Chapter 8 Audit

A client's purchasing system ends with the recording of a liability and its eventual payment. Which of the following best describes auditors' primary concern with respect to liabilities resulting from the purchasing system?

A. Accounts payable are not materially understated.

When confirming accounts payable, emphasis should be put on what kind of accounts?

A. Accounts with small or zero balances.

In performing a search for unrecorded retirements of fixed assets, an auditor most likely would

A. inspect the property ledger and the insurance and tax records, and then tour the client's facilities.

The typical functions of the personnel and payroll cycle would not include

A. labor relations.

In determining the effectiveness of an entity's policies and procedures relating to the occurrence assertion for payroll transactions, auditors most likely would inquire about and

A. observe the separation of duties concerning personnel responsibilities and payroll disbursement

Vouchers should be stamped PAID to

A. prevent duplicate payment

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be

A. vendors with whom the entity has previously done business.

To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is

B. stamped "paid" by the check signer.

Cutoff tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year most likely would provide assurance about management's assertion of

C. completeness.

When auditing liabilities account balances, auditors are most concerned with management' assertion about

C. completeness.

An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal. The purpose of this substantive audit procedure most likely was to

C. determine that purchases were properly recorded.

An auditor most likely would assess control risk at the maximum if the payroll department supervisor is responsible for

C. distribute payroll checks to all employees.

Purchase cutoff procedures should be designed to produce evidence of whether merchandise is included in the inventory of the client company if the company

C. holds legal title to the merchandise.

When verifying debits to the perpetual inventory records of a nonmanufacturing company, auditors would be most interested in examining a sample of purchase

C. invoices.

An auditor most likely would extend substantive tests of payroll when

C. overpayments are discovered in performing tests of controls.

Improperly capitalizing an expense item results in

C. overstatement of profit in the current year and understatement in future years.

To determine whether accounts payable are complete, auditors perform a test to verify that all merchandise received has been recorded. The population for this test consists of all

C. receiving reports.

L. Curtis, a maintenance supervisor, submitted maintenance invoices from a phony repair company and received the checks at a post office box. This should have been prevented by

C. refusal by the purchasing department to approve the vendor.

The auditor decided to test accounts payable by sending open-ended (blank) confirmations to selected vendors. The auditor's best approach in selecting the vendor accounts to confirm is to

C. select vendor accounts based on the number of purchases from vendors during the year.

A liability for a long-term purchase contract should generally be recognized when

C. the goods are received

When goods are received, the receiving clerk should match the goods with the

C. vendor's shipping document and the purchase order.

Auditors ordinarily ascertain whether payroll checks are properly endorsed during the audit of

A. clock cards.

Which of the following audit procedures is best for identifying unrecorded accounts payable?

A . Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period

The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the

C. authorization of transactions from the custody of related assets.

Which of the following functional responsibilities would not typically relate to salaried employees?

A. Collecting timekeeping data.

For which of the following accounts would the matching concept be the most appropriate?

A. Cost of goods sold.

Which of the following fraud detection steps could not be performed by CAATs?

A. Look for photocopies in invoice files.

"All purchase orders are supported by requisitions from proper persons" is a specific example of which management assertion?

A. Occurrence.

Which of the following departments most likely would approve changes in pay rates and deductions from employee salaries?

A. Personnel

Which of the following accounts would most likely be audited in connection with a related balance sheet account?

A. Property tax expense.

A voucher would typically contain

A. a purchase requisition, purchase order, vendor invoice, receiving report, and check copy.

Computer controls that might be found in an advanced on-line acquisition and expenditure system would not include

A. all vendor invoices are prenumbered and the numbers accounted for.

Which of the following would detect the understatement of a purchase discount?

B. Compare purchase disbursement records and checks with invoice terms.

An audit team most likely would assess control risk at the maximum if the payroll department supervisor is responsible for

C. authorizing payroll rate changes for all employees.

Which of the following is the best audit procedure for determining the existence of unrecorded liabilities?

B. Examine a sample of cash disbursements in the period subsequent to year-end.

.Which of the following would not typically be a specific relevant assertion about fixed asset accounts?

B. Net carrying book values in the accounts are reflected at current market values

"Recorded vouchers (accounts payable entries) in the voucher register (e.g., purchases journal) supported by completed voucher documentation" is a specific example of which management assertion?

B. Occurrence.

Which of the following situations represents an internal control weakness in the payroll department?

B. Paychecks are distributed by the employees' immediate supervisor

What evidence is appropriate to determine whether recorded purchase transactions are valid and the vendors charged the correct prices?

B. Receiving reports and purchase orders.

Which of the following situations indicates a potential material weakness in internal control over acquisition and expenditure?

B. The same person authorizes voucher packages and signs checks.

A CPA learns that his client has paid a vendor twice for the same shipment; once based upon the original invoice and once based upon the monthly statement sent from the vendor. A control procedure that should have prevented this duplicate payment is

B. attachment of the receiving report to the disbursement report.

An entity's internal control structure requires for every check request that there be an approved voucher, supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all

B. canceled checks.

An auditor is planning the testing of the accounts payable balance. The auditor's main concerns should be

B. completeness and cutoff.

In a test of controls, auditors may trace receiving reports to vouchers recorded in the voucher register. This is a test for

B. completeness.

An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that

B. employees work the number of hours for which they are paid

When auditing PP&E, the auditor's approach is generally to

B. examine evidence supporting additions during the year.

The inherent risk that accounts payable may be omitted or otherwise understated typically is

B. high.

For the copy of the purchase order that goes to the receiving department, it is best to

B. leave off the quantity of the goods ordered.

An auditor wishes to perform tests of controls on a client's purchasing procedures. If the control activities leave no audit trail of documentary evidence, the auditor most likely will test the procedures by

B. observation and inquiry

Matthew Corp. has changed from a system of recording time worked on clock cards to a computerized payroll system in which employees record time in and out with magnetic cards. The computerized system automatically updates all payroll records. Because of this change,

B. part of the audit trail is altered.

Small Corporation uses a Wages Clearing Account for its payroll disbursements. At the end of February, a reasonably large debit balance remained in this account. The most likely reason for this is that

B. some labor cost had not been properly classified in the expense accounts.

Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?

C. Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices

Which of the following personnel department procedures reduces the risk of payroll fraud and represents an appropriate responsibility for the department?

C. Authorizing the addition or deletion of employees from the payroll.

The auditor traces items from the receiving reports to the accounts payable journal in order to satisfy the

C. completeness assertion.

Tracing a sample of time clock cards to payroll registers (journals) is a procedure designed to obtain evidence about the transaction assertion(s) of

C. completeness only.

Which of the following client control activities is not usually performed in the vouchers payable (accounts payable) department?

C. Controlling the mailing of the check and remittance advice.

Effective control over the cash payroll function would mandate which of the following?

C. Each employee should be asked to sign a receipt for wages received.

Which of the following would not overstate current-period net income?

C. Failing to record a check paying an item in vouchers payable.

Which of the following is not a major control risk in the payroll cycle?

C. Losing employees to competitors.

An audit plan for accounts payable would not include which of the following procedures?

C. Reviewing cash receipts for the period after year-end.

Which of the following accounts does not appear in the acquisition and expenditure cycle?

C. Sales Returns.

Which of the following procedures is least likely to be performed before the balance-sheet date?

C. Search for unrecorded liabilities.

Which of the following controls should prevent an invoice for the purchase of merchandise from being paid twice?

C. The check signer reviews and cancels the voucher packets.

.Specific balance assertions typical of accounts payable would not include

C. accounts payable are not pledged as collateral

Failure to record a liability generally results in

C. an overstatement of profit.

An auditor most likely would perform substantive procedures on payroll transactions and balances when

C. analytical procedures indicate unusual fluctuations in recurring payroll entries.

A furniture company ordered 84 tables from a supplier. The supplier accidentally sent only 48 tables, but the receiving department at the furniture company accepted the tables. The invoice was eventually received but was for the 84 tables ordered. The furniture company paid the entire amount. Which of the following controls would have been least likely to have prevented this erroneous payment?

D. Personnel in the furniture company's purchasing department should compare the purchase requisition to the purchase order.

Which of the following is an internal control activity that could prevent a paid disbursement voucher from being presented for payment a second time?

D. The official who signs the check should compare the check with the voucher and should stamp PAID on the voucher documents.

Which of the following would be an indicator of potential fraud?

D. All of the above indicate potential fraud.

An internal control questionnaire for payroll processing occurrence assertion would not include which of the following questions?

D. Are all wage rates determined by contract or approved by a personnel officer?

Which of the following would not be included in the supporting documents for a voucher?

D. Blank check.

Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?

D. Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.

The permanent reference files (master files) in a personnel and payroll database ordinarily do not include which of the following

D. Employee earning record.

An audit team would most likely examine the detail support for which of the following charges?

D. Legal expense.

. Which of the following expense accounts would not normally be tested by listing all debits and examining any significant items?

D. Payroll expense.

Which of the following accounts would most likely be reviewed by the auditor to gain reasonable assurance that additions to the equipment account are not understated?

D. Repairs and maintenance expense

Cash disbursements are authorized by

D. a complete voucher package.

When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that

D. all goods owned at year-end are included in the inventory balance.

Substantive tests of account balances in the payroll cycle are likely to include the following procedures except

D. detail vouching of payroll expense entries.

A large retail enterprise has established a policy that requires the paymaster to deliver all unclaimed payroll checks to the internal audit department at the end of each payroll distribution day. This policy was most likely adopted to

D. detect any fictitious employee who may have been placed on the payroll.

Auditors may conclude that depreciation charges are too small by noting

D. large and frequent losses on assets retired

The sampling unit in a test of controls pertaining to the existence or occurrence of payroll transactions ordinarily is a(an)

D. payroll register (journal) entry.

A voucher package is used to

D. provide a source document for recording the purchase of a good or service.

R. Budd, the purchasing agent of Lake Hardware Wholesalers, has a relative who owns a retail hardware store. Budd arranged for hardware to be delivered by manufacturers to the retail store on a cash-ondelivery (COD) basis, thereby enabling his relative to buy at Lake's wholesale prices. Budd was probably able to accomplish this because of Lake's poor internal control over

D. purchase orders.

To test the transaction assertion of occurrence in the area of payroll, the auditor most likely would

D. select a sample of payroll register entries and vouch hours worked to clock time cards.

A weakness in internal control over recording retirements of equipment may cause an auditor to

D. select certain items of equipment from the accounting records and locate them in the plant

The usual source for journal entries posted to the general ledger to record the purchase of inventory is

D. vouchers payable journal from the accounts payable department.

Acquisition and expenditure activities include (1) purchasing goods and services, (2) receiving the goods or services, (3) recording the asset or expense and related liability, and (4) depreciating assets purchased

False

If a person is absent from the company due to illness or vacation, their paycheck should be returned to the payroll department.

False

In order to ensure appropriate segregation of duties, the supervisor in each department handles the custody of the payroll checks

False

Proper separation of duties involves the purchasing department as the recordkeeping function.

False

Purchases are requisitioned by a purchasing department that seeks the best prices and quality

False

The payroll department approves payroll hours prior to processing the payroll.

False

The principal goal of the physical inspection of property, plant, and equipment is to determine actual valuation of property

False

The receiving department receives a "blind" copy of the purchase order which does not include the vendor's name and address

False

Unrecorded liabilities can be prevented if there is an appropriate segregation of duties in accounts payable.

False

Auditors should inspect the "unmatched receiving report" file to determine whether the liability for the receipt of goods has been recorded.

True

Bill of ladings for goods shipped from a vendor to the purchasing company should always include the company's purchase order number.

True

Changes to the payroll master file should be approved by human resources department.

True

If internal controls over the expenditure cycle are weak, auditors will need to design substantive procedures to try to detect whether control failures have produced misleading financial statement account balances.

True

If the risk of material misstatement is assessed as high, it is likely that additional substantive procedures will be required.

True

Paychecks should be written to a payroll bank account that is used only for payroll.

True

The accounts payable department reconciles the vendor invoice, purchase order, and receiving report prior to approving the payment to the vendor.

True

The auditors' "search for unrecorded liabilities" should emphasize payments made shortly after the end of the year.

True

The emphasis is on the completeness assertion because financial statement users tend to be more concerned about understated expenses and liabilities than overstated.

True

Tracing the payables to the cash disbursements journal can provide the evidence regarding the valuation of accounts payable.

True