ACCT 4123 Chapter 8

Assertion: Net property and equipment are properly valued at the balance-sheet date.

Substantive Procedure: Review the provision for depreciation expense and determine whether depreciable lives and methods used in the current year are consistent with those used in the prior year.

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

The check signer reviews and cancels the voucher packets.

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

The same person authorizes voucher packages and signs checks.

True or false: Periodic comparison or reconciliation of existing assets to recorded amounts includes reviewing unmatched purchase orders, receiving reports and invoices.

True [Reason: This should be done along with comparing accounts payable records to vendors' monthly statements.]

Amount of expense incurred on debt but not charged yet by bank

Type of Liability: Accrued Interest

Amount estimated to be incurred for utilities for unbilled period

Type of Liability: Accrued Utilities

Amount estimated to be anticipated for warranty claim of sales already recorded

Type of Liability: Accrued Warranty

An amount paid by a customer for a container to be later returned to the company

Type of Liability: Customer Deposit

The amount collected from a customer for a retail sale imposed by the state government

Type of Liability: Sales Tax Payable

When testing other accrued liabilities, auditors may independently calculate the amount and ______ it to management's estimate.

compare

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

completeness

Managements' claim that no repair & maintenance expenses should be capitalized relates to the ______ assertion.

completeness

Selecting a sample of closed purchase orders and tracing them to the accounts payable journal provides evidence of

completeness

When considering assertions and obtaining evidence about accounts payables and other liabilities, auditors must emphasize the _____ assertion.

completeness

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

completeness.

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

completeness.

Because management may desire to improve the books by not recording an obligation in the correct period, _____ and _____ are important assertions for accounts payable.

completeness; cutoff

The most significant risks in the expenditure cycles generally relate to the _____ of expenditures and _____ of acquisitions.

completeness; valuation

Accounts payable _____ can be mailed to vendors from whom substantial purchases have been made.

confirmations

Bart's Company has prepared the PP&E and depreciation schedule shown in Exhibit 8.54.1 below. The following information is available. (Assume the beginning balance has been audited): - The land was purchased eight years ago when building 1 was erected. The location was then remote but now is bordered by a major freeway. The appraised value of the land is $35 million. - Building 1 has an estimated useful life of 35 years and no residual value. - Building 2 was built by a local contractor this year. It also has an estimated useful life of 35 years and no residual value. The company occupied it on May 1 this year. - Computer A system was purchased January 1 six years ago when the estimated useful life was eight years with no residual value. It was sold on May 1 for $500,000. - Computer B system was placed in operation as soon as Computer A system was sold. It is estimated to be in use for six years with no residual value at the end. - The company estimated the useful life of the press at 20 years with no residual value. - Auto 1 was sold during the year for $1,000. - Auto 2 was purchased on July 1. The company expects to use it five years and then sell it for $2,000. - All depreciation is calculated on the straight-line method using months of service. a. Verify the depreciation calculations. Are there any errors? Put the errors in the form of an adjusting journal entry, assuming that 90 percent of the depreciation on the buildings and the press has been charged to Cost of Goods Sold and 10 percent is still capitalized in the inventory, and the other depreciation expense is classified as General and Administrative Expense (i.e., building and press depreciation is considered a product cost; inventory on hand includes 10 percent of the depreciation expense for buildings and the press: $180,700; Cost of Goods Sold contains the other 90 percent: $1,626,300).

- Computer B $3500 / 6 yr = $583/yr Began use on May 1 = 8 mos of year $583 x 4/12 = $194 - Press: $1500 / 20 yrs = $75/yr Inventory: $75 x 10% = $7500 COGS: $75 x 90% = $67500 Debit: Accumulated Depreciation: $269,000 Credit: General and administrative expense: $194,000 Inventory: $7,500 COGS: $67,500

Misstatements for Property, Plant, and Equipment that are examples of fraud

- Expenditures for repairs and maintenance intentionally recorded as Property, Plant, and Equipment to overstate income

Misstatements for Property, Plant, and Equipment that are examples of error

- Purchases of equipment are erroneously reported in a maintenance and expense account - As asset that has been replaced is discarded due to lack of value, with no entry to the general ledger - A gain recorded on an exchange of non-monetary assets that lacks commercial substance

According to the FASB Statement of Concepts, expenses may be recognized when they are ______.

- allocated to future periods - matched to revenue - incurred

Accounts payable confirmations ______.

- are not required by auditing standards - may be used when internal controls are weak

The primary relevant assertions for accounts payable are ______.

- cutoff - valuation - completeness

Specific assertions related to the valuation of PP&E include ______.

- depreciation is properly allocated - asset cost includes freight-in

Entity-level controls over the expenditure process include ______.

- document security - corporate values and ethics - management review - proper authorization

Fraud issues in the purchasing department include the risk of ______.

- fictitious invoices - misdirected purchases - kickbacks

Periodic reconciliations of existing assets to recorded amounts include comparing ______.

- inventory records to a physical inventory count - an accounts payable trial balance to the control account

Expenses may be improperly classified to ______.

- lower total expenses - increase total assets

Risks in the acquisition and expenditure cycle include ______.

- noncancelable purchase agreements - unrecorded liabilities

Required disclosures must ensure that the presentation and disclosure assertions of ______ are all met.

- occurrence - rights and obligations - completeness - classification - understandability - accuracy and valuation

While the "three-way match" may be the most important control in the purchasing cycle, a problem in matching the documents can lead to ______.

- overstated profits - unrecorded liabilities - understated costs

Accounts payable confirmations may be used when ______.

- the company's cash position is tight - physical inventories significantly exceed general ledger inventory balance - internal controls are weak - vendor accounts include unusual transactions

Which of the following statements are correct? A. Evidence is more difficult to obtain to support the completeness assertion than the existence assertion. B. Financial statement users are typically more concerned with understated than overstated expenses and liabilities. C. Auditors can only rely entirely on a management assertion of completeness when there is a favorable assessment of the risk of material misstatement.

A & B

Which of the following statements are correct? A. Most expenses can be tested along with related assets and liabilities. B. Miscellaneous expenses do not need to be audited. C. If the risk of material misstatement is high, expenses can be tested using tests of controls. D. Maintenance and repair expenses should be examined for items requiring capitalization.

A, D [Incorrect: B. Misc. expenses should be examined for significant unusual items. C. tests of details.]

Effective control over the cash payroll function would mandate which of the following? A. Each employee should be asked to sign a receipt for wages received. B. A separate checking account for payroll should be maintained. C. The payroll clerk should fill the envelopes with cash and include a computation of the net wages. D. The paymaster should be retain unclaimed payroll envelopes.

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

Substantive tests of account balances in the payroll cycle are likely to include the following procedures except: A. detail vouching of payroll expense entries. B. analytical review procedures. C. recalculation of accruals. D. comparison of accruals to subsequent payments.

A. detail vouching of payroll expense entries.

Which of the following statements are correct? A. The search for unrecorded liabilities should emphasize large accounts. B. The accounts payable trial balance should agree with the accounts payable control account. C. Records may be kept by individual voucher instead of by vendor name. D. Vendor(s) with a zero balance should be excluded from the trial balance.

B, C [Incorrect: A. Small and zero balance accounts should be emphasized. D. All vendors should be included]

Which of the following statements are correct? A. Recalculating amortization is not sufficient audit evidence for existence. B. Goodwill is of special interest to auditors due to potential impairment. C. Vouching may be extensive in the areas of R&D. D. Auditors should ask management about any lawsuits or defects related to intangible assets.

B, C [Incorrect: A. The opposite is true. D. Inquiries should be made to company counsel.]

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? A. Accounts payable B. Repairs and maintenance expense C. Depreciation expense D. Gain on disposal of equipment

B. Repairs and maintenance expense

An audit firm is testing controls within the purchasing cycle. In which of the following procedures would the firm most likely apply sampling techniques? A. Risk assessment procedures performed to obtain an understanding of internal control in the purchasing cycle. B. Testing of operating effectiveness of controls over authorization of purchase orders. C. Analyses of controls to determine the appropriate segregation of duties in the purchasing cycle. D. Tests of automated application controls involving check amount limits when effective information technology general controls are present.

B. Testing of operating effectiveness of controls over authorization of purchase orders.

Which of the following would be an indicator of potential fraud? A. Photocopies of invoices in the voucher file B. Vendor invoices in numerical order C. Vendors with only post office box addresses D. All of these indicate potential fraud.

D. All of these indicate potential fraud.

Which of the following situations represents an internal control weakness in the payroll department? A. Payroll department personnel are rotated in their duties. B. Payroll records are reconciled with quarterly tax reports. C. The timekeeping function is independent of the payroll department. D. Paychecks are distributed by the employees' immediate supervisor.

D. Paychecks are distributed by the employees' immediate supervisor.

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

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

True or false: Generally vendor approval takes place in a single department.

False [Reason: It often requires several departments to approve a vendor.]

Improperly excluded from AP

Invoice dated 1/20 for cleaning services for the month of December; not included in AP as of 12/31

Properly excluded from AP

Invoice dated 1/5 for January security protection; not included in AP as of 12/31

Properly included in AP

Invoice dated for 12/20 for maintenance services and unpaid as of year-end; listed in AP at 12/31

Improperly included in AP

Invoice received 12/30 for January temporary workers; included in AP as of 12/31

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

Occurrence

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

Receiving reports and purchase orders

Assertion: The entity has legal right to property and equipment acquired during the year.

Substantive Procedure: Examine deeds and title insurance certificates.

Assertion: Recorded property and equipment represent assets that actually exist at the balance-sheet date.

Substantive Procedure: Physically examine all major property and equipment additions.

Maine Construction builds office buildings. The buildings generally cost between $5 million and $8 million to build, and the plumbing can cost between $300,000 and $600,000 depending on the building requirements. Therefore, Maine always sends the plumbing work out for bid before deciding on whom to use as a subcontractor. The company has had 21 projects over the past five years with $10 million dollars in plumbing contracts being sent out for bids. Over the past five years, Maine has asked for bids from three contractors: Beltran Plumbing, Delgado Plumbing Services, and Wright Contracting-Plumbing Specialists. Each vendor has been reviewed by Maine and is on Maine's approved vendor list. a. Of the 21 projects sent out for bid, Wright had the winning bid on 12 of the projects. b. Of the 21 projects sent out for bid, Wright had the winning bid on 12 of the projects. In each of these bidding processes, Wright's bid was the last bid received. c. Of the 21 projects sent out for bid, each vendor had the winning bid on 7 of the projects.

a. No b. Yes c. Yes

When searching for unrecorded liabilities, the auditors consider transactions recorded _____ year-end.

after

Generally purchases should only be made from sellers on the _____ _____ list to ensure the seller is authorized by the organization.

approved vendor

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

authorization of transactions from the custody of related assets.

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

authorizing payroll rate changes for all employees.

When goods arrive at a company, they are accompanied by a ______.

bill of lading

Auditors test effectiveness of controls to ensure they can justify their planned levels of ______ risk.

control

The accounts payable trial balance should agree with the accounts payable _____ _____.

control account

Tracing the date of receipt to the date in the voucher journal provides evidence of _____.

cutoff

Because management may desire to improve the books by not recording an obligation in the correct period, _____ and _____ are important assertions for accounts payable.

cutoff; completeness

Auditors must confirm that the _____ of Property, Plant, and Equipment agree with the general ledger.

detail ledgers

Which of the following would the auditor NOT be testing for by examining lease agreements? - estimates - existence - presentation - rights - valuation

estimates

Continual management review, proper authorizations, and a place where inappropriate behavior may be reported are all _____- level controls in the expenditure process.

entity

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

examine evidence supporting additions during the year.

The principal goal of the physical inspection of PP&E is to determine actual _____ and _____.

existence; valuation

To reflect the consumption of economic benefits, GAAP prescribes that _____ be charged to income.

expenses

Property tax payments are typically ______ in number.

few

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

high.

It is important for the auditor to verify that the controls described by the employees during the auditor's survey of controls over property, plant, and equipment have actually been ______.

implemented

After obtaining an understanding of the client and its environment, auditors must identify the _____ risks related to the accounts.

inherent

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

invoices.

Recalculation based on audited costs and rates ______ sufficient appropriate audit evidence for amortization of intangible assets.

is

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

Auditors should examine the open purchase order file to find evidence of ______.

losses on purchase commitments

When auditors find unrecorded liabilities, before adjusting they must consider_______.

materiality

Auditors may discover evidence of losses on purchase commitments by examining the _____ _____ _____ file.

open purchase order

Once an appropriate vendor is selected for the goods or services, a ______ is sent to the selected vendor.

purchase order

Once an appropriate vendor is selected for the goods or services, a(n) _____ _____ is sent to the selected vendor.

purchase order

When goods are delivered the bill of lading must be matched to the ______ on file to ensure only the correct items are received.

purchase order

The expenditure cycle begins when an individual or department that needs supplies, equipment or services sends a ______ to the purchasing department.

purchase requisition

The expenditure cycle begins when an individual or department that needs supplies, equipment or services sends a(n) _____ _____ to the purchasing department.

purchase requisition

To gain overall assurance as to the reasonableness of accounts payable, the auditor may consider ________.

ratios

A "shell" company is used by an employee to ______.

receive fictitious payments

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

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

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

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

stamped "paid" by the check signer.

If the risk of material misstatement is high, auditors can look for evidence that significant transactions are properly recorded using _____ of _____.

test; details

The objective of misstating a purchase or payable is often to ______.

understate expenses

To search for unrecorded liabilities, auditors should inspect and compare the unmatched receiving report file with the _____ _____ file.

unmatched invoice

To find evidence of unrecorded liabilities, auditors should inspect the ______.

unmatched receiving reports

Auditors should inspect the unmatched invoice file and compare it with the unmatched receiving report file to determine ______.

unrecorded liabilities

Auditors should inspect the unmatched receiving report file to find evidence of ______.

unrecorded liabilities

Because individuals may attempt to run personal expenses through accounts payable, the ______ of expenses is a significant risk in the expenditures cycle.

validity

Accounts that are debited, who verified the invoice and reconciled the purchase order, receiving report and vendor invoice are included on the _____ attached by the accounts payable department.

voucher

Copies of the purchase order, vendor invoice and receiving report are contained in the _____ _____.

voucher package

The two primary means of gathering evidence to support management's assertions with respect to PP&E are physical inspection and _____.

vouching