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