25.2 What is a key source of audit evidence for the issue of ordinary shares?
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1 .24.1 In order to gather sufficient, appropriate evidence, the auditor may make use of external confirmations. These may take the form of being a positive or negative request.A positive confirmation request for trade receivables always asks respondents to reply to the auditor indicating whether or not they agree with the information provided.Is this statement true or false?
A True B False
2 .24.2 During their interim audit the auditors discover that there is often a delay between goods being delivered to customers and the subsequent raising of a sales invoice.Which test is most likely to establish the extent of any understatement of receivables at the year end?
A Comparing goods despatch notes issued shortly after the year end with sales records B Comparing goods despatch notes issued shortly before the year end with sales records C Comparing sales invoices issued shortly before the year end with goods dispatched notes D A receivables confirmation with a d...
3 .24.4 How would an auditor trace transactions if the objective of the auditor’s tests of details is to detect possible understatement of sales?
A From purchase order to shipping documents B From cash receipts to sales invoices C From shipping documents to sales invoices
4 .24.3 The auditor of Lydney Co reviews the receivables ledger at the planning stage for the year end audit and determines that it comprises a large number of small balances, with a few larger balances, which are settled, on average, in two months. As in previous years, the reporting deadline is one month after the year end. Internal controls are considered to be effective and the error rate is expected to be low.What is likely to be the most effective substantive audit procedure to assist in the verification of year end receivables?
A Request a sample of customers to confirm the balance on their account at an interim date and review movements to the year end B Request a sample of customers to confirm the balance on their account at the year end C Trace a sample of invoices and cash receipts through the system to the customers...
5 .24.5 The managing director of a client company has refused to allow the auditor to write to a major customer who is on the list of receivables selected for direct confirmation, as the customer is a close personal friend who may be offended by the request.In these circumstances the auditor’s next step would be to
A Indicate that his refusal constitutes a restriction of scope which will lead to a modification of the audit opinion B Perform the circularisation as planned since the auditor’s responsibility is to the members and not the directors C Perform the circularisation substituting another receivable wi...
7 .25.3 A company uses the services of a company secretary agent to deal with all regulatory issues relating to share capital including maintenance of the share register, share issues and statutory returns.What written confirmation should the auditor obtain from the company’s agent?
A Details of any restrictions on the payment of dividends B The number of shares issued and outstanding C Guarantees of preferred share liquidation value D The authorised share capital
8 .25.4 An auditor is in the process of performing substantive procedures on a client’s equity balances and traces share-related transactions recorded during the year to the board minutes.Which of the following assertions is the auditor testing with this procedure?
A Valuation B Understandability and classification C Existence and occurrence D Completeness
9 .25.1 The financial statements of a manufacturing company do not disclose a loan of USD1,500 made to a director during the year and repaid in full before the year end. The company’s profit for the year was USD2million.What reference, if any, should be made to this matter in the audit report?
A No reference is necessary B As an except for opinion, giving details of the loan (lack of evidence) C As an except for opinion, giving details of the loan (material misstatement) D An adverse opinion, giving details of the loan
10 .26.4 Farnham Co has a bank overdraft of USD450,000, secured by a floating charge over its inventory.It also has a deposit with the same bank of USD200,000. The bank confirmation letter states that the bank has the right to off-set these balances, and has set an overall net borrowing limit on the company of USD300,000. The finance director has disclosed these amounts as “secured overdraft – USD250,000” under “current liabilities”, with no further description in the notes other than the nature of the security.What steps, if any, should the auditor take in respect of this matter?
A None, as the treatment is correct B Insist upon classification of USD200,000 under current assets and USD450,000 under current liabilities C Insist that the company discloses in the notes the full amount of the overdraft and that it is in breach of its borrowing limit D Accept the treatment but in...
