CAF-8 · Chapter 9

Substantive Procedures: Current Assets MCQs with Answers

10 multiple-choice questions on Substantive Procedures: Current Assets for CAF-8 Audit and Assurance Essentials. Try each one before revealing the answer and explanation.

1. Question 1

   During the year-end inventory count, an auditor identifies several boxes of finished goods that are covered in thick dust and appear damaged. Which assertion is primarily at risk?

   • A) Existence
   • B) Completeness
   • C) Valuation and Allocation
   • D) Rights and Obligations
   Show answer & explanation

   Answer: C) Valuation and Allocation

   Dusty and damaged inventory suggests the items may be obsolete or unsellable. Under IAS 2, inventory must be valued at the lower of cost and net realizable value (NRV). This addresses the Valuation assertion.

2. Question 2

   To test the 'Cut-off' assertion for inventory at year-end, the auditor should:

   • A) Confirm bank balances with the local bank.
   • B) Record the last Goods Received Note (GRN) and Goods Dispatch Note (GDN) numbers from the year-end and trace them to the accounting records.
   • C) Recalculate the interest on a short-term loan.
   • D) Send letters to all employees asking for their salary details.
   Show answer & explanation

   Answer: B) Record the last Goods Received Note (GRN) and Goods Dispatch Note (GDN) numbers from the year-end and trace them to the accounting records.

   Cut-off testing ensures transactions are recorded in the correct accounting period by checking documents just before and just after the year-end.

3. Question 3

   When sending external confirmations to trade receivables (debtors), what is the primary purpose of a 'Positive Confirmation'?

   • A) To ask the debtor to reply only if they disagree with the balance.
   • B) To ask the debtor to respond in all cases, confirming whether they agree or disagree with the balance.
   • C) To ask the debtor to pay the balance immediately to the auditor's account.
   • D) To ask the debtor for their opinion on the company's management.
   Show answer & explanation

   Answer: B) To ask the debtor to respond in all cases, confirming whether they agree or disagree with the balance.

   A positive confirmation request provides more reliable evidence than a negative one because the auditor expects a response regardless of whether the debtor agrees with the figure.

4. Question 4

   If a debtor fails to respond to three positive confirmation requests, which alternative procedure should the auditor perform to verify the existence and valuation of the receivable?

   • A) Write off the balance as an automatic bad debt.
   • B) Review subsequent cash receipts from the debtor after the year-end.
   • C) Ask the client's CEO to vouch for the debtor's integrity.
   • D) Send a fourth letter with a more aggressive tone.
   Show answer & explanation

   Answer: B) Review subsequent cash receipts from the debtor after the year-end.

   Verifying that the debtor actually paid the balance after the year-end (subsequent cash testing) is the most persuasive alternative evidence for existence and valuation.

5. Question 5

   Which of the following procedures would help an auditor identify understated (complete) trade payables at year-end?

   • A) Selecting a sample of recorded payables and vouching them to supplier invoices.
   • B) Performing a search for unrecorded liabilities by reviewing bank payments and supplier invoices received *after* the year-end.
   • C) Confirming the existence of fixed assets with the warehouse manager.
   • D) Recalculating the previous year's tax liability.
   Show answer & explanation

   Answer: B) Performing a search for unrecorded liabilities by reviewing bank payments and supplier invoices received *after* the year-end.

   Completeness of liabilities is tested by looking at what was paid *after* the year-end to see if any of those payments related to obligations that existed *at* the year-end but were not recorded.

6. Question 6

   What is the primary document used to perform a bank reconciliation?

   • A) The sales day book.
   • B) The client's cash book and the year-end bank statement or bank confirmation letter.
   • C) The staff holiday calendar.
   • D) The petty cash receipts.
   Show answer & explanation

   Answer: B) The client's cash book and the year-end bank statement or bank confirmation letter.

   A bank reconciliation compares the entity's internal record of cash (the cash book) with the external record provided by the bank (the statement or confirmation).

7. Question 7

   An auditor is observing the physical inventory count and notices that goods belonging to a third party (consignment stock) are being counted as part of the company's own stock. Which assertion is being violated?

   • A) Existence
   • B) Completeness
   • C) Rights and Obligations
   • D) Valuation
   Show answer & explanation

   Answer: C) Rights and Obligations

   Rights and obligations address whether the entity holds or controls the rights to the assets. Third-party stock should not be recorded as the company's asset because the company does not own it.

8. Question 8

   To verify the valuation of a large inventory of raw materials, the auditor should:

   • A) Trace the purchase prices from a sample of recent supplier invoices and compare them with the carry value.
   • B) Physically count every single grain of raw material.
   • C) Ask the warehouse staff how much they think the materials are worth.
   • D) Assume the value is correct if the market price is rising.
   Show answer & explanation

   Answer: A) Trace the purchase prices from a sample of recent supplier invoices and compare them with the carry value.

   Comparing recorded values to original cost evidence (invoices) is a fundamental substantive test for the valuation of raw materials.

9. Question 9

   When auditing prepayments, the auditor should review the insurance premium paid during the year. If a 12-month policy was paid 3 months before year-end, how much should be recorded as a prepayment?

   • A) The full amount of the premium.
   • B) Zero, it should be fully expensed.
   • C) 9 months' worth of the premium.
   • D) 3 months' worth of the premium.
   Show answer & explanation

   Answer: C) 9 months' worth of the premium.

   A prepayment represents the portion of an expense that relates to a future period. Since 3 months have passed, 9 months are still 'prepaid'.

10. Question 10

    Which of the following provides the most 'External' and 'Reliable' evidence for the cash balance?

    • A) A verbal statement from the company's treasurer.
    • B) A cash book printout from the client's software.
    • C) A direct bank confirmation letter received by the auditor from the client's bank.
    • D) A handwritten note from the petty cash custodian.
    Show answer & explanation

    Answer: C) A direct bank confirmation letter received by the auditor from the client's bank.

    Direct external confirmations from third parties (banks) are highly reliable because they are objective and independent of the client's internal systems.