Chapter 6: Verification of Liabilities — Online MCQ Test
AUDITING · CLASS 12th · Tamil Nadu State Board
Practice Chapter 6: Verification of Liabilities with a free chapter-wise online MCQ test.
This chapter covers: This chapter outlines audit procedures for validating business obligations. Students learn verification techniques for share capital debentures long term loans current liabilities....
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Chapter 6: Verification of Liabilities — Important Questions & Answers
What is the main objective of verification of liabilities in auditing?
- A. To confirm that liabilities are overstated for safety
- B. To ensure all liabilities are properly recorded and disclosed
- C. To calculate the profit of the business
- D. To value fixed assets at market price
Answer: B. To ensure all liabilities are properly recorded and disclosed
Verification of liabilities aims to ensure that all obligations of the business are complete, accurate, and properly shown in the balance sheet.
Verification of liabilities aims to ensure that all obligations of the business are complete, accurate, and properly shown in the balance sheet.
Which of the following is a contingent liability?
- A. Trade creditors
- B. Outstanding salaries
- C. Bill discounted but not matured
- D. Bank overdraft
Answer: C. Bill discounted but not matured
A bill discounted but not yet matured may become a liability only if it is dishonoured, so it is treated as a contingent liability.
A bill discounted but not yet matured may become a liability only if it is dishonoured, so it is treated as a contingent liability.
An auditor finds that a company has a long-term loan from a bank. Which of the following should be examined first?
- A. Loan agreement and security documents
- B. Stock register
- C. Sales journal
- D. Wage sheet
Answer: A. Loan agreement and security documents
Loan agreements and security documents help confirm the existence, terms, repayment conditions, and charge created over assets.
Loan agreements and security documents help confirm the existence, terms, repayment conditions, and charge created over assets.
A company has failed to disclose a disputed legal claim in its balance sheet notes. What is the auditor’s main concern?
- A. The claim should be treated as fixed capital
- B. The liability may be understated by non-disclosure
- C. The claim should be shown as revenue income
- D. The claim should be ignored if unpaid
Answer: B. The liability may be understated by non-disclosure
A disputed legal claim is a contingent liability and should be disclosed. Non-disclosure can lead to understatement of liabilities.
A disputed legal claim is a contingent liability and should be disclosed. Non-disclosure can lead to understatement of liabilities.
Which of the following is the most appropriate treatment for a contingent liability in the balance sheet?
- A. Shown as a secured loan under liabilities
- B. Added to share capital
- C. Disclosed by way of note, not included as an actual liability
- D. Ignored completely if the amount is uncertain
Answer: C. Disclosed by way of note, not included as an actual liability
Contingent liabilities are not recognized as actual liabilities unless they become certain; they are disclosed in the notes to accounts.
Contingent liabilities are not recognized as actual liabilities unless they become certain; they are disclosed in the notes to accounts.