CAF-8 · Chapter 10
Substantive Procedures: Other Areas MCQs with Answers
10 multiple-choice questions on Substantive Procedures: Other Areas for CAF-8 Audit and Assurance Essentials. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
When auditing 'Provisions' (e.g., for a pending legal case), the auditor's primary concern under IAS 37 is whether:
- A) A provision has been made for every potential risk in the next 10 years.
- B) There is a present obligation as a result of a past event, a probable outflow of resources, and a reliable estimate can be made.
- C) The provision has been fully paid in cash.
- D) The provision is shown as a non-current asset.
Show answer & explanation
Answer: B) There is a present obligation as a result of a past event, a probable outflow of resources, and a reliable estimate can be made.
These three criteria are the fundamental recognition requirements for a provision under IAS 37 (Provisions, Contingent Liabilities and Contingent Assets).
Question 2
An auditor is reviewing the 'Contingent Liabilities' of a company. A major lawsuit against the company is deemed 'Possible' but not 'Probable' by the legal counsel. What is the correct accounting treatment?
- A) Recognize a full provision in the balance sheet.
- B) Do nothing and ignore the issue.
- C) Disclose the matter in the notes to the financial statements.
- D) Recognize the full amount as an asset.
Show answer & explanation
Answer: C) Disclose the matter in the notes to the financial statements.
If an outflow is possible (but not probable), it is a contingent liability. According to IAS 37, contingent liabilities are disclosed in the notes, not recognized in the financial statements.
Question 3
To obtain evidence about a pending legal claim against the client, the auditor should primarily:
- A) Use a crystal ball to predict the future.
- B) Communicate directly with the client's external legal counsel through a letter of inquiry.
- C) Ask the company's receptionist for their opinion on the case.
- D) Assume management is correct without verification.
Show answer & explanation
Answer: B) Communicate directly with the client's external legal counsel through a letter of inquiry.
Direct communication with the client's lawyers provides independent, expert evidence regarding the status, probability, and estimated costs of legal disputes.
Question 4
In auditing share capital, which document provides the best evidence of the 'Authorized Share Capital' of a company incorporated in Pakistan?
- A) The daily stock market report.
- B) The Memorandum and Articles of Association.
- C) The latest marketing brochure.
- D) The petty cash vouchers.
Show answer & explanation
Answer: B) The Memorandum and Articles of Association.
The Memorandum and Articles of Association are legal constitutional documents that define the maximum number of shares a company is authorized to issue.
Question 5
When auditing the 'Non-Current Liabilities' (long-term loans), the auditor should cross-check the interest expense in the income statement with:
- A) The total sales for the year.
- B) The loan agreement, interest rates, and the outstanding loan balance.
- C) The number of employees in the finance department.
- D) The cost of land and buildings.
Show answer & explanation
Answer: B) The loan agreement, interest rates, and the outstanding loan balance.
The interest expense should be mathematically consistent with the terms of the loan and the actual amount of debt held by the company during the period.
Question 6
Which procedure best tests the 'Completeness' of a company's recorded payroll expense?
- A) Vouching a sample of employees from the payroll to their personnel files.
- B) Performing a proof-in-total (analytical procedure) by multiplying the average number of employees by the average salary and comparing it to the total recorded expense.
- C) Counting the number of desks in the office.
- D) Checking the spelling of names in the payroll system.
Show answer & explanation
Answer: B) Performing a proof-in-total (analytical procedure) by multiplying the average number of employees by the average salary and comparing it to the total recorded expense.
A proof-in-total is a powerful substantive analytical procedure used to ensure the total recorded expense is reasonable and complete based on known operational data.
Question 7
If a company pays a dividend during the year, the auditor must verify that the payment was properly authorized. Where would this authorization typically be found?
- A) In a local newspaper advertisement.
- B) In the minutes of the Board of Directors' meetings or the Annual General Meeting (AGM).
- C) On the company's social media page.
- D) In the petty cash book.
Show answer & explanation
Answer: B) In the minutes of the Board of Directors' meetings or the Annual General Meeting (AGM).
Dividends are significant transactions that require formal approval by directors (interim) or shareholders (final), which is documented in the meeting minutes.
Question 8
An auditor reviews a 'Subsequent Event' where a major debtor went bankrupt 2 weeks after the year-end but before the audit report was signed. How should this be handled?
- A) Ignore it as it happened after the year-end.
- B) Adjust the year-end financial statements by recording a bad debt provision for that debtor (Adjusting Event).
- C) Disclose it only in the next year's financial statements.
- D) Resign from the audit immediately.
Show answer & explanation
Answer: B) Adjust the year-end financial statements by recording a bad debt provision for that debtor (Adjusting Event).
The bankruptcy of a debtor after the year-end provides evidence of a condition (the debtor's insolvency) that existed at the year-end. This is an 'Adjusting Event' under IAS 10.
Question 9
What is the primary responsibility of the auditor regarding a company's 'Going Concern' status?
- A) To guarantee that the company will never go bankrupt.
- B) To obtain sufficient appropriate audit evidence about the appropriateness of management's use of the going concern basis of accounting.
- C) To manage the company's cash flow to keep it solvent.
- D) To personally lend money to the company if it faces a crisis.
Show answer & explanation
Answer: B) To obtain sufficient appropriate audit evidence about the appropriateness of management's use of the going concern basis of accounting.
ISA 570 requires the auditor to evaluate whether there is material uncertainty about the company's ability to continue as a going concern for at least 12 months.
Question 10
Which of the following procedures specifically tests for 'Unrecorded' liabilities (Completeness)?
- A) Selecting recorded liabilities and vouching them to invoices.
- B) Reviewing the invoices received and payments made after the year-end (subsequent payments review).
- C) Physically inspecting non-current assets.
- D) Reading the company's mission statement.
Show answer & explanation
Answer: B) Reviewing the invoices received and payments made after the year-end (subsequent payments review).
Reviewing what was paid after year-end helps find debts that should have been recorded as liabilities at the year-end but were missed.