ACCA AA · Chapter 11
Audit of specific items MCQs with Answers
12 multiple-choice questions on Audit of specific items for ACCA AA Audit and Assurance. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which of the following is correct regarding a bank confirmation request?
- A) The bank's reply is addressed to the client's directors
- B) The bank confirmation is only required where the client has an overdraft
- C) The client sends the request and forwards the bank's reply to the auditor
- D) The auditor controls the sending of the request and the bank replies directly to the auditor
Show answer & explanation
Answer: D) The auditor controls the sending of the request and the bank replies directly to the auditor
To maximise reliability, the auditor must maintain control over external confirmation requests, which includes sending them and receiving the responses directly. The client signs the request to authorise disclosure, but must not handle the reply. Confirmations are relevant for all balances and facilities, not only overdrafts.
Question 2
During attendance at the year-end inventory count, why does the auditor record the numbers of the last goods received note and goods dispatched note issued before the count?
- A) To agree the total quantity counted to the final inventory listing
- B) To test the valuation of slow-moving inventory
- C) To confirm that count teams are independent of the warehouse
- D) To test cut-off of purchases and sales at the final audit
Show answer & explanation
Answer: D) To test cut-off of purchases and sales at the final audit
Recording the last document numbers allows the auditor to check later that goods received before the count are included in both inventory and purchases, and that goods dispatched are excluded from inventory and included in sales. This tests cut-off. Valuation and the final listing are addressed by other procedures.
Question 3
At the year end, Cobble Co holds 2,000 units of a product that cost $50 per unit. The product is expected to sell for $60 per unit, but $15 per unit will be incurred on completion and selling costs. By how much should inventory be written down?
- A) $0
- B) $10,000
- C) $20,000
- D) $30,000
Show answer & explanation
Answer: B) $10,000
NRV per unit = $60 - $15 = $45, which is below cost of $50, so inventory must be written down by $5 per unit. Write-down = 2,000 x $5 = $10,000. Ignoring costs to complete and sell gives no write-down; $20,000 is the gross profit (2,000 x $10) and $30,000 is the total costs to sell.
Question 4
A customer selected for a positive receivables confirmation does not reply, even after a follow-up request. What is the most appropriate alternative procedure?
- A) Inspect cash received from the customer after the year end and agree it to specific year-end invoices
- B) Obtain a written representation from the credit controller that the balance is correct
- C) Treat the balance as confirmed because the customer did not dispute it
- D) Exclude the balance from the sample and select a replacement customer
Show answer & explanation
Answer: A) Inspect cash received from the customer after the year end and agree it to specific year-end invoices
ISA 505 requires alternative procedures for non-responses to positive confirmations. After-date cash receipts that clear specific year-end invoices provide strong evidence of existence, and inspecting dispatch notes and orders is another option. Silence cannot be treated as agreement under positive confirmation, and replacing the item would bias the sample.
Question 5
Under ISA 505, in which situation would it be appropriate to use negative confirmations as the sole substantive procedure for receivables?
- A) The auditor has identified a significant risk of fraud in revenue
- B) The risk of material misstatement is low, there are many small homogeneous balances, a very low exception rate is expected and recipients are not expected to disregard requests
- C) Controls over sales are ineffective and the expected exception rate is high
- D) The receivables balance consists of a few very large balances
Show answer & explanation
Answer: B) The risk of material misstatement is low, there are many small homogeneous balances, a very low exception rate is expected and recipients are not expected to disregard requests
Negative confirmations only require a reply if the customer disagrees, so they provide less persuasive evidence. ISA 505 permits their use as the sole substantive procedure only when all the listed conditions hold. Large balances, significant risks or weak controls call for positive confirmations and other more persuasive procedures.
Question 6
At the year end, the bank statement of Ferrel Co shows a balance of $42,000 in the company's favour. There are outstanding lodgements of $6,500 and unpresented cheques of $9,800. What should the balance per the cash book be?
- A) $25,700
- B) $38,700
- C) $45,300
- D) $58,300
Show answer & explanation
Answer: B) $38,700
Balance per cash book = bank statement balance + outstanding lodgements - unpresented cheques = $42,000 + $6,500 - $9,800 = $38,700. $45,300 reverses the treatment of both items, $58,300 adds both, and $25,700 deducts both.
Question 7
A former employee is suing Bodkin Co for $400,000. The company's lawyers state that it is possible, but not probable, that the claim will succeed. Materiality is $150,000. What treatment should the auditor expect in the financial statements?
- A) No provision, but disclosure of a contingent liability
- B) A provision of $200,000, being half of the claim
- C) A provision of $400,000
- D) No provision and no disclosure, because the outcome is uncertain
Show answer & explanation
Answer: A) No provision, but disclosure of a contingent liability
Under IAS 37 a provision is recognised only when an outflow is probable and can be reliably estimated. Where an outflow is possible but not probable, and not remote, a contingent liability is disclosed. As $400,000 exceeds materiality, the auditor should check that the disclosure is adequate, and may obtain evidence through a letter to the entity's lawyers.
Question 8
Kestrel Co has a 31 December year end. Electricity is billed quarterly in arrears. The bill for the quarter ending 31 January, received in February, was $9,000. Assuming even usage, what accrual should be included at 31 December?
- A) $3,000
- B) $6,000
- C) $9,000
- D) $12,000
Show answer & explanation
Answer: B) $6,000
The quarter to 31 January covers November, December and January. Two of those three months (November and December) fall in the year, so the accrual is $9,000 x 2/3 = $6,000. $3,000 accrues only one month and $9,000 wrongly accrues the full quarter.
Question 9
Selvage Co employed 120 staff throughout the year ended 31 December. The average annual salary at the start of the year was $30,000, and a 4% pay rise took effect from 1 April. What is the expected total salary cost for the year in a proof in total?
- A) $3,600,000
- B) $3,636,000
- C) $3,708,000
- D) $3,744,000
Show answer & explanation
Answer: C) $3,708,000
Average salary for the year = ($30,000 x 3/12) + ($31,200 x 9/12) = $7,500 + $23,400 = $30,900. Expected total = 120 x $30,900 = $3,708,000. $3,744,000 applies the rise for the full year, $3,636,000 applies it for only three months and $3,600,000 ignores it.
Question 10
Which procedure provides the best evidence of the completeness of trade payables?
- A) Recalculating the total of the payables ledger
- B) Selecting balances from the payables ledger and agreeing them to purchase invoices
- C) Obtaining a written representation that all liabilities have been recorded, without further work
- D) Reconciling supplier statements to the payables ledger and reviewing payments made after the year end for unrecorded liabilities
Show answer & explanation
Answer: D) Reconciling supplier statements to the payables ledger and reviewing payments made after the year end for unrecorded liabilities
The risk for payables is understatement, so the auditor looks for liabilities that should have been recorded. Supplier statements are third-party evidence that can reveal missing invoices, and after-date payments often relate to year-end obligations. Testing from the ledger only covers recorded items, and a representation alone is insufficient.
Question 11
Which of the following procedures best tests the valuation of additions to property, plant and equipment?
- A) Agreeing the cost of a sample of additions to purchase invoices and checking that only directly attributable costs have been capitalised
- B) Physically inspecting a sample of assets selected from the register
- C) Comparing the total depreciation charge with the prior year
- D) Reviewing the repairs expense account for capital items
Show answer & explanation
Answer: A) Agreeing the cost of a sample of additions to purchase invoices and checking that only directly attributable costs have been capitalised
Agreeing cost to invoices and reviewing what has been capitalised confirms the amount recorded is correct under IAS 16. Physical inspection tests existence, and reviewing the repairs account tests completeness of additions. A depreciation comparison is an analytical procedure on the charge, not on the cost of additions.
Question 12
Under ISA 501, what is the auditor's primary purpose in attending the client's physical inventory count?
- A) To supervise the client's count teams
- B) To determine the selling price of each inventory line
- C) To obtain evidence about the existence and condition of inventory and to evaluate management's counting procedures
- D) To count all of the inventory on behalf of management
Show answer & explanation
Answer: C) To obtain evidence about the existence and condition of inventory and to evaluate management's counting procedures
Attendance allows the auditor to evaluate management's instructions and procedures, observe their performance, inspect inventory and perform test counts. The count is management's responsibility, and the auditor should not take on a management role. NRV is assessed separately using after-date sales evidence.