Auditing Financial Statement Cycles

Introduction and context

Financial statements are presented as account balances and disclosures, but the underlying transactions usually arise through recurring business processes or financial statement cycles. A cycle links economic events, source documents, information systems, internal controls, ledger postings and financial reporting. Auditing by cycle therefore enables the auditor to move from broad financial statement assertions to specific risks, controls, substantive procedures and conclusions.

The principal cycles considered in this chapter are:

• revenue and receivables;
• purchases, payables and expenses;
• payroll and employee-related liabilities;
• inventory and production;
• cash and treasury;
• non-current assets;
• financing and equity; and
• taxation.

A cycle-based audit is not a substitute for an assertion-based audit. Rather, it is an organisational method for applying the risk-based approach required by International Standards on Auditing (ISAs). The auditor must understand the entity and its environment, identify and assess risks of material misstatement, design responses, obtain sufficient appropriate audit evidence, evaluate identified misstatements and form an overall conclusion.

Learning objectives

By the end of this chapter, the reader should be able to:

1. Explain how transaction cycles generate financial statement balances and disclosures.
2. Link assertions to risks, controls and audit evidence.
3. Design tests of controls and substantive procedures for major cycles.
4. Distinguish tests of details, substantive analytical procedures and controls testing.
5. Evaluate errors, estimates, fraud indicators, control deficiencies and uncorrected misstatements.
6. Apply professional judgement to a complex, integrated audit scenario.
7. Recognise the implications of technology, data analytics, ethics and governance for cycle auditing.

1. The cycle-based risk model

1.1 From transactions to assertions

A typical transaction moves through the following stages:

1. initiation by an authorised employee or customer;
2. approval under delegated authority;
3. execution, such as delivery of goods or receipt of services;
4. recording in a subsidiary ledger and the general ledger;
5. reconciliation and review; and
6. inclusion in financial statements and disclosures.

At each stage, failures may cause misstatement. For example, a fictitious sale may be entered in the sales ledger, posted to revenue and receivables, and remain undetected if dispatch records and customer confirmations are not reconciled.

1.2 Financial statement assertions

The core assertions are applied to classes of transactions, account balances and presentation and disclosure.

Assertions are not equally relevant to every balance. For revenue, occurrence and cut-off are often significant because of fraud incentives. For payables, completeness is usually more significant than occurrence. For inventory, existence and valuation commonly dominate.

1.3 Audit risk and the audit response

The traditional audit-risk model is expressed as:

where:

• AR is audit risk, the risk that the auditor expresses an inappropriate opinion;
• IR is inherent risk, the susceptibility of an assertion to misstatement before considering controls;
• CR is control risk, the risk that controls will not prevent, detect or correct a material misstatement; and
• DR is detection risk, the risk that audit procedures will not detect a material misstatement.

The relationship is a planning model rather than a mechanically measurable law. If assessed inherent and control risks are high, the auditor ordinarily reduces acceptable detection risk by using more persuasive or better-targeted procedures, larger samples, more experienced staff, unpredictable procedures or procedures closer to the reporting date.

Audit evidence must be sufficient in quantity and appropriate in relevance and reliability. Evidence obtained directly by the auditor, from independent external sources, or through original documents is generally more persuasive than internally generated evidence that has not been tested for reliability.

1.4 Controls and substantive procedures

A control is relevant to the audit when it addresses a risk of material misstatement in the financial statements. Common control categories include:

• preventive controls, such as credit approval before dispatch;
• detective controls, such as monthly bank reconciliations;
• automated application controls, such as system blocking of duplicate invoice numbers;
• general information-technology controls, such as access management and change control; and
• management review controls, such as investigation of budget variances.

If the auditor intends to rely on a control, the auditor must test both its implementation and operating effectiveness. Inquiry alone is normally insufficient to establish operating effectiveness. Possible tests include inspection, observation, reperformance and use of computer-assisted audit techniques.

Substantive procedures include tests of details and substantive analytical procedures. An analytical procedure is persuasive only when the relationship is predictable, relevant data are reliable and the auditor establishes an acceptable difference between expectation and recorded amount.

2. Revenue and receivables cycle

2.1 Risks and controls

The cycle normally includes customer acceptance, credit approval, order entry, dispatch, invoicing, recording of receivables, cash collection, returns and credit notes. Important risks include:

• fictitious sales created to meet targets;
• premature recognition before control of goods transfers;
• unrecorded sales returns or rebates;
• incorrect prices, quantities or tax treatment;
• receivables that are irrecoverable;
• side agreements that modify contractual terms; and
• management override of credit limits or period-end procedures.

Potential controls include sequential dispatch documentation, independent credit approval, system matching of orders, dispatch notes and invoices, segregation between sales and cash handling, review of aged receivables, and approval of credit notes after year-end.

2.2 Audit procedures

For occurrence, the auditor may select recorded sales and vouch them to customer orders, dispatch evidence, invoices and cash receipts. For completeness, the auditor may select dispatch notes and trace them forward to invoices and the ledger. These directions are important: ledger-to-source evidence primarily tests occurrence, whereas source-to-ledger evidence primarily tests completeness.

Cut-off testing should cover transactions immediately before and after year-end. The auditor compares dispatch dates, shipping terms, acceptance evidence and invoice dates with the accounting period. Confirmation of receivables may provide strong evidence about existence, rights and selected terms, but non-responses require alternative procedures such as inspection of subsequent cash receipts and underlying sales documents.

Valuation requires analysis of ageing, subsequent receipts, disputes, creditworthiness, historical loss patterns and forward-looking information. A simple ageing schedule is not automatically an adequate expected-credit-loss estimate; the auditor must understand the entity’s method and assess whether assumptions and data are reasonable.

Revenue analytics may compare monthly revenue with prior periods, budgets, production volumes, customer returns and gross margins. Unusual increases near year-end, round-number invoices, manual journal entries and sales to dormant customers may indicate fraud risk. Under ISA 240, presumed risks relating to revenue recognition require an audit response; the presumption may be rebutted only with persuasive documentation.

3. Purchases, payables and expenses cycle

3.1 The completeness problem

Purchases cycles include requisition, supplier selection, purchase order, receipt of goods or services, invoice processing, payment and recording. The dominant financial reporting risk is frequently understatement through unrecorded liabilities. Management may have an incentive to defer invoices or goods received until after year-end.

Controls may include approved supplier master files, purchase-order authorisation, three-way matching of purchase order, receiving report and invoice, independent review of unmatched items, sequential receiving reports and payment approval by authorised personnel.

3.2 Audit procedures

For occurrence, the auditor may vouch recorded purchases to purchase orders, receiving reports and supplier invoices. For completeness, the auditor should inspect unmatched receiving reports, subsequent cash disbursements, post-year-end invoices, supplier statements, the purchase journal and expense accruals. Supplier statement reconciliations are especially useful but should not be treated as conclusive if suppliers are missing from the population.

Searches for unrecorded liabilities combine documentary inspection and professional scepticism. The auditor considers:

• payments made after year-end;
• goods received before year-end but invoiced later;
• unusual debit balances in payables;
• significant manual journal entries;
• legal claims and correspondence;
• recurring expenses with unexpected gaps; and
• cut-off around the reporting date.

Expense analytics can identify missing months, unexpected declines, duplicate payments, unusual suppliers and changes in gross margin. However, a stable expense trend does not prove completeness because management may intentionally defer a liability.

4. Payroll cycle

Payroll commonly involves employee recruitment, master-file amendments, time records, wage calculation, deductions, payment and reporting to tax or social-security authorities.

Key risks include fictitious employees, unauthorised pay-rate changes, inflated hours, incorrect deductions, terminated employees remaining on the payroll, misclassification of contractors and incomplete accruals for bonuses, leave and pension obligations.

Relevant controls include human-resources approval of new employees and leavers, restricted access to payroll master data, independent review of exception reports, reconciliation of payroll to the general ledger, approval of overtime, and segregation between payroll preparation and payment release.

Audit procedures may include:

• agreeing a sample of employees to personnel files and evidence of employment;
• comparing pay rates with authorised contracts;
• reperformance of gross-to-net calculations;
• testing joiners and leavers around year-end;
• reviewing unusual bank accounts, duplicate addresses or duplicate identification numbers;
• reconciling payroll reports to the ledger and cash payments; and
• confirming remittance of payroll taxes and pension deductions.

Data analytics are particularly effective where the population is large. A full-population scan may identify identical bank accounts, payments outside normal payroll dates or employees paid after recorded termination. Such exceptions are risk indicators, not proof of error or fraud.

5. Inventory and production cycle

5.1 Risks

Inventory may comprise raw materials, work in progress and finished goods. Risks include:

• inventory recorded although it does not exist;
• goods held on consignment incorrectly included;
• obsolete, damaged or slow-moving items not written down;
• incorrect standard costs or overhead allocation;
• quantities counted twice or omitted;
• goods in transit recorded in the wrong period; and
• revenue and inventory movements recorded in different periods.

The accounting framework determines the applicable measurement rules. Under IFRS-based reporting, inventories are generally measured at the lower of cost and net realisable value. Cost may include purchase costs, conversion costs and other costs incurred to bring inventory to its present location and condition, subject to applicable requirements.

5.2 Attendance at physical inventory counting

Attendance at a physical count enables the auditor to evaluate management’s instructions, observe counting, inspect condition and perform test counts. It does not by itself prove the final inventory balance. The auditor reconciles count sheets to the inventory listing and ledger, investigates differences and tests movements between the count date and reporting date.

The auditor should record independent test counts, note the last and first goods-received and dispatch documents, identify damaged items and inspect third-party or consignment goods. Where attendance is impracticable, alternative procedures may include test counts at another date, examination of perpetual records and inspection of subsequent sales, but the auditor must consider whether sufficient appropriate evidence can be obtained.

5.3 Valuation procedures

Valuation testing may involve:

• agreeing purchase costs to supplier invoices;
• testing standard-cost build-ups;
• recalculating overhead allocations;
• comparing carrying amounts with subsequent selling prices;
• analysing ageing and turnover;
• examining production variances; and
• assessing management’s write-down assumptions.

A key professional issue is management bias. A valuation model that uses optimistic selling prices or excludes known damage may be mathematically accurate but conceptually inappropriate.

6. Cash and treasury cycle

Cash is highly liquid and vulnerable to theft, concealment and manipulation. Relevant risks include unrecorded bank accounts, unauthorised transfers, lapping of receipts, outstanding cheques misstated in reconciliations, restricted cash omitted from disclosure and foreign-exchange errors.

Bank confirmations can provide evidence about balances, loans, security, guarantees and other relationships. The auditor performs or reperforms bank reconciliations, agrees book balances to the ledger and bank statements, investigates old reconciling items, tests outstanding lodgements and payments after year-end, and examines unusual transfers near the reporting date.

A bank reconciliation can be represented as:

This expression assumes that deposits in transit and outstanding payments are correctly identified and that bank errors are separately investigated. It is not a substitute for testing the validity of each reconciling item. The auditor also considers whether cash is subject to legal or contractual restrictions and whether overdrafts should be presented as borrowings rather than netted against cash.

Cash-transfer testing is important where management could move funds between accounts around year-end to improve reported liquidity. The auditor examines transfers initiated shortly before and after year-end and ensures that both sides are recorded in the correct period.

7. Non-current assets

The non-current-assets cycle covers property, plant and equipment, right-of-use assets, intangible assets and related depreciation or amortisation.

Risks include capitalising repairs, failing to record disposals, incorrect depreciation dates, impaired assets remaining at excessive amounts, inappropriate useful lives, unrecorded lease obligations and intangible assets that do not meet recognition criteria.

Audit procedures include:

• vouching additions to approved capital expenditure, invoices and evidence of receipt;
• physically inspecting significant assets;
• testing disposals to authorisation, proceeds and removal from the register;
• recalculating depreciation;
• evaluating useful lives, residual values and methods;
• comparing repairs and maintenance expense with capital additions;
• assessing impairment indicators; and
• inspecting title documents or lease contracts.

For straight-line depreciation, where applicable:

The formula assumes a straight-line method, a consistent useful life and a residual value that is supportable. It is not appropriate where consumption is better represented by another method or where the asset is not available for use throughout the period. The auditor tests the assumptions rather than merely recalculating the arithmetic.

8. Financing and equity cycle

Financing includes bank loans, bonds, leases and other debt. Equity includes issued share capital, share premium, reserves, dividends and retained earnings.

Debt risks include omitted borrowings, incorrect interest accruals, covenant breaches, incorrect current/non-current classification, unrecorded security and incomplete disclosure of terms. Procedures include lender confirmations, inspection of agreements, recalculation of interest, review of covenant calculations and examination of post-year-end refinancing.

Equity risks include unauthorised share issues, incorrect recording of dividends, incomplete board minutes and failure to disclose changes in ownership. The auditor inspects statutory records, shareholder resolutions, registrar returns, minutes and bank receipts for capital contributions.

Covenant compliance requires careful attention. A loan may be technically recorded at the correct principal amount while its classification or disclosure is materially wrong because a covenant was breached before year-end. The auditor must understand the applicable reporting requirements and the rights of the lender at the reporting date.

9. Taxation cycle

Taxation commonly includes current income tax, deferred tax, indirect taxes, payroll taxes and uncertain tax positions. Risks arise from incomplete tax returns, incorrect taxable adjustments, unsupported deductions, inappropriate tax rates, unrecognised interest and penalties, and failure to recognise deferred tax consequences.

Audit procedures may include:

• reconciling tax calculations to accounting profit;
• testing material permanent and temporary differences;
• agreeing payments and liabilities to tax authority statements;
• inspecting correspondence and assessments;
• consulting tax specialists for complex positions;
• assessing uncertain tax treatments; and
• evaluating the effect of tax losses, unused credits and changes in enacted tax rates.

Deferred tax calculations require consistency between the carrying amount of an asset or liability, its tax base and the applicable tax consequences. The auditor should challenge forecasts supporting recognition of deferred tax assets, especially where the entity has a history of losses.

Tax is also a governance issue. Aggressive arrangements, related-party transactions and uncertain positions may create legal, reputational and going-concern consequences beyond the amount recorded in the ledger.

10. Sampling, analytics and evidence evaluation

Audit sampling is used when examining less than 100% of a population and when each sampling unit has a chance of selection. Sample size depends on the assessed risk, expected deviation or misstatement, tolerable deviation or misstatement, and the desired level of assurance. There is no universally correct sample size independent of these factors.

For a controls test, a simple conceptual relationship is:

The sampling allowance depends on the sampling method and desired confidence; it must not be invented or treated as a fixed percentage. If deviations are found, the auditor evaluates their nature and cause, considers whether they are isolated or systemic, and reassesses reliance on the control.

For substantive testing, projected misstatements are compared with tolerable misstatement. A detected error may be individually immaterial but indicate a wider population problem, fraud risk or management bias. Extrapolation is a statistical or professional estimation process and must reflect the sampling design.

Technology permits full-population testing of journal entries, duplicate invoices, unusual postings, segregation-of-duties conflicts and period-end transactions. Artificial-intelligence tools may classify anomalies or assist document review, but the auditor remains responsible for understanding data completeness, model limitations, false positives, explainability, confidentiality and human review. An algorithmic exception is not audit evidence until the underlying item is investigated.

11. Integrated applied case

Background

Illustrative case: Meridian Components Ltd. Meridian manufactures electronic components and reports a rapid year-end increase in revenue. Management bonuses depend on achieving a revenue target. The company uses an enterprise-resource-planning system, but a sales director has privileged access allowing manual invoice creation. Inventory is held at two warehouses, one operated by a logistics provider. Meridian also refinanced a bank loan shortly after year-end.

Problem identification

Preliminary analytics show that December revenue is 32% higher than the monthly average for the first eleven months. Gross margin increased sharply, sales returns rose after year-end, and several invoices were issued on the final day of the reporting period. The payables ledger shows an unusual decline despite increased production.

Analysis

The revenue increase creates risks of premature or fictitious revenue. The privileged access creates a risk of management override. Post-year-end returns may indicate that goods were shipped without genuine customer acceptance. The decline in payables may indicate unrecorded liabilities. The outsourced warehouse creates risks concerning inventory existence, rights and completeness. The refinancing raises questions about covenant compliance and classification.

Audit approach

The audit team designs the following responses:

1. Obtain an understanding of the revenue contract terms and identify when control transfers to customers.
2. Test December sales from the ledger to orders, dispatch records, customer acceptance and subsequent cash receipts.
3. Test dispatches before and after year-end forward to invoices to address completeness and cut-off.
4. Analyse credit notes and returns issued after year-end and investigate links to December sales.
5. Extract all manual sales invoices and inspect authorisation and system logs.
6. Confirm selected receivables and perform alternative procedures for non-responses.
7. Attend the internal warehouse count and obtain independent confirmation from the logistics provider concerning quantities and ownership.
8. Search for unrecorded liabilities using January payments, receiving reports and supplier statements.
9. Inspect the refinancing agreement, recalculate covenants and evaluate classification and disclosures.
10. Communicate significant control deficiencies, including privileged access and inadequate review of credit notes, to those charged with governance.

Findings and evaluation

Suppose the auditor identifies $410,000 of December invoices for goods dispatched in January and $180,000 of December sales returned in January because customers had not accepted the goods. Management corrects the first amount but refuses to adjust the returns. The auditor also identifies $95,000 of goods received before year-end but recorded as purchases in January. The misstatements are evaluated individually and in aggregate against materiality, but qualitative factors are also considered: the errors affect a bonus target, arise in a high-risk period and suggest management bias.

The auditor communicates the uncorrected misstatement, assesses whether further procedures are needed, obtains written representations without treating them as a substitute for other evidence, and determines the effect on the audit opinion. If evidence indicates intentional manipulation, the auditor considers the implications under fraud-related requirements and communicates appropriately to management and those charged with governance.

Outcome and learning points

A cycle-based approach reveals that revenue, inventory, receivables, payables, financing and governance risks are interconnected. Testing only the sales ledger would not have identified the January receiving records or the refinancing terms. Strong audit work combines process understanding, assertion-specific procedures, data analysis, external evidence, professional scepticism and evaluation of management bias.

12. Professional judgement, ethics and governance

Cycle auditing creates frequent ethical tensions. Auditors may face pressure to accept weak explanations, reduce work to meet deadlines or overlook errors that would affect management bonuses. Fundamental principles of professional conduct—integrity, objectivity, professional competence and due care, confidentiality and professional behaviour—must guide decisions.

Important safeguards include independent review, consultation, documentation of disagreements, rotation where required, evaluation of non-audit services and communication with those charged with governance. The auditor should not allow familiarity with management, fee dependence or commercial pressure to reduce professional scepticism.

Control deficiencies should be communicated at the appropriate level. A deficiency becomes significant when, in the auditor’s professional judgement, it merits attention by those charged with governance. Examples include inadequate segregation of duties, ineffective access controls, failure to investigate reconciliations and lack of review over significant estimates.

13. Contemporary developments and best practice

Modern cycle auditing increasingly involves integrated data, cloud systems, robotic process automation, electronic confirmations and continuous monitoring. Best practice includes:

• documenting process narratives and key controls;
• mapping significant risks to assertions and procedures;
• testing information used in controls for completeness and accuracy;
• involving IT specialists where systems are complex;
• using unpredictable procedures for fraud-sensitive cycles;
• linking audit findings across cycles rather than treating them in isolation;
• evaluating subsequent events and going-concern implications; and
• maintaining a clear trail from identified risk to conclusion.

The use of technology does not remove the need for audit judgement. A complete population can still contain incomplete data, and a sophisticated dashboard can still reflect an inappropriate accounting policy. The auditor must understand the source, transformation, ownership and reliability of information.

Chapter Summary

Financial statement cycles provide a practical structure for applying the risk-based audit approach. Each cycle connects business activities, information systems, internal controls, ledger accounts and disclosures. Effective auditing begins by identifying relevant assertions and assessing the risk of material misstatement. The auditor then designs an appropriate combination of tests of controls, substantive analytical procedures and tests of details.

Revenue work commonly emphasises occurrence, cut-off and fraud risk; purchases and payables emphasise completeness; payroll requires attention to fictitious employees and unauthorised changes; inventory requires observation, rights and valuation testing; cash requires confirmations and reconciliation procedures; non-current assets require testing of additions, depreciation and impairment; financing and equity require agreement to legal records and contracts; and taxation requires evaluation of calculations, uncertain positions and deferred tax assumptions.

Evidence must be sufficient and appropriate, and technology can strengthen but not replace professional judgement. Misstatements must be evaluated individually, in aggregate and qualitatively, including their effect on management incentives and the possibility of fraud. Ethical conduct, governance communication and clear documentation are essential to a defensible audit conclusion.

Key Terms

Assertion: A representation by management about recognition, measurement, presentation or disclosure.

Audit evidence: Information used by the auditor in reaching conclusions.

Audit risk: Risk that the auditor expresses an inappropriate opinion on materially misstated financial statements.

Completeness: The assertion that all items that should be recorded are recorded.

Control risk: Risk that a control fails to prevent, detect or correct a material misstatement.

Cut-off: Recording transactions in the correct accounting period.

Detection risk: Risk that audit procedures fail to detect a material misstatement.

Existence: The assertion that an asset, liability or transaction exists or occurred.

Inherent risk: Susceptibility to misstatement before consideration of controls.

Management override: Circumvention of controls by senior personnel.

Material misstatement: An error or omission that could influence users’ decisions.

Net realisable value: Estimated selling price less costs of completion and sale, where applicable.

Occurrence: The assertion that recorded transactions actually took place.

Professional scepticism: An attitude involving a questioning mind and critical assessment of evidence.

Substantive analytical procedure: Evaluation of financial information through analysis of plausible relationships and expectations.

Test of details: Examination of individual transactions, balances or disclosures.

Test of controls: Procedure designed to evaluate whether a control operated effectively.

Tolerable misstatement: Maximum misstatement the auditor is willing to accept in a population.

Unrecorded liability: An obligation existing at the reporting date but omitted from the accounts.

Valuation: The assertion that amounts are recorded at appropriate monetary values.

Review Questions

Short Answer Questions

1. Why is completeness usually a more significant assertion for payables than for revenue?
2. Distinguish between a test of occurrence and a test of completeness using sales transactions.
3. What evidence can a bank confirmation provide?
4. Why does attendance at an inventory count not, by itself, prove the final inventory balance?
5. State the principal components of the audit-risk model.

Long Answer Questions

1. Explain how an auditor would design an assertion-based audit of the revenue and receivables cycle.
2. Discuss the procedures used to search for unrecorded liabilities and explain their limitations.
3. Evaluate the role of controls testing in a payroll audit.
4. Explain how inventory existence and valuation risks require different audit procedures.
5. Discuss how technology and data analytics affect audit evidence, professional judgement and auditor responsibility.

Analytical / Application Questions

1. A company records unusually high sales on the final two days of the year, followed by substantial returns in January. Identify the assertions and fraud risks involved, and design an appropriate audit response.
2. During a bank-reconciliation test, the auditor finds several old outstanding cheques and a transfer recorded in the accounting system before year-end but by the bank after year-end. Analyse the possible misstatements and propose further procedures.
3. An entity has declining sales, obsolete inventory and a recently breached loan covenant. Integrate the inventory, financing, taxation and going-concern implications and explain how the audit team should respond.

Multiple Choice Questions with Answers

Question 1

Which assertion is usually most directly tested by tracing receiving reports to the purchases ledger?

A. Occurrence

B. Completeness

C. Rights and obligations

D. Presentation

Correct Answer: B. Completeness

Question 2

Under the audit-risk model, if inherent risk and control risk are assessed as high, the auditor would normally seek to:

A. Accept higher detection risk

B. Reduce substantive work

C. Reduce acceptable detection risk

D. Ignore sampling risk

Correct Answer: C. Reduce acceptable detection risk

Question 3

Which procedure most directly tests the occurrence of recorded revenue?

A. Tracing dispatch notes to the sales ledger

B. Vouching recorded sales to customer orders and dispatch evidence

C. Reviewing unmatched receiving reports

D. Inspecting supplier statements

Correct Answer: B. Vouching recorded sales to customer orders and dispatch evidence

Question 4

Which evidence is generally most persuasive for verifying a bank balance?

A. A management-prepared cash summary

B. An unsigned internal reconciliation

C. An external bank confirmation

D. A forecast of cash flows

Correct Answer: C. An external bank confirmation

Question 5

A major purpose of attending an inventory count is to:

A. Approve management’s valuation policy

B. Observe counting and perform independent test counts

C. Replace all subsequent substantive procedures

D. Confirm that every item is owned by the entity

Correct Answer: B. Observe counting and perform independent test counts

Question 6

Which payroll procedure is most effective for identifying fictitious employees?

A. Comparing total payroll with last year only

B. Agreeing selected employees to personnel records and evidence of employment

C. Inspecting the depreciation schedule

D. Confirming trade receivables

Correct Answer: B. Agreeing selected employees to personnel records and evidence of employment

Question 7

Under the straight-line depreciation formula, an asset costing $100,000 with a residual value of $10,000 and a five-year useful life has annual depreciation of:

A. $18,000

B. $20,000

C. $22,000

D. $90,000

Correct Answer: A. $18,000

Question 8

Which procedure is particularly relevant to detecting unrecorded liabilities?

A. Inspecting payments made after year-end

B. Observing customer credit approval

C. Confirming share capital with customers

D. Recalculating sales commissions only

Correct Answer: A. Inspecting payments made after year-end

Question 9

A loan covenant breached before year-end may affect:

A. Only the existence of inventory

B. Classification and disclosure of borrowings

C. Only payroll completeness

D. The physical count instructions

Correct Answer: B. Classification and disclosure of borrowings

Question 10

Which statement best describes an anomaly identified by an audit-analytics tool?

A. It is automatically proof of fraud

B. It can replace professional judgement

C. It is a risk indicator requiring investigation

D. It is irrelevant if the population is complete

Correct Answer: C. It is a risk indicator requiring investigation