AAA Module 3 Quiz

Nolaugh Pty Ltd has a significant debtor with a balance of $3.5 million as at year end. The debtor has however directly confirmed a balance of $2.8 million upon receiving a confirmation letter from the auditors of Nolaugh Pty Ltd. Which of these balances will the auditor consider to be more reliable

• None, as the auditor must first investigate the difference.

• Nolaugh's balance is more reliable if there are invoices to support the balance.

• The balance confirmed by the debtor of $2.8 million is more reliable as it is from an external party.

• Both of these balances are equally reliable

Answer explanation

Audit evidence gathered from external parties is more reliable than evidence obtained from management.

Kiama, the auditor of Mwangi Flight Enterprises, performs audit procedures relating to existence of aeroplanes. Kiama selects a sample of 15 planes out of the 30,510 planes owned by the Company and carries out the audit procedure.

 What is the key attribute of audit evidence that has not been complied with

• Relevancy.

• Appropriateness.

• Reliability.

• Sufficiency.

Answer explanation

Sufficiency is the correct answer. It refers to the quantity of evidence. The sample of 15 aeroplanes only represents 0.05% of all aeroplanes and is consequently not adequate as a basis of forming a conclusion on whether the aeroplanes exist.

Relevancy is not the correct answer as there is no information to suggest that the attribute is not complied with i.e. that the audit procedure does not test for existence of aeroplanes.

Appropriateness has to do with the quality of the audit evidence. There is no information to suggest that the test is not appropriate.

There is no information to suggest that the test is not reliable either because of its source or nature.

 

Module: 3 > 3.1 Key principles > Sufficient appropriate audit evidence > Page: 171

Kiama, the auditor of Mwangi Flight Enterprises, performs audit procedures relating to existence of aeroplanes. Kiama does this by selecting a sample of the aeroplanes and requesting Boeing the supplier to confirm whether it had sold these planes to the Company.

 What is the key attribute of audit evidence that has not been complied with?

• Reliability.

• Sufficiency.

• Relevancy.

• All of the above.

Answer explanation

The audit procedure is not relevant as it does not achieve the objective of the test which is to confirm that the aeroplanes exist. A confirmation from suppliers will only provide evidence that the aeroplanes were purchased by the client but will not confirm whether they still exist.

Generally speaking information obtained from third parties is more reliable than information obtained internally. Consequently this is not the key attribute that has not been complied with.

The quantity of audit evidence gathered is not compromised by the test.

'All the above' is incorrect as it is only relevancy that has not been complied with.

 

Module: 3 > 3.1 Key principles > Sufficient appropriate audit evidence > Page: 171

Kiama, the auditor of Mwangi Flight Enterprises, performs audit procedures relating to its debtors. Kiama does this by confirming that the accounting system ages the balances correctly and also checks for subsequent receipts from debtors. Kiama also sends debtors confirmation letters to a number of customers. One significant debtor however disputes the balance indicated in the letter (per the client’s records). Kiama concludes that the balance as per the client’s system is correct as there is no evidence that controls within the debtor’s organisation are effective.

 What is the key attribute of audit evidence that has not been complied with?

• Sufficiency.

• Relevancy.

• Reliability.

• All of the above.

Answer explanation

C is the correct answer. Evidence gathered from third parties is generally more reliable than audit evidence gathered from within the organisation. Kiama in this case ignored the evidence of the third party and relied more on the evidence of the organisation which breaches the reliability attribute. Generally, auditors do not consider the effectiveness of the controls of the debtor when assessing confirmed balances.

The quantity of audit evidence gathered (sufficiency) is not compromised by the test.

Sending debtors confirmation letters is a relevant audit procedure when assessing the risk of material misstatement over the account balance.

Module: 3 > 3.1 Key principles > Sufficient appropriate audit evidence > Page: 171

Which of the following is the correct definition of rights and obligations?

• The company has authority or legal duty relating to the item.

• The item has been rightfully recorded in the financial statements.

• The item has been measured correctly and its obligations disclosed.

• The financial statement has been classified correctly showing the rights and obligations of the entity.

Answer explanation

A is correct because rights and obligations refers to having authority or legal duty on a financial statement item. All other options are incorrect.

Module: 3 > 3.1 Key principles > Financial statement assertions > Page: 172

An auditor is concerned that an item is not recorded. Which assertion is at risk?

• Existence

• Occurrence

• Presentation

• Completeness

Answer explanation

D is correct as completeness relates to whether all items (that should have been recorded) have been recorded. All other options are incorrect.

Module: 3 > 3.1 Key principles > Financial statement assertions > Page: 172

An auditor is concerned that an item has been incorrectly recorded in the current year but relates to the subsequent year. which assertion is at risk?

• Existence

• Occurrence

• Presentation

• Rights and obligations

Answer explanation

B is correct because occurrence relates to ensuring that only items that represent transactions for the current period have been recorded in the current financial year.

All other options are incorrect.

Module: 3 > 3.1 Key principles > Financial statement assertions > Page: 172

he auditor of XYZ Ltd wants to test the operating effectiveness of controls in the payment system.

Which of the following computer assisted audit software will the auditor use?

• Test data.

• Utility programs.

• Specialised audit software.

• Generalised audit software.

Answer explanation

A is correct as test data techniques are used for testing of controls. Options B, C and D are programs that are used to manipulate and extract data for substantive testing.

Module: 3 > 3.2 Tests of controls > Using CAATs for tests of controls > Page: 180

The auditor of Entity S received a response from a negative debtors’ circularisation which advised that the balance of $45,600 per the circularisation was incorrect and should in fact be $46,500.

The auditor is not sure what this actually means for the audit and is considering the following possibilities:

I    A response from a negative circularisation means that valuation is incorrect.

II   A response from a negative circularisation means that existence is not a risk.

III This response indicates that completeness of debtors is likely to be an issue.

IV  This response indicates that presentation and disclosure of debtors is likely to be incorrect.

Which of the possibilities are correct?

• I and II only.

• II and IV only.

• I, II and III only

• I, III and IV only

Answer explanation

C is correct because a response from a negative circularisation is generally not a good thing. It indicates that something is wrong. The response from a negative circularisation would prove the existence of a debtor (i.e. only a debtor that exists would be able to respond to the circularisation) but it also means that the valuation of that debtor is incorrect (i.e. it should be $46,500 instead of $45,600). Further, the fact that the amount is less than what was reflected in the circularaisation is a possible indication that some transactions with the debtor has not been recorded and so completeness is an issue. Presentation and disclosure relates to how this balance is presented in the financial statements and the response from a negative circularisation does not provide any evidence relating to this assertion.

Module: 3 > 3.3 Substantive audit procedures > Tests of details > Page: 194

Management of Entity A indicated that their debtors are extremely private and do not wish to be contacted by the auditors. Accordingly, the auditors were not allowed to send out a positive debtors’ confirmation.

What other procedure would be the most suitable to use as an alternative?  

• Perform a negative debtors confirmation.

• Inspect the customer signed delivery note.

• Inspect subsequent bank statements for deposits by debtors.

• Inspect the debtors' invoices and agree it to the purchase orders.

Answer explanation

C is correct because by checking the subsequent bank statements for deposits received from the debtors, the auditor would be able to confirm that those debtors do in fact exist. (Non-existent debtors would not pay for goods). Further, it indicates that the debtor is able to pay and that the debtor is not bad. Hence, valuation is also proved to an extent. A negative circularisation would not be suitable given that the debtors do not want to be contacted by the auditors. The customer signed delivery note may be forged by the client and also does not necessarily contact the amount of the invoice for the goods but just confirms that the customer received the goods. Agreeing invoices to purchase orders would just prove that the orders received have been properly processed but it does not confirm whether the orders were received from a valid debtor or that the amount is correct.

Module: 3 > 3.3 Substantive audit procedures > Negative Confirmation Requests > Page: 194