Question

1. Which of the following is an assertion?

a. A statement made by management regarding the collectability of accounts receivable.

b. The audit firms estimation of the clients inventory obsolescence.

c. The statement by managment regarding the appointment of auditors.

c. The statement by management that the firm will close its branch office because of snow

2. Which of the following source of evidence would be the most reliable:

a. a written confirmation sent by a bank directly to the auditor

b. a written confirmation sent by a debtor to the client

c. a written document produced electronically by a client with good internal controls

d. a written document in the form of a fax sent by a debtor to the client indicating acceptance of a special offer

3. A covered member (i.e., the auditor) will be considered independemt from the client if his or her close relative:

a. has a direct financial interest in the client

b. is an employee of the client in a key position

c. has a financial interest in a client that allows the relative to have an insignificant inflience over the activities of the client

d. has a material indirect financial interest in a client

4. Which of the following is a compensating control for a lack of segregation of duties in a small business enviroment?

a. collusion between an accountant and cahier

b. active involvement and oversight by the owner

c. cumulative access and authority of a super user

d. requirement for an annual physical inventory count

5. Cut-off procedures:

a. can be tested at interim and rolled forward

b. can be tested at any point in the audit

c. apply only to balalnce sheet accounts

d. can only be tested at year end

Answer 1

1. Solution: The correct option is “ a” i.e A statement made by the management regarding the collectability of the Accounts Receivable . Assertion is the statement that is made by the management who is responsible for the preparation of the financial statements either in an implied manner or in an explicit manner that all elements or items of the financial statements have been apapropriately accounted for and adequate disclosures have also been made.

In this case management has made an assertion about the existence of the accounts receivable at the end of the period and then by checking its collectiblity they have ensured that it is shown at the right value in the balance sheet at the year end.

2. Solution : The correct option is” a “ i.e written confirmation sent by a bank directly to the auditor.

This evidence is the most reliable as the source from where it has been obtained is an external sourcei.e it orginates from a source outside the client’s organization. It is the process of obtaining a representationof some information or obtaining a confirmation about the existence of a certain situation directly from the third party.

3. Solution : The correct option is “ c “ i.e has financial interest in the client that allows the relative to have an insignificant influence over the activities of the client. It is important for an auditor to maintain his objectivity while expressing an opinion. If the relative of the auditor does not have a significant influence on the client’s activities then the independence of the auditor is not compromised as these interests are insignificant and immaterial and therefore no safeguards are required.

4. Solution : The correct option is “ d “ i.e requirement for an annual physical inventory count.

If there is lack of segregation of duties in a small business environment, then the compensating control would be an annual physical inventory count . It should be an independent review and should also include spot checks.

5. Solution : The correct option is” d’ i.e cuttof procedures can be tested at the year end.

This is the time when cut off errors are noted in order to address the cut off of revenue and purchasesat the year end.Cut off procedures could be to ensure that end period sales, purchases and inventory are properly accounted for.