Audit Chapter 11

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 auditor's 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

A purchasing agent places an order for inventory whenever a requisition is received from the warehouse. The warehouse clerk issues requisitions based on periodic physical counts because no perpetual records are maintained. Numerous duplicate orders have been placed for goods previously ordered but not received. To prevent this excess ordering, the firm should a.Keep an adequate record of open purchase orders and review it before ordering. b.Count goods in the warehouse less often. c.Use prenumbered purchase orders. d.Not use purchase requisitions.

a

An effective control that protects against the preparation of improper or inaccurate disbursements is to require that all checks be a. Signed by an officer after necessary supporting evidence has been examined. b. Reviewed by the CFO before mailing. c.Sequentially numbered and accounted for by internal auditors. d. Perforated or otherwise effectively canceled when they are returned with the bank statement.

a

During the audit of a construction contract, it was discovered that the contractor was being paid for each ton of dirt removed. The contract called for payment based on cubic yards removed. Which internal control might have prevented this error? a. Comparison of invoices with purchase orders or contracts. b. Comparison of invoices with receiving reports. c. Comparison of actual costs with budgeted costs. d. Extension checks of invoice amounts.

a

To avoid potential errors and fraud, well-designed internal control in the accounts payable area should include a segregation of which of the following functions? a. Cash disbursements and vendor invoice verification. b. Vendor 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

Unrecorded liabilities are most likely to be found during the review of which of the following documents? Unpaid bills. Shipping records. Bills of lading. Unmatched sales invoices.

a

When confirmation for accounts payable is undertaken, which form of confirmation should be used? a.Positive confirmation. b.Negative confirmation. c.Either positive or negative confirmation, depending on the significance, or amount of the account. d.Neither positive nor negative confirmation; accounts payable cannot be confirmed.

a

Your objective is to determine that nonrecurring purchases, initiated by various user organizations, have been properly authorized. If all purchases are made through the purchasing department, to which of the following documents should you vouch purchases? A. Purchase requisitions. b.Purchase orders. c.Invoices. d.Receiving reports.

a

As an in-charge auditor, you are reviewing a communication about significant deficiencies and material weaknesses related to internal control over cash receipts and disbursements. Which of the following conditions, standing alone, should cause you the least concern? a. Checks are signed by only one person. b. Signed checks are distributed by the controller to approved payees. c. CFO fails to establish that the names and addresses of check payees are bona fide. d. Cash disbursements are made directly out of cash receipts.

a The auditor should be least concerned that the checks are signed by only one person if that person is not assigned other incompatible functions, and proper documentation is required before signing.

A client's materials purchasing cycle begins with requisitions from user departments and ends with the receipt of materials and the recognition of a liability. An auditor's primary objective in reviewing this cycle is to a. Evaluate the reliability of information generated by the purchasing process. b. Investigate the physical handling and recording of unusual acquisitions of materials. c. Consider the need to be on hand for the annual physical count if this system is not functioning properly. d. Ascertain that materials ordered, received, and paid for are on hand.

a The auditor should obtain an understanding of internal control. The purpose of internal control is to address business risks that threaten the achievement of the following entity objectives: (1) reliability of financial reporting, (2) effectiveness and efficiency of operations, and (3) compliance with laws and regulations (AU-C 315).

In a well-designed internal control system, the same employee may be permitted to a. Mail signed checks and also cancel supporting documents. b. Prepare receiving reports and also approve purchase orders. c. Approve vouchers for payment and also have access to unused purchase orders. d. Mail signed checks and also prepare bank reconciliations.

a The cash disbursements department has an asset custody function. Consequently, this department is responsible for signing checks after verification of their accuracy by reference to the supporting documents. The supporting documents should then be canceled and the checks mailed. Cancelation prevents the documentation from being used to support duplicate payments. Moreover, having the party who signs the checks place them in the mail reduces the risk that they will be altered or diverted.

Which of the following audit procedures is best for identifying unrecorded trade accounts payable? a.Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period. b.Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports. c.Examining unusual relationships between monthly accounts payable balances and recorded cash payments. d.Reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date.

a The greatest risk in the audit of payables is that unrecorded liabilities exist. Omission of an entry to record a payable is a misstatement that is more difficult to detect than an inaccurate or false entry. The search for unrecorded payables should (1) include examining cash payments made after the balance sheet date and comparing them with the accounts payable trial balance, (2) sending confirmations to vendors with small and zero balances, and (3) reconciling payable balances with vendors' documentation.

Which of the following procedures would an auditor least likely perform before the balance sheet date? a.Confirmation of accounts payable. b.Observation of merchandise inventory. c.Assessment of the risks of material misstatement. d.Identification of related parties.

a The most important assertion about accounts payable is completeness, which is best tested at year end. For example, the auditor may examine subsequent cash payments to determine whether the related payables are not recorded. Although confirmation is not a required auditing procedure, it may be useful in detecting unrecorded payables if the auditor's sample includes vendors for which the risk of understatement is high, e.g., regular vendors with zero or low recorded balances.

To minimize the risk that agents in the purchasing department will use their positions for personal gain, the organization should a. Require competitive bidding. b. Request internal auditors to confirm selected purchases and accounts payable. c. Specify that all items purchased must pass value-per-unit-of-cost reviews. d. Direct the purchasing department to maintain records on purchase prices paid, with review of such records required every 6 months.

a The primary function of a purchasing department is to ensure the authorized acquisition of goods of a specified quality on a timely basis at an economical price. Competitive bidding procedures should reduce both costs and the likelihood that a purchasing agent will show favoritism to a vendor.

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 whereas 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, whereas evidence supporting accounts payable is readily available. d. Accrued liabilities at year end will become accounts payable during the following year.

a The procedures differ because the balances result from different transactional processes. Liabilities are accrued for such continuing transactions as rent, salaries, and interest. Accounts payable are short-term obligations arising from the purchase of goods and services in the ordinary course of business.

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely is a.Vendors with whom the entity has previously done business. b.Amounts recorded in the accounts payable subsidiary ledger. d.Payees of checks drawn in the month after the year end. c.Invoices filed in the entity's open invoice file.

a When sending confirmations for accounts payable, the population of accounts should include small and zero balances as well as large balances. The auditor should use the activity in the account as a gauge for sample selection. That is, if orders are placed with a vendor on a consistent basis, a confirmation should be sent to that vendor regardless of the recorded balance due.

Confirmation of accounts payable with creditors is most appropriate when a. The majority of accounts payable balances are owed to related parties. b. Creditor statements are not available, and internal control over accounts payable is unsatisfactory. c. Accounts payable balances are immaterial. d. Internal control over accounts payable is effective, and sufficient evidence exists to minimize the risk of a material misstatement.

b

For effective internal control, the accounts payable department ordinarily should a. Obliterate the quantity ordered on the receiving department copy of the purchase order. b. Establish the agreement of the vendor's invoice with the receiving report and purchase order. c. Stamp, perforate, or otherwise cancel supporting documentation after payment is mailed. d. Ascertain that each requisition is approved as to price, quantity, and quality by an authorized employee.

b

Internal control is strengthened when the quantity of merchandise ordered is omitted from the copy of the purchase order sent to the a. Department that initiated the requisition. b. Receiving department. c. Purchasing agent. d. Accounts payable department.

b

Mailing disbursement checks and remittance advices should be controlled by the employee who a. Matches the receiving reports, purchase orders, and vendors' invoices. b. Signs the checks last. c. Prepares the daily voucher summary. d. Agrees the check register to the daily check summary.

b

The primary audit procedure to determine whether accounts payable are measured properly is a.A confirmation of accounts payable. b.Vouching accounts payable to supporting documentation. c.An analytical procedure. d.Verification that accounts payable are reported as a current liability in the balance sheet.

b

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 a. Supported by a vendor's invoice. b. Stamped "paid" by the check signer. c. Prenumbered and accounted for. d. Approved for authorized purchases.

b

Which of the following is a standard control over cash disbursements? a. Checks should be signed by the controller and at least one other employee of the company. b. Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations. c. Checks and supporting documents should be marked "Paid" immediately after the check is returned with the bank statement. d. Checks should be sent directly to the payee by the employee who prepares documents that authorize check preparation.

b

Which of the following results of analytical procedures would most likely indicate possible unrecorded liabilities? a. Current ratio of 2:1 as compared to 5:1 for the prior period. b. Ratio of accounts payable to total current liabilities of 4:1, compared to 6:1 for the prior period. c. Accounts payable turnover of 5, compared to 10 for the prior period. d. Accounts payable balance increase greater than 10% over the prior period.

b

When the shipping department returns nonconforming goods to a vendor, the purchasing department should send to the accounting department the a. Unpaid voucher. b. Debit memo. c. Vendor invoice. d. Credit memo.

b A debit memo indicates a reduction in the amount owed to a vendor because goods have been returned. The debit memo authorizes the accounting department to debit the appropriate payable.A credit memo is a document indicating a reduction in the amount due from a customer.

When performing procedures to test assertions about purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which relevant assertion would this procedure most likely support? a.Completeness. b.Occurrence. c.Valuation and allocation. d.Classification.

b A voucher signifies a liability. Its issuance is recorded in the voucher register after comparison of the vendor's invoice with the purchase requisition, purchase order, and receiving report. The direction of testing is an important consideration in addressing the RMMs. Selecting a sample of recorded entries in the voucher register to vouch to the supporting documentation provides evidence that the transactions occurred.

In assessing risks of material misstatement for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support? a.Completeness. b.Occurrence. c.Accuracy. d.Classification.

b A voucher signifies a liability. Its issuance is recorded in the voucher register after comparison of the vendor's invoice with the purchase requisition, purchase order, and receiving report. The direction of testing is an important consideration in determining the relevant assertion. Selecting a sample of recorded entries in the voucher register and vouching them to the supporting documentation provides evidence that the transactions occurred.

Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department? a. Comparing the vendor's invoice with the receiving report. b. Canceling supporting documentation after payment. c. Verifying the mathematical accuracy of the vendor's invoice. d. Approving the voucher for payment by an authorized person.

b Checks for disbursements should be signed by a responsible person in the cash disbursements department after necessary supporting evidence has been examined. This individual therefore should be responsible for canceling the supporting documentation after payment.

An auditor's purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning relevant assertions about a.Existence. b.Classification and understandability. c.Completeness. d.Valuation and allocation.

b Events such as the renewal of the note payable do not require adjustment of the financial statements but may require disclosure. Accordingly, the auditor should determine that the renewal had essentially the same terms and conditions as the recorded debt at year end. A significant change may affect the classification of notes payable (e.g., as current or noncurrent), the understandability of the statements, and the required disclosures.

When performing a substantive test of a random sample of cash disbursements, an auditor is supplied with a photocopy of vendor invoices supporting the disbursements for one particular vendor rather than the original invoices. The auditor is told that the vendor's original invoices have been misplaced. What should the auditor do in response to this situation? a.Increase randomly the number of items in the substantive test to increase the reliance that may be placed on the overall test. b.Reevaluate the risk of fraud and design alternate tests for the related transactions. c.Increase testing by agreeing more of the payments to this particular vendor to the photocopies of its invoices. d.Count the missing original documents as misstatements, and project the total amount of the error based on the size of the population and the dollar amount of the errors.

b Several issues should cause the auditor to be suspicious. First, how could the client lose the original? Second, how did the client obtain a photocopy if the original was lost? Finally, and most importantly, photocopies are much less credible given the ease with which they can be altered. Thus, the auditor should reevaluate the risk of fraud.

Which of the 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 forms. d.Reading of the minutes of meetings of the board of directors.

b The analysis and recomputation of depreciation expense is useful in determining whether the expense and asset accounts have been properly stated. Because liabilities are not part of the depreciation recording process, analysis and recomputation of depreciation would not detect unrecorded liabilities.

An entity's internal control requires that an approved voucher, a prenumbered purchase order, and a prenumbered receiving report accompany every check request. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all a.Purchase orders. b.Canceled checks. c.Receiving reports. d.Approved vouchers.

b The best procedure is to test whether any checks have been issued without vouchers, purchase orders, and receiving reports. An appropriate sample of canceled checks should be traced to the related supporting documentation. The checks should not have been written before the dates on the receiving reports.

In the accounting system of Apogee Company, the quantities counted by the receiving department and entered at a terminal are transmitted to the computer, which immediately transmits the amounts back to the terminal for display on the terminal screen. This display enables the operator to a.Establish the validity of the account number. b.Verify that the amount was entered accurately. c.Verify the authorization of the disbursement. d.Prevent the overpayment of the account.

b The display of the amounts entered is an input control that permits visual verification of the accuracy of the input by the operator. This is termed closed-loop verification.

To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all a.Payment vouchers. b.Receiving reports. c.Purchase requisitions. d.Vendors' invoices.

b The population to be tested consists of receiving reports. An accounts payable record should be available for each receiving report.

In a properly designed internal control system, the same employee most likely would match vendors' invoices with receiving reports and also a. Post the detailed accounts payable records. b. Recompute the calculations on vendors' invoices. c. Reconcile the accounts payable ledger. d. Cancel vendors' invoices after payment.

b The vouchers payable clerk (1) matches purchase orders, vendors' invoices, and receiving reports; (2) tests the calculations and terms on the vendors' invoices; and (3) prepares a disbursement voucher.

Which of the following tests of details most likely would help an auditor determine whether accounts payable have been misstated? a.Examining reported purchase returns that appear too low. b.Examining vendor statements for amounts not reported as purchases. c.Searching for customer-returned goods that were not reported as returns. d.Reviewing bank transfers recorded as cash received from customers.

b Vendor statements should reflect currently recorded accounts payable. Examining statements at year end and matching line items to recorded payables will detect unrecorded payables

An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all a.Merchandise received. b.Vendors' invoices. c.Canceled checks. d.Receiving reports.

b Vendors' invoices are the billing documents received by the client. They describe the items purchased, the amounts due, and the payment terms. The auditor should trace these invoices to the related receiving reports.

Effective controls relevant to purchasing of raw materials should usually include all of the following except a. Systematic reporting of product changes that will affect raw materials. b. Determining the need for the raw materials prior to preparing the purchase order. c. Obtaining third-party written quality and quantity reports prior to payment for the raw materials. d. Obtaining financial approval prior to making a commitment.

c

Operating control of the check-signing machine normally should be the responsibility of the a. General accounting function. b. Treasury function. c. Legal counsel. d. Internal audit function.

c

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 the relevant assertion regarding a.Valuation and allocation. b.Existence. c.Cutoff. d.Classification and understandability.

c

Under which of the following circumstances would it be advisable for the auditor to confirm accounts payable with creditors? a.Internal controls relating to accounts payable are effective and there is sufficient appropriate evidence on hand to minimize the risk of material misstatement. b.Confirmation response is expected to be favorable and accounts payable balances are immaterial in amount. c.Creditor statements are not available and internal controls relating to accounts payable are unsatisfactory. d.The majority of accounts payable balances are with associated companies.

c

Which of the following constitutes the best evidence of the transfer of accountability for incoming material from the receiving department to other departments or activities? a. The physical evidence of that type of material in other departments. b. Oral evidence from personnel in both receiving and other departments. c. An authorized signature on the prescribed transfer form. d. Documentary evidence in the form of entries in journals and ledgers.

c

Which of the following controls should prevent an invoice for the purchase of merchandise from being paid twice? a.The check signer accounts for the numerical sequence of receiving reports used in support of each payment. b.An individual independent of cash operations prepares a bank reconciliation. c.The check signer reviews and cancels the voucher packets. d.Two check signers are required for all checks over a specified amount.

c

Which of the following internal control activities is not usually performed in the CFO's department? a. Verifying the accuracy of checks and vouchers. b. Controlling the mailing of checks to vendors. c. Approving vendors' invoices for payment. d. Canceling payment vouchers when paid.

c

Which of the following is a substantive procedure that an auditor most likely would perform to verify the existence and valuation assertions about recorded accounts payable? a.Investigating the open purchase order file to ascertain that prenumbered purchase orders are used and accounted for. b.Receiving the client's mail, unopened, for a reasonable period of time after year end to search for unrecorded vendor's invoices. c.Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports. d.Confirming accounts payable balances with known suppliers who have zero balances.

c

Which of the following observations made during the preliminary survey of a local department store's disbursement cycle reflects a control strength? a. Individual department managers use prenumbered forms to order merchandise from vendors. b. The receiving department is given a copy of the purchase order complete with a description of goods, quantity ordered, and extended price for all merchandise ordered. c. The CFO's office prepares checks for suppliers based on vouchers prepared by the accounts payable department. d. Individual department managers are responsible for the movement of merchandise from the receiving dock to storage or sales areas as appropriate.

c

Which of the following procedures relating to the examination of accounts payable could the auditor delegate entirely to the client's employees? a.Test footings in the accounts payable ledger. b.Reconcile unpaid invoices to vendors' statements. c.Prepare a schedule of accounts payable. d.Mail confirmations for selected account balances.

c

Which of the following situations most likely could lead to an embezzlement scheme? a. The accounts receivable bookkeeper receives a list of payments prepared by the cashier and personally makes entries in the customers' accounts receivable subsidiary ledger. b. Each vendor invoice is matched with the related purchase order and receiving report by the vouchers payable clerk who personally approves the voucher for payment. c. Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statement. d. Vouchers and supporting documentation are examined and then canceled by the CFO who personally mails the checks to vendors.

c

Which of the following procedures is least likely to be performed before the balance sheet date? a.Observation of inventory. b.Testing internal control over cash. c.Search for unrecorded liabilities. d.Confirmation of receivables.

c A significant risk is that all payables may not be reflected in the year-end balance. The auditor will review cash disbursements made subsequent to year end to determine whether payments are for previously unrecorded liabilities. Other procedures that would not be performed prior to the balance sheet date include reviewing subsequent events, requesting the lawyer's letter, and obtaining management representations.

The procedure that best discourages the resubmission of vendor invoices after they have been paid is a.A requirement for double endorsement of checks. b.The cancelation of vouchers by accounting personnel. c.The cancelation of vouchers by CFO personnel. d.The mailing of payments directly to payees by accounting personnel.

c Canceling vouchers and supporting papers (with perforations, ink, etc.) upon payment prevents the payment of a duplicate voucher. If the person signing the check does the canceling, the documents cannot be recycled for duplicate payments. Securing the paid-voucher file from access by the accounts payable clerk is another effective control.

**A company employs three accounts payable clerks and one treasurer. Their responsibilities are as follows: Which of the following would indicate a weakness in the company's internal control? a.Clerk 1 opens all of the incoming mail. b.Clerk 2 reconciles the accounts payable ledger with the general ledger monthly. c.Clerk 3 mails the checks and remittances after they have been signed. d.The treasurer uses a stamp for signing checks.

c Certain duties should be segregated so that an individual cannot perpetrate and conceal fraud or error. The ideal structure segregates authorization of the transaction, recording of the transaction, and custody of the assets from the transaction. Clerk 3 should not both post the invoices to accounts payable (recording the transaction) and mail the checks after they have been signed (custody of the assets).

Effective controls relevant to the efficiency of purchases will result in proper evaluation of the time for ordering merchandise. When making this evaluation, the purchasing company should give primary consideration to a. The price differences that exist among various vendors who can supply the merchandise at the required time. b. The borrowing cost of money (interest) that the company must incur as a consequence of acquiring the merchandise. c. The trade-off between the cost of owning and storing excess merchandise and the risk of loss by not having merchandise on hand. d. The flow of funds within the company that indicates when money is available to pay for merchandise.

c Effective purchasing departments should use the basic economic order quantity (EOQ) calculation that minimizes both the cost of owning and storing excess merchandise and the cost of ordering merchandise (and thus the timing of ordering). This model assumes the demand is constant and does not consider the cost of stockouts. Probabilistic models have been developed to incorporate the risk of loss (cost) by not having merchandise on hand.

In an audit of a purchasing department, which of the following usually is considered a risk factor? a.Purchase specifications are developed by the department requesting the material. b.Purchases are made against blanket or open purchase orders for certain types of items. c.Purchases are made from parties related to buyers or other company officials. d.Purchases are not rotated among suppliers included on an approved vendor list.

c Purchasing from parties related to buyers or other entity officials is a risk factor because it suggests the possibility of fraud. Such conflicts of interest may result in transactions unfavorable to the company.

Which of the following events occurring in the year under audit would most likely indicate that internal controls utilized in previous years may be inadequate in the year under audit? a. The entity announced that the internal audit function would be eliminated after the balance sheet date. b. The audit committee chairperson unexpectedly resigned during the year under audit. c. The chief financial officer waived approvals on all checks to one vendor to expedite payment. d. The frequency of accounts payable check runs was changed from biweekly to weekly.

c The CFO's ability to override internal control is a control deficiency. The nature of this action suggests that the CFO may have had this ability in prior years.

Which of the following control activities is not usually performed with regard to vouchers payable in the accounting department? a. Determining the mathematical accuracy of the vendor's invoice. b. Having an authorized person approve the voucher. c. Controlling the mailing of the check and remittance advice. d. Matching the receiving report with the purchase order.

c The cash disbursements department, which is responsible to the CFO, has an asset custody function that should be segregated from the recording function of the accounting department. Consequently, checks for disbursements should be signed by a responsible person in that department after necessary supporting evidence has been examined. This individual also should be responsible for canceling the supporting documentation and mailing the signed checks and remittance advices. The documentation typically consists of a payment voucher, requisition, purchase order, receiving report, and vendor invoice.

A university does not have a centralized receiving function for departmental purchases of books, supplies, and equipment. Which of the following controls will most effectively prevent payment for goods not received, if performed prior to invoice payment? a. Vendor invoices should be matched with department purchase orders. b. Names and addresses on vendor invoices should be compared to a list of department-authorized vendors. c. Vendor invoices should be approved by a departmental supervisor other than the employee ordering the goods. d. Invoices over a specified amount should be approved by the vice president of finance.

c The departmental supervisors are the most likely to be aware of the goods received by their departments. Moreover, separating ordering authority from payment authority will prevent unauthorized purchases.

Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities? a. Trace a sample of accounts payable entries recorded just before year end to the unmatched receiving report file. b. Compare a sample of purchase orders issued just after year end with the year-end accounts payable trial balance. c. Vouch a sample of cash disbursements recorded just after year end to receiving reports and vendor invoices. d. Scan the cash disbursements entries recorded just before year end for indications of unusual transactions.

c The greatest risk in the audit of payables is that unrecorded liabilities exist. Omission of an entry to record a payable is a fraud or error that is more difficult to detect than an inaccurate or false entry. The search for unrecorded payables should include (1) examining cash disbursements made after the balance sheet date and comparing them with the accounts payable trial balance, (2) sending confirmations to vendors with small and zero balances, and (3) reconciling payable balances with vendors' documentation.

In auditing accounts payable, an auditor's procedures most likely will focus primarily on the relevant assertion about a.Existence. b.Classification and understandability. c.Completeness. d.Valuation and allocation.

c The primary audit risk for accounts payable is understatement of the liability. Thus, the auditor will most likely focus on the completeness assertion.

A receiving department receives copies of purchase orders for use in identifying and recording inventory receipts. The purchase orders list the name of the vendor and the quantities of the materials ordered. A possible error that this system could allow is a.Payment to unauthorized vendors. b.Payment for unauthorized purchases. c.Overpayment for partial deliveries. d.Delay in recording purchases.

c To ensure a fair count, the copy of the purchase order sent to the receiving clerk should not include quantities. The receiving clerk should count the items in the shipment and prepare a receiving report. Copies are sent to inventory control and accounts payable.

Which of the following procedures would an auditor most likely perform in searching for unrecorded payables? a.Reconcile receiving reports with related cash payments made just prior to the year end. b.Review the responses of accounts receivable confirmations for indications of disputes with customers. c.Compare cash payments made after the balance sheet date with the accounts payable trial balance. d.Examine a sample of creditor balances to supporting invoices, receiving reports, and purchase orders.

c Tracing subsequent payments to recorded payables is a primary procedure to match payments (checks issued) after year end with the related payables. Checks should be issued only for recorded payables. Any checks that cannot be matched are likely indications of unrecorded liabilities. Management may want to delay recording of liabilities to improve the current ratio. However, unrecorded accounts payable still must be paid, and financial statements that fail to report all liabilities at year end are misstated.

An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to a.Identify unusually large purchases that should be investigated further. b.Verify that cash disbursements were for goods actually received. c.Determine that purchases were properly recorded. d.Test whether payments were for goods actually ordered.

c The auditor tests the completeness assertion for accounting records by tracing supporting documents to the entries in the records.

An audit assistant found a purchase order for a regular supplier in the amount of $5,500. The purchase order was dated after receipt of the goods. The purchasing agent had forgotten to issue the purchase order. Also, a disbursement of $450 for materials did not have a receiving report. The assistant wanted to select additional purchase orders for investigation but was unconcerned about the lack of a receiving report. The audit director should a.Agree with the assistant because the amount of the purchase order exception was considerably larger than the receiving report exception. b.Agree with the assistant because the cash disbursement clerk had been assured by the receiving clerk that the failure to fill out a report did not happen very often. c.Disagree with the assistant because the two problems have an equal risk of loss associated with them. d.Disagree with the assistant because the lack of a receiving report has a greater risk of loss associated with it.

d

An internal control narrative indicates that an approved voucher is required to support every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively? a.Select and examine vouchers and ascertain that the related canceled checks are dated no later than the vouchers. b.Select and examine vouchers and ascertain that the related canceled checks are dated no earlier than the vouchers. c.Select and examine canceled checks and ascertain that the related vouchers are dated no earlier than the checks. d.Select and examine canceled checks and ascertain that the related vouchers are dated no later than the checks.

d

In planning to assess control risk for purchasing and disbursement procedures, the auditor will be least influenced by a. The availability of a company manual describing purchasing and disbursement procedures. b. The scope and results of audit work by the company's internal auditor. c. The existence within the purchasing and disbursement area of internal control strengths that offset weaknesses. d. The strength or weakness of internal control in other areas, e.g., sales and accounts receivable.

d

In testing controls over cash disbursements, an auditor most likely would determine that the person who signs checks also a. Reviews the monthly bank reconciliation. b. Returns the checks to accounts payable. c. Is denied access to the supporting documents. d. Is responsible for mailing the checks.

d

The authority to accept incoming goods in receiving should be based on a(n) a.Vendor's invoice. b.Materials requisition. c.Bill of lading. d.Approved purchase order.

d

The objectives of internal control for a production cycle are to provide assurance that transactions are properly executed and recorded, and that a. Independent internal verification of activity reports is established. b. Transfers to finished goods are documented by a completed production report and a quality control report. c. Production orders are prenumbered and signed by a supervisor. d. Custody of work-in-process and of finished goods is properly maintained.

d

The primary audit objective regarding the purchasing of materials by the client is to a. Ascertain that materials paid for are on hand. b. Observe the annual physical count. c. Investigate the recording of unusual transactions regarding materials. d. Determine the reliability of financial reporting by the purchasing function.

d

Which of the following controls is most effective in providing assurance that recorded purchases are free of material errors? a. The receiving department compares the quantity ordered on purchase orders with the quantity received on receiving reports. b. Vendors' invoices are compared with purchase orders by an employee who is independent of the receiving department. c. Receiving reports require the signature of the individual who authorized the purchase. d. Purchase orders, receiving reports, and vendors' invoices are independently matched in preparing vouchers.

d

Which of the following describes a weakness in accounts payable procedures? a. The accounts payable clerk files invoices and supporting documentation after payment. b. The accounts payable clerk manually verifies arithmetic on the vendor invoice. c. The accounts payable system compares the receiving report to the vendor invoice. d. The accounts payable manager issues purchase orders.

d

Which of the following items in a communication about control deficiencies in internal control over cash receipts and disbursements is least significant? a.Cash receipts are not deposited intact daily. b.CFO fails to verify the names and addresses of check payees. c.Signed checks are distributed by the controller to approved payees. d.Checks are signed by one person.

d

Based on observations made during an audit, the auditor should discuss with management the effectiveness of the company's controls that protect against the purchase of a. Required supplies provided by a vendor who offers no trade or cash discounts. b. Inventory items acquired based on an economic order quantity (EOQ) inventory management concept. c. New equipment that is needed but does not qualify for an accelerated write-off under the class life rules. d. Supplies individually ordered, without considering possible volume discounts.

d An auditor should communicate to management and those charged with governance significant deficiencies and material weaknesses observed during an audit (AU-C 265). (S)he should discuss procedures that permit the avoidable loss of assets. Thus, an auditor should determine whether the failure to consider possible volume discounts is due to fraud or error.

If internal control is properly designed, the same employee may be permitted to a.Receive and deposit checks and also approve write-offs of customer accounts. b. Approve vouchers for payment and also sign checks. c. Reconcile the bank statements and also receive and deposit cash. d. Sign checks and also cancel supporting documents.

d Checks for disbursements should be signed by an officer, normally the CFO, after necessary supporting evidence has been examined. The documentation typically consists of a voucher, purchase order, receiving report, and a vendor invoice. Canceling vouchers and supporting papers (with perforations, ink, etc.) upon payment of the voucher prevents the payment of a duplicate voucher. If the person signing the check cancels the documents, they cannot be recycled for duplicate payments. Securing the paid-voucher file from access by the accounts payable clerk is another effective control.

Which of the following internal control activities is not usually performed in the vouchers payable department? a. Matching the vendor's invoice with the related receiving report. b. Approving vouchers for payment by having an authorized employee sign the vouchers. c. Indicating the asset and expense accounts to be debited. d. Accounting for unused prenumbered purchase orders and receiving reports.

d Employees in the vouchers payable department should have no responsibilities related to purchasing or receiving goods. The purchasing department accounts for unused prenumbered purchase orders. The receiving department accounts for unused prenumbered receiving reports.

An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively? Select and examine a. Receiving reports and ascertain that the related canceled checks are dated no earlier than the receiving reports. b. Receiving reports and ascertain that the related canceled checks are dated no later than the receiving reports. c. Canceled checks and ascertain that the related receiving reports are dated no earlier than the checks. d. Canceled checks and ascertain that the related receiving reports are dated no later than the checks.

d The best procedure is to test whether any checks have been issued without receiving reports. An appropriate sample of canceled checks and the related supporting documentation should be examined. The checks should not have been written before the dates on the receiving reports.

Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases? a. Is an authorized purchase order required before the receiving department can accept a shipment or the vouchers payable department can record a voucher? b. Are purchase requisitions prenumbered and independently matched with vendor invoices? c. Is the unpaid voucher file periodically reconciled with inventory records by an employee who does not have access to purchase requisitions? d. Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?

d The completeness assertion concerns whether all transactions and accounts that should be presented are so included. Thus, management asserts that all purchases are recorded and included in the accounts. A standard control related to the completeness assertion for purchases is the use of prenumbered documents. Items missing from the numerical sequence may represent unrecorded transactions and accounts.

Which of the following questions is inappropriate on an internal control questionnaire concerning purchase transactions? a. Are an approved purchase requisition and a signed purchase order required for each purchase? b. Are prenumbered purchase orders and receiving reports used and accounted for? c. Are all goods received in a centralized receiving department and counted, inspected, and compared with purchase orders on receipt? d. Are intact cash receipts deposited daily in the bank?

d The question about the daily deposit of intact cash receipts is related to the cash receipts cycle, not the purchases-payables-cash disbursements cycle.

In a well-designed internal control system, employees in the same department most likely would approve purchase orders, and also a. Reconcile the open invoice file. b. Inspect goods upon receipt. c. Authorize requisitions of goods. d. Negotiate terms with vendors.

d To prevent or detect fraud or error in the performance of assigned responsibilities, duties are often segregated. Approving purchase orders and negotiating terms with vendors are part of the authorization process performed by the purchasing department.