Audit Chapter 18

Absent disputed amounts and minor timing differences, the vendor's statements should reconcile to the

AP master file

Which substantive analytical procedure would help determine if there are unrecorded or nonexistent accounts?

Calculate ratios, such as accounts payable divided by current liabilities.

Peprah Company pays its accounts payable 45 days after receipt of the goods or services. In this case, which audit procedure should be used to detect any unrecorded liabilities?

Examine cash disbursements for several weeks after the balance sheet date.

Which of the following is not a typical audit procedure performed as part of the out-of-period liability tests?

Examine underlying documentation for cash disbursements made during the last month of the year.

Which of the following is the most effective control procedure to detect vouchers that were prepared for the payment of goods that were not received?

Match purchase order, receiving report, and vendor's invoice for each voucher in accounts payable department.

You are performing an audit of Hawk Company. In evaluating the accounts payable balance you are concerned with the completeness assertion. Which of the following audit procedures best satisfies your concern?

Send confirmations to vendors with large, active, zero balance accounts and a representative sample of all others.

Which of the following is not an accurate statement regarding the acquisition and payment cycle?

The accounting department should be responsible for receiving goods and preparing the receiving report.

Which of the following is a key internal control for the posting and summarization transaction-related audit objective?

The accounts payable master file contents are internally verified

Under which of the following circumstances would it be advisable for the auditor to confirm accounts payable with creditors?

The creditor statements are not available and internal control over payables is deficient.

A document indicating a reduction in the amount owed to a vendor because of returned goods is

a debit memo

Which of the following tests of controls is least useful in assessing the transaction-related audit objective related to occurrence?

account for sequence of vouchers

When auditors examine vendors' statements or receive confirmations, there must be a reconciliation of the statement or confirmation with the

accounts payable list

The computer-generated file which records acquisitions, disbursements and allowances for each vendor is the

accounts payable master file

Which of the following is not one of the classes of transactions in the acquisition and payment cycle?

acquisition of common stock

To test for cutoff errors which overstate liabilities, the auditor should trace the receiving reports issued ________ to vendors' invoices

after year end

A written purchase order is a contractual document that is

an offer to buy goods or services

The overall objective in the audit of accounts payable is to determine whether accounts payable

are fairly stated and properly disclosed

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. A control procedure that should have prevented this duplicate payment is

attachment of the receiving report to the disbursement report.

Because of the importance of tests of controls and substantive tests of transactions for acquisitions and cash disbursements, it is common in this audit area to use

attributes sampling

When assets are being verified, auditors focus much of their attention on making sure that the accounts are not overstated. Alternatively, auditors focus their efforts on understatement when auditing liabilities. What is the primary reason for this difference in focus?

auditors legal liability

When determining sample sizes for accounts payable tests,

auditors must try to ensure that the population includes all potential payables.

Which of the following is not a key control in the acquisition and payment cycle?

authorization of credit

Which one of the following duties should not be assigned the purchases department?

authorizing the acquisition of goods

The main focus taken by the auditor in verifying liability balances is on the discovery of I. understated liabilities. II. omitted liabilities.

both 1 and 2

Failure to record the acquisition of goods is a violation of which audit objective?

completeness

The internal control that requires that "checks are prenumbered and accounted for" satisfies the objective of

completeness

The test of transactions which requires one to "reconcile recorded cash disbursements with the cash disbursements on the bank statement" satisfies the objective of

completeness

You are the in-charge auditor and are designing audit procedures for accounts payable. Which of the following management assertions would you normally be most concerned about?

completeness

Auditors are especially concerned about the ________ and ________ balance-related audit objectives because of the potential for understatements in the account balance.

completeness, cutoff

Which of the following is most reliable for verifying the correct balance of accounts payable?

confirmations

A document generally received from the vendor which indicates a reduction in the amount owed due to the company granting an allowance is a

debit memo

For effective internal control purposes, the accounts payable department generally should

establish the agreement of the vendor's invoice with the receiving report and purchase order.

Matching the supplier's invoice, the purchase order, and the receiving report prior to preparing the voucher would normally be the responsibility of the

general accounting function

In the processing and recording of cash disbursements

in many cases, the company submits payment to the vendor electronically through an electronic funds transfer (EFT) between the company's bank and the vendor's bank

Smaller privately held companies may not maintain an accounts payable master file by vendor. These companies pay on the basis of

individual vendor invoices

Cutoff procedures for inventory purchased should be designed by companies to assure that

inventory received before year-end was recorded before year-end

An inventory acquisition is received late in the afternoon of December 31 after the physical inventory is completed. If the acquisition is included in accounts payable and purchases, but excluded from inventory, the result

is an understatement of net earnings

What typically ends the acquisitions and payment cycle?

issuance of a new payment on accounts payable

What typically initiates the acquisitions and payment cycle?

issuance of a purchase requisition or request for purchase of goods or services

An auditor is using audit sampling to test transactions in the acquisition and payment cycle. She would normally set the tolerable exception rate at what level?

low

The extent of a search for unrecorded liabilities largely depends on

materiality and control risk

You have been assigned to the accounts payable transaction cycle as part of your auditing responsibilities. You have decided to vouch a sample of entries in the accounts payable master file to supporting documents. Which assertion is this test of controls most likely to support?

occurence

The auditor's internal control objective to determine that "recorded acquisitions are for goods and services received" satisfies the audit objective of

occurrence

Vendors' statements and vendors' invoices are both relatively reliable evidence because they

originate from a 3rd party

When reviewing the controls and procedures in the acquisition and payment cycle,

personnel who record the acquisitions should not have access to cash or other assets

Which of the following business functions is not considered to be part of the acquisitions class of transactions?

processing cash distributions

After a purchase requisition is approved, a ________ must be initiated to purchase the goods or services.

purchase order

The accounts payable department usually has responsibility for approving acquisitions for payment by comparing the details on the

purchase order, receiving report, vendors invoice

________ is a balance-related audit objective that is not applicable to liabilities

realizable value

With respect to a small company's system of purchasing supplies, an auditor's primary concern should be to obtain satisfaction that supplies ordered and paid for have been

received, counted, and checked to quantities and amounts on purchase orders and invoices

An auditor is gathering evidence on the completeness assertion. To do so, she performs a test to verify that all goods received by the company have been recorded properly. The document population for this test would consist of all

receiving reports

Internal controls that are likely to prevent the client from including as a business expense those transactions that primarily benefit management or other employees rather that the entity being audited satisfy the control objective that

recorded acquisitions are for goods and services received.

You are performing the audit of Jenkins and Company. Your tests of controls and tests of transactions for accounts payable demonstrate that the controls are operating effectively. This would normally allow you to

reduce the need for substantive testing of balances for accounts payable.

A substantive tests of transactions for acquisitions that would be used to provide evidence regarding the occurrence assertion would be to

review the acquisitions journal for large or unusual amounts

Which of the following accounts is not included in the acquisitions class of transactions?

sales discounts

The documents typically used to reconcile the balance on the accounts payable list with the confirmation or vendor's statements include all of the following except for

sales invoices

Which of the following accounts is not part of the acquisition and payment cycle?

sales returns and allowances

When an acquisition is on an FOB origin basis, the inventory and related accounts payable must be recorded in the current period if the goods were

shipped on or before the balance sheet date

When a client uses perpetual inventory records, the tests of details of balances for inventory can be significantly reduced if the auditor believes the records are accurate. The controls over the acquisitions included in the records are normally tested as a part of the

tests of controls and substantive tests of transactions for acquisitions

In determining that the accounts payable cutoff is correct, it is essential that the cutoff tests be coordinated with the

tests of long term liabilites

A liability is properly accounted for as an account payable if

the amount is known and owed as of the balance sheet date

When testing the controls for the completeness transaction-related audit objectives

the audit time for accounts payable can be reduced if the client has effective internal controls and the auditor properly tests those controls.

When determining the methodology for designing tests of details of balances for accounts payable,

the focus by many companies on improving their supply-chain management activities has led to numerous changes in the design of systems used to initiate and record acquisition and payment activities.

When the client's physical inventory occurs before the last day of the year, it is still necessary to perform an accounts payable cutoff at the time of the count. In addition, the auditor must verify whether all acquisitions taking place between the count and the end of the year were added to

the physical inventory and accounts payable

Cutoff information for inventory acquisitions should be obtained during

the physical observation of inventory

Auditor confirmation of accounts payable balances at the balance sheet date may not need to be performed by the auditor because

there is likely to be other reliable external evidence available to support the balances.

A key internal control over the acquisition cycle is to ensure that the company requires recording transactions as soon as possible after the goods and services have been received. This satisfies the transaction-related audit objective of

timing

The overall objective in the audit of the acquisition and payment cycle is

to evaluate whether the affected accounts are fairly presented in accordance with accounting standards.

Which of the following should sign checks under conditions of effective internal control?

treasurer

In searching for unrecorded liabilities the purpose of the audit procedure to "examine underlying documentation for subsequent cash disbursements" is to

uncover payments made in a subsequent accounting period for liabilities that existed at the balance sheet date.

A company recorded an acquisition of merchandise and its related liability, but failed to include the merchandise in ending inventory. The effect on the financial statements was to

understate net income

A document review of which of the following is most likely to yield evidence of any unrecorded liabilities?

unpaid accounts payable

By tracing receiving reports issued at and before year-end to vendors' invoices and making sure they are included in accounts payable, the auditor is testing for

unrecorded obligations

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

vendors invoices

The auditor gets highly reliable evidence about individual transactions by examining

vendors invoices

The auditor is performing tests of transactions for individual accounts payable transactions with vendors. Which document provides more reliable information about individual transactions with vendors?

vendors invoices

The auditor is performing substantive tests of balances for accounts payable. What documentation would provide the best evidence for the ending balance?

vendors statement

A document used by organizations to establish a formal means of recording and controlling acquisitions which usually contains a package of documents about the acquisition is the

voucher

At what point in the acquisition and payment cycle do most companies first recognize the acquisition and related liability on their records?

when the company receives the good or service from a vendor

At what point do most companies recognize liabilities in the acquisition and payment cycle when the goods are shipped FOB destination?

when the goods or services are received