Auditing chapter 8

To determine whether accounts payable are complete, auditors perform a test to verify that all merchandise received has been recorded. The population for this test consists of all a. Receiving reports. b. Purchase orders. c. Vendors' invoices. d. Canceled checks.

A The receiving reports are the population that contains the record of all goods received for which liabilities should be recorded.

An audit team would most likely examine the detail support for charges to which of the following accounts? a. Legal expense. b. Supplies expense. c. Payroll expense. d. Cost of goods sold.

A The auditor examines the specific charges to determine potential litigation

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 are on a subsidiary trial balance of accounts payable. b. Examine a sample of cash disbursements in the period subsequent to year-end. c. Examine unusual relationships between monthly accounts payable and recorded purchases. d. Examine a sample of invoices a few days prior to and subsequent to the year-end to ascertain whether they have been properly recorded.

B Auditors may be able to determine that cash disbursements in the subsequent period are paying liabilities of the period under audit.

Which of the following is an internal control activity that could prevent a paid disbursement voucher from being presented for payment a second time? a. Vouchers should be prepared by individuals who are responsible for signing disbursement checks. b. The official who signs the check should compare the check with the voucher and should stamp "PAID" on the voucher documents. c. Disbursement vouchers should be approved by at least two responsible management officials. d. The date on a disbursement voucher should be within a few days of the date the voucher is presented for payment.

B The voucher date may be several weeks before the payment is due.

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. Reviewing bank transfers recorded as cash received from customers. d. Searching for customer-returned goods that were not reported as returns.

B. A purchased item listed on the monthly statement should be included in the accounts payable. If it cannot be traced to the accounts payable record, the vendor account will be understated.

For which of the following accounts would the matching concept be the most appropriate? a. Depreciation expense. b. Cost of goods sold. c. Research and development. d. Sales.

B. Cost of goods sold should be matched with sales by using inventory to record cost of goods not yet sold.

In a test of controls, auditors may trace receiving reports to vouchers recorded in the voucher register. This is a test for a. Occurrence. b. Completeness. c. Classification. d. Cutoff.

B. This test ensures that liabilities generated by the receipt of goods are recorded in the voucher register.

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

C The search for unrecorded liabilities generally depends upon using accounting records created in the period after the year end.

Budd, the purchasing agent of Lake Hardware Wholesalers, has a relative who owns a retail hardware store. Budd arranged for hardware to be delivered by manufacturers to the retail store on a cash-on-delivery (COD) basis, thereby enabling his relative to buy at Lake's wholesale prices. Budd was probably able to accomplish this because of Lake's poor internal control over. a. Cash receipts. b. Perpetual inventory records. c. Purchase orders. d. Purchase requisitions.

C Nobody at Lake was reviewing purchase orders to notice the delivery and payment by another party (Budd's relative's store). This deviation caused no direct loss to Lake, but it is a misuse of Lake's pricing agreements with its vendors and puts Lake at risk.

Which of the following accounts does not appear in the acquisition and expenditure cycle? a. Purchases returns. b. Cash. c. Sales returns. d. Prepaid insurance.

C. Although similar to purchases because they require a receiving report, sales returns are considered part of the revenue and collection cycle because they affect accounts receivable.

Which of the following would not overstate current-period net income? a. Capitalizing an expenditure that should be expensed. b. Failing to record a liability as an expense. c. Failing to record a check paying an item in Vouchers Payable. d. All of the above would overstate net income.

C. Has no effect on net income.

When auditing account balances of liabilities, auditors are most concerned with management's assertion about a. Valuation and allocation. b. Rights and obligations. c. Existence. d. Completeness.

D Completeness is the most important assertion in this cycle. The hiding of liabilities is a primary concern for all auditors in the liability and expense areas. Supplies expense is generally audited in connection with supplies inventory.