Chapter 14
If any inherent risks of accounts payable are related to ___________, the auditors will make certain they understand the programs and controls established by management to control the risk. a. fraud b. detection c. business
A
T or F: Auditors often confirm vendors' accounts with zero balances at year-end.
True
T or F: In the audit of financial statements, the auditors are particularly concerned with possible understatement of liabilities and the possible overstatement of revenues.
True
T or F: Unclaimed payroll checks should be voided and the amount should be recorded in a special liability account.
True
Property tax payments are typically ______ in number.
Few
T or F: To overstate net income requires the recording of an improper accounting entry.
False
In addition to accounts payable, other items classified as current liabilities include: (Select all that apply) a. prepaid expenses b. unclaimed wages c. customers' deposits d. supplies e. sales tax payable
B, C, E
T or F: Vouching of selected accounts payable on the client's year-end trial balance is primarily a test of completeness of recorded accounts payable.
False
Sales tax collected from customers constitute ___________ of the business until they are remitted to the taxing authority. a. current liabilities b. other expenses c. other revenues d. current assets
A
T or F: Unless the auditors are engaged to prepare the client's tax return, there is no need for the auditors to review the return.
False
T or F: Auditors are concerned with the discovery of receivables from related parties, but not with the discovery of payables from related parties.
False
In an effective purchasing system, a stores or inventory control department will prepare and approve the issuance of a purchase requisition that will be sent to the ____________ department. a. accounting b. sales c. purchasing
C
Accounts payable _______ can be mailed to vendors from whom substantial purchases have been made.
Confirmations
Ordinarily, the most significant assertion relating to accounts payable is: a) Completeness b) Existence c) Presentation d) Valuation
A
Payables to a corporation's __________ require particular attention by the auditors since they are not the result of arm's length bargaining by parties of opposing interests. a. officers b. major customers c. suppliers d. employees
A
Income taxes withheld from employees but not yet submitted to the government are considered to be a(n) _______.
Liability
When testing customer deposits, auditors typically review a(n) ______of the individual deposits.
List
A client's procurement system ends with the assumption of a liability and the eventual payment of the liability. Which of the following best describes the auditors' primary concern with respect to liabilities resulting from the procurement system? a. Accounts payable are not materially understated. b. Authority to incur liabilities is restricted to one designated person. c. Acquisition of materials is not made from one vendor or one group of vendors. d. Commitments for all purchases are made only after established competitive bidding procedures are followed.
A
For effective internal control, the accounts payable department should compare the information on each vendor's invoice with the: a) Receiving report and the purchase order b) Receiving report and the voucher c) Vendor's packing slip and the purchase order d) Vendor's packing slip and the voucher
A
Items that would not be classified as current liabilities include: a. prepaid expenses b. accrued liabilities c. unclaimed wages
A
Which of the following procedures is least likely to be performed before the balance sheet date? a. Search for unrecorded liabilities. b. Review of internal control over cash disbursements. c. Observation of inventory. d. Confirmation of receivables.
A
Principal working papers include which of the following? (Select all that apply) a. confirmation requests b. purchase requisitions c. lead schedule d. sample vouchers
A, C
When searching for unrecorded liabilities, the auditors consider transactions recorded _____ year-end.
After
Auditors will obtain a trial balance of accounts payable and reconcile it with the general ledger. The purpose of this substantive procedure does not include: a. determining that amount in the BS is in agreement with the detailed records b. providing a starting point for additional procedures c. providing absolute proof of the total indebtedness
C
Most of the inherent risks of accounts payable arise from ____________ risks faced by management. a. internal b. control c. business
C
T or F: Confirmation of accrued liabilities is ordinarily a required audit procedure.
False
Based on their understanding of the client and its environment, including internal controls over accounts payable, the auditors develop their planned assessed levels of the risks of ____________ for the assertions about accounts payable.
Material misstatement
When auditors find unrecorded liabilities, before adjusting they must consider_______.
Materiality
To gain overall assurance as to the reasonableness of accounts payable, the auditor may consider ________.
Ratios
Federal and state governments do not specify the exact _____to be maintained, but do specify the amounts to be withheld.
Records
Auditors need to consider _____ terms for determining ownership and whether a liability should be recorded.
Shipping
For most accrued liabilities, the audit approach will emphasize a: a. review and test of management's process of developing estimates b. independently develop an estimate of the amount to compare to management's estimate c. review subsequent events or transactions bearing on the estimate
A
T or F: A company's receiving department should be independent of its purchasing department.
True
The auditors cannot express an opinion on either the balance sheet or income statement of a corporation without first obtaining evidence that the provision for __________ has been properly computed. a. income taxes b. accumulated depreciation c. officers salaries
A
When confirming accounts payable, the approach is most likely to be one of: a) Selecting the accounts with the largest balances at year-end, plus a sample of other accounts b) Selecting the accounts of companies with whom the client has previously done the most business, plus a sample of other accounts c) Selecting a random sample of accounts payable at year-end d) Confirming all accounts
B
A subsequent procedure that establishes existence and valuation is ___________ of accounts payable by direct correspondence with vendors.
Confirmation
Identify which of the following procedures are performed to test controls. (Select all that apply) a. perform analytical procedures for A/P b. test IT application controls c. reenact an erroneous transaction d. verify a sample of postings to the A/P control account
B, D
T or F: Accounts payable confirmation requests usually have the vendor indicate the amount of the payable from the client.
True
Proper BS presentation of accounts payable requires that any material amounts payable to ____________ be listed separately from amounts payable to trade creditors.
Related parties (directors, principal stockholders, officers, employees)
T or F: Since it is difficult to detect unrecorded liabilities, auditors rely primarily on the client's representations that no unrecorded liabilities exist.
False
T or F: Companies typically send statements to vendors detailing their accounts payable to the vendors.
False
T or F: All unrecorded liabilities of the same dollar total have the same effect on the client's net income.
False
T or F: The audit procedure of confirmation by direct communication is just as important for accounts payable as it is for accounts receivable.
False
An audit of the balance in the accounts payable account is ordinarily not designed to: a) Detect accounts payable that are substantially past due b) Verify that accounts payable were properly authorized c) Ascertain the reasonableness of recorded liabilities d) Determine that all existing liabilities at the balance sheet date have been recorded
A
An audit of the balance in the accounts payable account is ordinarily not designed to: a. detect accounts payable due to public versus non-public companies. b. verify that accounts payable were properly authorized. c. ascertain the reasonableness of recorded liabilities. d. determine that all existing liabilities at the balance sheet date have been recorded.
A
In an audit, the valuation of year-end accounts payable is most likely addressed by: a) Confirmation b) Examination of cash disbursements immediately prior to year-end c) Examination of cash disbursements immediately subsequent to year-end d) Analytical procedures applied to vouchers payable at year-end
A
The audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts payable because: a. accrued liabilities usually pertain to services of a continuing nature while accounts payable are the result of completed transactions. b. accrued liability balances are less material than accounts payable balances. c. evidence supporting accrued liabilities is nonexistent while evidence supporting accounts payable is readily available. d. accrued liabilities at year-end will become accounts payable during the following year.
A
The search for unrecorded liabilities must be made __________ the BS date. a. on b. before c. after
C
Identify a type of obligation that should not be included in accounts payable. a. receipt of legal services b. interest-bearing obligations c. credit purchases of supplies
B
In performing a test of controls, the auditors vouch a sample of entries in the purchases journal to the supporting documents. Which assertion would this test of controls most likely test? a) Completeness b) Existence c) Valuation d) Rights
B
The principal working papers for accounts payable include all of the following except: a. lead schedule b. purchase requisitions c. confirmation requests
B
The basic auditing steps for accrued liabilities include examining any __________ or other documents on hand that provide the basis for the accrual.
Contracts
The auditors will analyze the unclaimed wages account for the purpose of determining that the _____________ (debits/credits) represent only authorized payments to employees, remittances to the state under unclaimed property laws, or transfers back to general cash funds through approved transactions.
Debits
If tests of controls indicate that the client has strong internal controls, this assessment of low control risk for accounts payable may result in minimizing ___________ for accounts payable.
Substantive procedures
A substantive procedure that auditors perform when the risk of material misstatement of accounts payable is high is to reconcile accounts payable with monthly statements from ___________.
Vendors
Auditors may perform tests of controls by tracing a sample of general ledger postings to the ___________ register and cash disbursements journal.
Voucher
Which of following audit procedures is least likely to detect an unrecorded liability? a. Analysis and recomputation of interest expense. b. Analysis and recomputation of depreciation expense. c. Mailing of standard bank confirmation form. d. Readings of the minutes of meetings of the board of directors.
B
To avoid potential errors and fraud, well-designed internal control in the accounts payable area should include a separation of which of the following functions? a. Cash disbursements and invoice verification. b. Invoice verification and merchandise ordering. c. Physical handling of merchandise received and preparation of receiving reports. d. Check signing and cancellation of payment documentation.
A
Analytical procedures performed to accounts payable and related accounts include which of the following procedures? (Select all that apply) a. test sales discounts and compare to prior periods to determine changes in terms b. compute ratios and compare to prior years c. compare amounts owed to individual creditors to balances in prior years
B, C (testing purchase discounts, not sales)
T or F: Auditors may test controls by vouching a sample of postings through the audit trail both from the posting to the source document, and in reverse order from the source document up to the general ledger posting.
True
Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. a. Comparing subsequent cash payments to the accounts payable trial balance. b. Reviewing receiving reports issued near year-end. c. Reviewing union contracts. d. Reviewing unusual transactions during the year. e. Vouching selected accounts payable on the trial balance. The existence of unrecorded accounts payable.
A
Bell's accounts-payable clerk has a brother who is one of Bell's vendors. The brother will often invoice Bell twice for the same delivery. The accounts-payable clerk removes the receiving report for the first invoice from the paid voucher file and uses it for support of payment for the duplicate invoice. The most effective procedure for preventing this activity is to: a. mail signed checks without allowing them to be returned to the accounts-payable clerk. b. cancel vouchers and supporting papers when payment is made. c. use dual signatures. d. use prenumbered receiving reports.
B
Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. a. Comparing subsequent cash payments to the accounts payable trial balance. b. Reviewing receiving reports issued near year-end. c. Reviewing union contracts. d. Reviewing unusual transactions during the year. e. Vouching selected accounts payable on the trial balance. An improper cutoff of accounts payable.
B
A review of the procedures followed in accepting and returning deposits should be made by the auditors with a view to disclosing any shortcomings in: a. overstated deposits b. deposit refunds c. internal control
C
Income taxes that are withheld from employees' pay and not remitted as of the balance sheet date will constituted a ____________ to be verified by the auditors.
Liabilitiy
Accrued expenses including interest, taxes, rent, and wages appear in the ___________ section of the balance sheet. a. long-term liabilities b. other expenses c. current liabilities d. current assets
C
All material ___________ payables should be disclosed in the financial statements. a. recently paid b. past-due c. related party
C
A client erroneously recorded a large purchase twice. Which of the following internal control measures would be most likely to detect this error in a timely and efficient manner? a) Footing the purchases journal b) Reconciling vendors' monthly statements with subsidiary payable ledger accounts c) Tracing totals from the purchases journal to the ledger accounts d) Sending written quarterly confirmation to all vendors
B
Auditors may review the portion of accounts payable that is ____________ at YE and compare it to corresponding data for previous years. a. not yet due b. past due c. paid
B
Which of the following is the most efficient audit procedure for the detection of unrecorded liabilities? a. Examine purchase orders issued for several days prior to the close of the year. b. Compare cash disbursements in the subsequent period with the accounts payable trial balance at year-end. c. Confirm large accounts payable balances at the balance sheet date. d. Obtain a "liability certificate" from the client.
B
Which of the following procedures is least likely to be completed before the balance sheet date? a) Confirmation of receivables b) Search for unrecorded liabilities c) Observation of inventory d) Review of internal accounting control over cash disbursements
B
In an effective purchasing system, receiving reports should be sent to the ___________ departments. (Select all that apply) a. accounts receivable b. accounts payable c. inventory control d. stores e. purchasing
B, D, E
For companies that use a voucher system, when subsequent procedures to verity the individual vouchers are made after the BS date, the client should: a. delay payments until audit staff can review vouchers b. examine vouchers and provide auditors verbal assurance to auditors about the validity of documentation c. prepare a list of YE unpaid vouchers
C
Identify which of the following is the first objective of auditing accounts payable. a. Obtain an understanding of internal controls over A/P b. Assess the risk of material misstatement and design tests of controls and substantive procedures c. Use the understanding of the client and its environment to consider inherent risks
C
In order to efficiently establish the accuracy of the accounts payable cutoff, the auditors will be most likely to: a. compare cutoff reports with purchase orders. b. compare vendors' invoices with vendors' statements. c. coordinate cutoff tests with physical inventory observation. d. coordinate mailing of confirmations with cutoff tests.
C
Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. a. Comparing subsequent cash payments to the accounts payable trial balance. b. Reviewing receiving reports issued near year-end. c. Reviewing union contracts. d. Reviewing unusual transactions during the year. e. Vouching selected accounts payable on the trial balance. The existence of an unrecorded accrued payable.
C
To determine that each voucher is submitted and paid only once, when a payment is approved, supporting documents should be canceled by the: a) Authorized members of the audit committee b) Accounting department c) Individual who signs the checks d) Chief executive officer
C
Under which of the following circumstances would it be advisable for the auditors to confirm accounts payable with creditors? a. The majority of accounts payable balances are with associated companies. b. Internal control over accounts payable is adequate and there is sufficient evidence on hand to minimize the risk of a material misstatement. c. Creditor statements are not available and internal control over accounts payable is unsatisfactory. d. Confirmation response is expected to be favorable and accounts payable balances are of immaterial amounts.
C
Which of the following procedures relating to the audit of accounts payable would the auditors be most likely to delegate entirely to the clients' employees? a. Test footings in the accounts payable ledger. b. Examine disbursements subsequent to year-end. c. Prepare a schedule of accounts payable. d. Mail confirmations for selected account balances.
C
Auditors should test the reasonableness of sales tax payable by: (Select all that apply) a. confirming with major customers sales tax collected b. tracing paid checks to sales tax invoices and vouchers c. examining sales invoices to confirm customers are being charged correct amount of tax d. applying sales tax rate to total taxable sales
C, D
Identify which of the following tasks auditors use to obtain an understanding of internal control over accounts payable. (Select all that apply) a. make a fictitious purchase b. review all invoices and supporting documentation c. use a questionnaire d. perform a walk-through e. prepare a flowchart
C, D, E
When testing other accrued liabilities, auditors may independently calculate the amount and ______ it to management's estimate.
Compare
Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because: a) This is a duplication of cutoff tests b) Accounts payable balances at the balance sheet date may not be paid before the audit is completed c) Correspondence with the audit client's attorney will reveal all legal action by vendors for nonpayment d) There is likely to be other reliable external evidence available to support the balances
D
Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because: a. this is a duplication of cutoff tests. b. accounts payable balances at the balance sheet date may not be paid before the audit is completed. c. correspondence with the audit client's attorney will reveal all legal action by vendors for nonpayment. d. there is likely to be other reliable external evidence available to support the balances.
D
Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. a. Comparing subsequent cash payments to the accounts payable trial balance. b. Reviewing receiving reports issued near year-end. c. Reviewing union contracts. d. Reviewing unusual transactions during the year. e. Vouching selected accounts payable on the trial balance. The existence of related party payables.
D
The least likely approach in auditing management's estimate relating to an accrued liability is to: a) Independently develop an estimate of the amount to compare to management's estimate b) Review and test management's process of developing the estimate C) Review subsequent events or transactions bearing on the estimate d) Send confirmations relating to the estimate
D
Which of the following is the best audit procedure for determining the existence of unrecorded liabilities? a) Examine confirmation requests returned by creditors whose accounts appear on a subsidiary trial balance of accounts payable b) Examine unusual relationships between monthly accounts payable balances and recorded purchases c) Examine a sample of invoices a few days prior to and subsequent to year-end to ascertain whether they have been properly recorded d) Examine selected cash disbursements in the period subsequent to year-end
D
Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. a. Comparing subsequent cash payments to the accounts payable trial balance. b. Reviewing receiving reports issued near year-end. c. Reviewing union contracts. d. Reviewing unusual transactions during the year. e. Vouching selected accounts payable on the trial balance. The existence of a fictitious account payable.
E
Auditors should be alert that deposits shown by the records as refunded to customers may in fact have been abstracted by ___________.
Employees
T or F: Most of the audit work on liabilities is ordinarily performed during the interim period.
False
T or F: The amount of accrued payroll is typically verified by confirmation with selected employees.
False
T or F: Accounts payable with debit balances should be reclassified as receivables.
True
T or F: Auditors may discover unrecorded liabilities by reconciling vendors' statements with the accounts payable trial balance.
True
T or F: Review of a client's cash payments subsequent to the balance sheet date is an important test of the completeness of recorded payables.
True
T or F: When testing the amount of pension liability, the auditors typically rely on a specialist.
True