ICAEW ARF · Chapter 8
Audit procedures and substantive testing MCQs with Answers
12 multiple-choice questions on Audit procedures and substantive testing for ICAEW ARF Assurance and Risk Fundamentals. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
An auditor watches the client's staff carrying out the year-end inventory count. What type of audit procedure is this?
- A) Inspection
- B) Inquiry
- C) Observation
- D) Reperformance
Show answer & explanation
Answer: C) Observation
Observation consists of looking at a process or procedure being performed by others, such as watching the inventory count. Inspection involves examining records, documents or physical assets, inquiry involves seeking information from people, and reperformance involves the auditor independently carrying out a control.
Question 2
An auditor independently prepares the client's year-end bank reconciliation to check that the client's control has operated correctly. What type of procedure is this?
- A) Recalculation
- B) Observation
- C) External confirmation
- D) Reperformance
Show answer & explanation
Answer: D) Reperformance
Reperformance is the auditor's independent execution of procedures or controls originally performed by the entity, such as a bank reconciliation. Recalculation checks the mathematical accuracy of documents or records, observation involves watching a process, and external confirmation is a direct response from a third party.
Question 3
Which of the following describes a positive confirmation request for trade receivables?
- A) The customer is asked to reply only if they disagree with the balance
- B) The customer is asked to reply in all cases, either agreeing the balance or providing details of any differences
- C) The customer is asked to send a copy of their payment to the auditor
- D) The auditor telephones the customer to confirm the balance orally
Show answer & explanation
Answer: B) The customer is asked to reply in all cases, either agreeing the balance or providing details of any differences
A positive confirmation asks the customer to respond whether or not they agree, which provides more reliable evidence because a reply is expected. A negative confirmation asks for a reply only if the customer disagrees, so a non-reply provides limited evidence. Oral confirmations are less reliable than written responses received directly.
Question 4
A customer does not reply to a positive confirmation request for its year-end balance, even after a follow-up. Which alternative procedure is most appropriate?
- A) Treat the balance as confirmed because the customer did not dispute it
- B) Remove the balance from the sample and select a different customer
- C) Ask the client's credit controller to confirm the balance in writing
- D) Inspect cash received from the customer after the year end and agree it to remittance advices for invoices outstanding at the year end
Show answer & explanation
Answer: D) Inspect cash received from the customer after the year end and agree it to remittance advices for invoices outstanding at the year end
When no reply is received to a positive request, the auditor should perform alternative procedures. Cash received after the year end for specific invoices is strong evidence that the debt existed. A non-reply cannot be treated as agreement, replacing the item would bias the sample, and a confirmation from the client's own staff is internal evidence.
Question 5
Last year a client's total wages cost was £1,200,000 for an average of 40 employees. This year the average number of employees is 44 and all staff received a 3% pay rise from the first day of the year. What is the auditor's expected wages cost for this year?
- A) £1,320,000
- B) £1,359,600
- C) £1,236,000
- D) £1,356,000
Show answer & explanation
Answer: B) £1,359,600
Average cost per employee last year = £1,200,000 / 40 = £30,000. After the 3% rise: £30,000 x 1.03 = £30,900. Expected cost = £30,900 x 44 = £1,359,600. £1,320,000 ignores the pay rise, £1,236,000 ignores the extra employees, and £1,356,000 wrongly adds the 3% and 10% increases together instead of multiplying them.
Question 6
Which procedure provides the best evidence about the completeness of trade payables?
- A) Agreeing a sample of balances on the payables ledger to supporting invoices
- B) Checking the casting of the payables ledger
- C) Examining payments made and invoices received after the year end for liabilities that existed at the year end but were not recorded
- D) Inspecting purchase orders raised after the year end
Show answer & explanation
Answer: C) Examining payments made and invoices received after the year end for liabilities that existed at the year end but were not recorded
A search for unrecorded liabilities looks at transactions after the year end to find amounts that related to the year but were omitted, which tests completeness. Vouching ledger balances tests existence because it starts from recorded items. Casting tests arithmetic, and orders raised after the year end do not represent year-end liabilities.
Question 7
Which of the following is correct about a bank confirmation request for audit purposes?
- A) The request is authorised by the client but sent by the auditor, and the bank replies directly to the auditor
- B) The request is sent by the client, and the bank replies to the client, who passes the reply to the auditor
- C) The auditor sends the request without the client's authority
- D) The bank sends its reply to the client's finance director for checking first
Show answer & explanation
Answer: A) The request is authorised by the client but sent by the auditor, and the bank replies directly to the auditor
Banks need the client's authority to disclose information, but the auditor should control the process by sending the request and receiving the reply directly. This prevents the client from intercepting or altering the response and makes the evidence more reliable.
Question 8
Which procedure provides the best evidence of the existence of assets recorded in a client's non-current asset register?
- A) Selecting assets on site and checking they are included in the register
- B) Recalculating the depreciation charge for the year
- C) Agreeing the register total to the general ledger
- D) Selecting assets from the register and physically inspecting them
Show answer & explanation
Answer: D) Selecting assets from the register and physically inspecting them
Existence is tested by starting from the recorded assets and confirming that they are physically present. Starting from assets on site tests completeness, recalculating depreciation tests valuation, and agreeing totals checks that the register reconciles to the ledger.
Question 9
A client's plant and machinery has a cost brought forward of £480,000. Additions in the year cost £60,000 and there were no disposals. The accounting policy is 20% straight-line, with a full year's charge in the year of acquisition. The client has charged depreciation of £102,000. What is the expected charge and what does the comparison show?
- A) £96,000; the charge is overstated by £6,000
- B) £102,000; the charge is correct
- C) £108,000; the charge is understated by £6,000
- D) £108,000; the charge is overstated by £6,000
Show answer & explanation
Answer: C) £108,000; the charge is understated by £6,000
Expected depreciation = (£480,000 + £60,000) x 20% = £540,000 x 20% = £108,000. The client's charge of £102,000 is £6,000 lower, which equals half a year's depreciation on the additions (£60,000 x 20% x 6/12), suggesting a time-apportioned charge was used contrary to policy. £96,000 omits the additions altogether.
Question 10
Which of the following is NOT the auditor's responsibility when attending a client's inventory count?
- A) Observing whether the client's staff follow the count instructions
- B) Counting all of the inventory and preparing the count sheets for the client
- C) Performing test counts in both directions between the records and the physical inventory
- D) Recording details of the last goods received and despatched notes for cut-off testing
Show answer & explanation
Answer: B) Counting all of the inventory and preparing the count sheets for the client
Management is responsible for counting the inventory and preparing the count records. The auditor attends to observe the count, perform test counts, gather cut-off information and note damaged or obsolete items. If the auditor performed the count, this would create a self-review threat and confuse responsibilities.
Question 11
Which of the following best describes analytical procedures?
- A) Evaluations of financial information through analysis of plausible relationships among both financial and non-financial data
- B) Checking the arithmetical accuracy of documents and records
- C) Obtaining written responses directly from third parties
- D) Examining documents to confirm that transactions were authorised
Show answer & explanation
Answer: A) Evaluations of financial information through analysis of plausible relationships among both financial and non-financial data
Analytical procedures involve comparing figures and ratios with expectations, such as prior years, budgets or industry data, and investigating fluctuations that are unusual. Checking arithmetic is recalculation, third-party responses are external confirmations, and examining documents for authorisation is inspection.
Question 12
A company's year end is 31 December. Its last electricity bill covered the period up to 31 October. The next quarterly bill, received in February, was £9,600 for the three months from 1 November to 31 January. What accrual should be recognised at 31 December?
- A) £9,600
- B) £3,200
- C) £6,000
- D) £6,400
Show answer & explanation
Answer: D) £6,400
Two of the three months covered by the bill (November and December) fall within the year. Accrual = £9,600 x 2/3 = £6,400. £9,600 would accrue the whole quarter including January, £3,200 is only one month, and £6,000 would be two-thirds of an estimate of £9,000 rather than the actual bill.