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Hi Tutor,
Hope you could help me on this question:
BPP revision kit question 64:
Which of the following statements is correct regarding the audit procedures concerning the non current asset cycle?
A. The same ordering documentation may be used in the non current assets cycle as in the purchases cycle. If this is the case, it will not be necessary to document the non current assets cycle
B. Because there are likely to be less capital purchases than standard purchases in the year, it may not be cost efficient to undertake tests of controls.
C. Because the control risk around the non current asset cycle is likely to be high, it is important to perform tests of controls
D. The non current assets cycle is likely to have a lower risk of material misstatement than the purchases cycle
The answer is B.
Reason: it is likely that the number of capital purchases in the year will be less than the number of standard purchases in the year. If the invoices are not segregated, it may not be cost efficient to test the controls over this area, in which case substantive testing would have to be undertaken.What are capital purchases and standard purchases? Why is it likely that capital purchases will be lower than standard purchases in the year?
Standard purchases are purchases of raw materials and goods for resale. In most businesses these transactions are very common and frequent.
Purchases of non-current assets, for example a car or piece of machinery are usually much less frequent and are low volume. Each transaction is often for high value so the most effective way of auditing these transactions might be to carry out substantive tests on them.
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