ICAEW ARF · Chapter 7
Assertions and audit evidence MCQs with Answers
11 multiple-choice questions on Assertions and audit evidence for ICAEW ARF Assurance and Risk Fundamentals. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
In the context of audit evidence, what do the terms 'sufficient' and 'appropriate' refer to?
- A) Sufficient refers to the quality of evidence, and appropriate refers to its quantity
- B) Sufficient means all items have been tested, and appropriate means the client agrees
- C) Sufficient refers to the timing of evidence, and appropriate refers to its cost
- D) Sufficient refers to the quantity of evidence, and appropriate refers to its quality (relevance and reliability)
Show answer & explanation
Answer: D) Sufficient refers to the quantity of evidence, and appropriate refers to its quality (relevance and reliability)
Sufficiency is the measure of the quantity of audit evidence, which is affected by risk and by the quality of the evidence. Appropriateness is the measure of quality, meaning its relevance and reliability in supporting the auditor's conclusions. The two are interrelated: higher quality evidence may mean less is needed.
Question 2
Which of the following sources of audit evidence about a company's bank balance is the most reliable?
- A) A photocopy of the year-end bank statement provided by the client
- B) A confirmation sent by the bank directly to the auditor
- C) An oral statement from the finance director about the balance
- D) A client-prepared bank reconciliation
Show answer & explanation
Answer: B) A confirmation sent by the bank directly to the auditor
Evidence obtained directly by the auditor from an independent external source is generally the most reliable. A photocopy supplied by the client could have been altered, oral statements are less reliable than written evidence, and a client-prepared reconciliation is generated internally. The bank reconciliation still needs testing, but the confirmation provides the strongest evidence of the balance.
Question 3
An auditor selects items from the client's inventory records and physically inspects them in the warehouse. Which assertion does this procedure mainly test?
- A) Completeness
- B) Existence
- C) Valuation
- D) Classification
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Answer: B) Existence
Testing from the records to the physical items checks that recorded inventory actually exists. Testing in the opposite direction, from the physical items to the records, tests completeness. Physical inspection may give some evidence of condition, but valuation is mainly tested by examining costs and selling prices.
Question 4
During an inventory count, the auditor selects items on the warehouse floor and traces them to the final inventory listing. Which assertion is being tested?
- A) Existence
- B) Completeness
- C) Rights and obligations
- D) Accuracy
Show answer & explanation
Answer: B) Completeness
Starting with the physical items and checking they appear in the records tests whether all inventory that exists has been recorded, which is completeness. Testing from the records to the floor would test existence. Ownership and accuracy require evidence such as purchase invoices and cost records.
Question 5
Which of the following procedures best tests the cut-off of sales?
- A) Agreeing a sample of sales invoices to customer orders
- B) Sending confirmation requests to customers with the largest balances
- C) Comparing monthly sales with the budget
- D) Selecting goods despatched notes from shortly before and after the year end and checking the related sales were recorded in the correct period
Show answer & explanation
Answer: D) Selecting goods despatched notes from shortly before and after the year end and checking the related sales were recorded in the correct period
Cut-off concerns recording transactions in the correct accounting period. Examining despatches around the year end and checking when the related sales were recorded identifies items recorded in the wrong period. Agreeing invoices to orders tests occurrence, confirmations test existence of receivables, and budget comparisons are analytical procedures that are less precise.
Question 6
An auditor obtains an official copy of the title register from HM Land Registry for a freehold property owned by a UK client. Which assertion does this mainly support?
- A) Valuation
- B) Rights and obligations
- C) Completeness
- D) Cut-off
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Answer: B) Rights and obligations
The title register shows who owns the property, so it provides evidence that the entity holds the rights to the asset. It does not show the property's value, which would require evidence such as a valuation report or depreciation calculations. It also does not show whether all properties have been recorded.
Question 7
An auditor compares the cost of a sample of year-end inventory items with their selling prices after the year end. Which assertion is being tested?
- A) Existence
- B) Completeness
- C) Occurrence
- D) Valuation
Show answer & explanation
Answer: D) Valuation
Inventory must be measured at the lower of cost and net realisable value. Comparing cost with post year-end selling prices, less costs to sell, shows whether any items need writing down below cost. This does not test whether the items exist or whether all items are recorded.
Question 8
An auditor reviews the repairs and maintenance expense account for items that should have been capitalised as property, plant and equipment. Which assertion about property, plant and equipment does this mainly test?
- A) Existence
- B) Rights and obligations
- C) Completeness
- D) Cut-off
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Answer: C) Completeness
If capital expenditure has been charged wrongly to repairs, property, plant and equipment will be understated. Searching the expense account for such items therefore tests whether all assets have been recorded. Existence would be tested by inspecting assets on the register, and rights by examining ownership documents.
Question 9
Which of the following statements about written representations from management is correct?
- A) They are the most reliable form of audit evidence because they are signed by the directors
- B) They can replace other audit evidence that the auditor would otherwise obtain
- C) They are necessary audit evidence but do not on their own provide sufficient appropriate evidence about the matters they cover
- D) They are optional and need only be obtained if the client offers them
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Answer: C) They are necessary audit evidence but do not on their own provide sufficient appropriate evidence about the matters they cover
Auditing standards require written representations, for example that management has fulfilled its responsibilities and provided all relevant information. However, they come from the entity itself, so they cannot replace other evidence that should be available. If management refuses to give required representations, the auditor must consider the effect on the opinion.
Question 10
An auditor finds that evidence from a customer confirmation is inconsistent with the client's records. What should the auditor do?
- A) Accept the client's records, as they are prepared by the entity's accounting system
- B) Accept the confirmation and adjust the financial statements without further work
- C) Determine what changes or additions to audit procedures are needed to resolve the matter, and consider the effect on other aspects of the audit
- D) Ignore the inconsistency if the difference is below performance materiality
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Answer: C) Determine what changes or additions to audit procedures are needed to resolve the matter, and consider the effect on other aspects of the audit
When evidence from different sources is inconsistent, the auditor must investigate further, for example by reviewing the customer account, cut-off and cash received, to find the cause. The inconsistency may indicate errors or fraud that also affect other areas. Neither source should simply be accepted, and individually small differences may still matter in aggregate or reveal a systematic problem.
Question 11
An auditor uses an independent property valuer as an auditor's expert. Which of the following is the auditor required to do?
- A) Refer to the expert in an unmodified auditor's report to share responsibility for the opinion
- B) Accept the expert's conclusions without evaluation, as the expert has specialist skills
- C) Obtain the client's approval of the expert's findings before using them
- D) Evaluate the expert's competence, capabilities and objectivity, and the adequacy of the expert's work
Show answer & explanation
Answer: D) Evaluate the expert's competence, capabilities and objectivity, and the adequacy of the expert's work
When using an auditor's expert, the auditor must evaluate whether the expert has the necessary competence, capabilities and objectivity, agree the scope of the work and evaluate whether the findings are adequate. The auditor retains sole responsibility for the opinion, so an unmodified report does not refer to the expert. Client approval is not required.