
D Overstatement
E Understatement
F Not test

Answer 37

A,F Overstatement – 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 (director loan).
Not test – the amount is below the materiality threshold. The likelihood of material
fraud or misstatement within the balance is very low. SAMPLE PAPER

Question 38

Gamma 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 found to be higher than book inventory.
Which one of the following explains this difference?
A Unrecorded write offs of scrapped inventory
B Unrecorded purchase returns
C Unrecorded branch requisitions
D Unrecorded branch returns

Answer 38

C 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. All the others would lean to book inventory higher
than actual inventory. SAMPLE PAPER

Question 39

The results of substantive audit tests at Errata plc are set out below. The materiality
threshold set for these tests was £1,000.
For each of the following results, select the action which should be taken by the audit
senior.
No misstatements found
A Draw conclusion
B Refer to senior colleague
C Extend sample
An arithmetical misstatement of £5,000 found
D Draw conclusion
E Refer to senior colleague
F Extend sample
A misstatement of £10 found, sanctioned by the finance director
G Draw conclusion
H Refer to senior colleague
I Extend sample

Answer 39

A,F, H
No misstatements are found; therefore, the appropriate action would be to draw a
conclusion.
An arithmetic misstatement of £5,000 found would be above the materiality threshold
and so the auditor should extend his sample.
A misstatement of £10 found, sanctioned by the finance director (FD) should lead to
the auditor to refer the matter to a senior colleague due to the FD’s sanctioning.
SAMPLE PAPER

Question 40

Which one of the following describes how an assurance provider would check the existence
assertion for a non-current asset?
A Trace the physical item to the non-current asset register
B Trace the physical item to the financial statements
C Trace an entry in the non-current asset register to the physical item
D Trace an entry in the non-current asset register to the financial statements
E Trace an entry in the financial statements to the physical item

Answer 40

C To test for existence the reporting accountant should work from the financial
statements to the physical item. However, the financial statements themselves do not
contain an analysis of the individual items that make up non-current assets so the
reporting accountant will need to select his sample from the non-current asset register
(having checked that this record agrees to the financial statements). SAMPLE PAPER

Question 41

Which two of the following statements identify an appropriate source of information for
audit work directed towards the stated risk associated with tangible non-current assets?
A Purchase invoices for assets purchased 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

Answer 41

A,D Purchase invoices for assets purchased within the year may contain evidence in relation
to the risk of omission of assets owned by the company.
Physical inspection of the assets themselves by the auditor would not generate
evidence in relation to the risk of the company not actually owning the assets. The
mere existence of the physical assets does not tell us that the company has the rights
and obligations that relate to them.
Valuations carried out by third party valuers would not generate evidence in relation to
the risk of the assets being incorrectly presented in the financial statements. Although
the assets may be valued correctly, this does not necessarily mean that they have been
presented in line with IFRSs.
Sales invoices for assets sold within the year may contain evidence in relation to the risk
of the company not actually owning the assets. This helps address the risk that the
assets do not exist.

Question 42

Assurance providers obtain evidence using procedures, as set out in ISA (UK) 500, Audit
Evidence.
For each of the following statements, select whether they are most likely to be true or false.
A major risk of misstatement of the receivables balance in the financial statements is of
debts not being complete.
A True
B False
The principal risk of misstatement of long-term liabilities in the financial statements is of
non-existent liabilities being declared.
C True
D False
A major risk of misstatement of the inventory balance in the financial statements is of
inventory being included in the financial statements at full value when it is obsolete or
damaged.
E True
F False

Answer 42

B,D,E
Completeness of debts receivable is not usually considered a major risk (ie,
understatement of assets) – the opposite is usually the case ie, existence is a major risk.
Although existence of long-term liabilities is indeed a risk, it is not the principal risk.
Incorrect valuation of inventory – particularly obsolete or damaged inventory – is a
major risk of misstatement.

Question 43

At which two of the following business locations should auditors be particularly alert to the
risk of money laundering?
A Car wash
B Manufacturer of upholstery
C Surveyors' offices
D Pawn shop

Answer 43

A,D A car wash or a pawn shop is likely to have a large number of cash transactions, which
makes it a suitable front business for a money laundering operation