Auditing Ch. 11

True or false: Substantive analytical procedures are rarely used to evaluate the reasonableness of accounts payable and accrued expenses.

False

True or false: The auditor can only obtain assurance about the cutoff assertion for purchases by conducting tests of controls, not substantive tests of transactions.

False

Generally, the purchasing process and its related accounts

do not result in contentious accounting issues are not difficult to audit

The auditor's major concern with the ______ assertion is whether the recorded liabilities are valid obligations of the entity.

existence

The critical segregation of duties for preventing fictitious purchases is the separation of the _____ and _____ functions from the accounts payable and disbursement functions.

requisitioning purchasing

True or false: The purchasing system includes returns of goods to suppliers for cash or credit.

True

Organizations can control requisitioning authorization by

authorization dollar limits for different levels of employees

Procedures to ensure that prepared cash disbursements are recorded on a timely basis in the cash disbursements journal and the accounts payable support the _____ assertion.

cutoff

Procedures to ensure that prepared cash disbursements are recorded on a timely basis in the cash disbursements journal and the accounts payable support the ______ assertion.

cutoff

When tests of controls support the planned level of control risk, no modifications are normally necessary to the planned level of _____ _____ and the auditor may proceed with the planned substantive procedures.

detection risk

When the tests of controls do not support the planned level of control risk, the auditor must set a ______ level of control risk and a ______ level of detection risk.

higher lower

A purchase order

includes the description, quality and quantity of the goods being purchased indicates the authorization to purchase the goods or services

If the auditor has tested entity controls for ensuring that liabilities are recorded, he or she may be able to focus on accounts payable confirmations of ______ dollar accounts.

large

For the occurrence assertion, the auditor is concerned with a misstatement caused by a cash disbursement being recorded in the entity's records when no ______ has actually occurred.

payment

When auditing the purchasing process, the auditor should consider important industry-related factors in assessing inherent risk including

whether the supply of raw materials is adequate how volatile raw material prices are

Substantive analytical procedures are used to examine plausible relationships among _____ _____ and accrued expenses.

accounts payable

The main accounts affected by the auditor's achieved control risk for the purchasing process include ______.

accounts payable accrued expenses

The potential misstatement related to the assertion is that the payment amount is recorded incorrectly

accuracy

Control activities used to identify unrecorded liabilities and accruals should be part of the _____ process for the entity.

closing

The major misstatement related to the completeness assertion is that a cash disbursement is made but not

recorded in the entity's records

Two particularly important disclosures for accounts payable and accrued expenses are _____ _____ purchase transactions and _____ _____.

related-party purchase commitments

The important issue in the _____ function of the purchasing process it that the request meets the authorization procedures implemented by the entity.

requisitioning

Proper segregation of duties for purchasing include

requisitioning from invoice processing receiving from invoice processing requisitioning from general ledger

A key control over unauthorized cash disbursements is

segregation of duties

Accounts payable confirmations may be used as an important source of evidence if ______.

the entity has weak internal control

1. The beginning step in the purchase process is usually 2. An authorized person in a department requests goods with a 3. A purchase transaction usually begins with a _____ _____ being generated by a department or support function. 4. To request goods or services, an authorized individual completes a

the purchase requisition

If the entity fails to record a purchase that has been made, assets or expenses will be ______, and accounts payable will be ______.

understated understated

To verify the existence of liabilities, the auditor can ______.

vouch a sample of the items on the accounts payable listing to voucher packets

True or false: The purchasing process is generally a source of contentious accounting issues.

False

true or false: If vendors do not respond to the accounts payable confirmation, the auditor should send another request.

False

In addition to the control activities used for the occurrence assertion, accounting for the numerical sequence of checks helps ensure the _____ assertion is met.

completeness

The __ assertion attempts to determine whether all purchase transactions and related accounts payable are recorded in the proper period.

cutoff

The auditor tests the control activities for the _____ assertion by comparing the date on the receiving report with the date on the voucher.

cutoff

If purchases are recorded through the voucher register or purchases journal, the only entries into the cash disbursements journal are ______ to accounts payable and ______ to cash.

debits credits

Purchase transactions for the acquisition of equipment are subject to the controls included in the purchasing process. If those controls are reliable, the auditor may be able to increase the detection risk for the affected financial statement accounts and therefore ______ the number of substantive procedures needed.

Reduce

The auditor's test of controls for the _____ assertion involves reperforming the accounts payable clerk's duties on a sample of voucher packets

accuracy

True or false: Proper segregation of duties for purchasing mean that the individual who can requisition goods should receive the goods but not be responsible for invoice processing.

False

The potential misstatement related to the accuracy assertion is that the payment

amount is recorded incorrectly

To ensure proper authorization of cash disbursements, an employee who prepares cash disbursements, should not ______.

approve purchases

Substantive tests of transactions ______.

are often conducted at the same time as tests of controls may be difficult to distinguish from a test of controls

Requiring that cash disbursements are not prepared unless all source documents are included in the voucher packet and approved ensures proper

authorization

A possible misstatement for the accuracy assertion is that purchase transactions may

be recorded at incorrect amounts

Recording purchases in the correct account is evidence regarding the ______ assertion.

classification

Segregating short-term and long-term payables is one of the major issues with respect to presentation and disclosure assertions about ______.

classification

The auditor's concern with proper _____ is that a cash disbursement may be charged to the wrong general ledger account.

classification

Controls to ensure that purchase transactions are recorded promptly and in the proper period are controls over

cutoff

Whether the supply of raw materials is adequate and how volatile raw material prices are two important industry-related factors in assessing _____ risk

inherent

The auditor can test purchase cutoff of accounts payable by first obtaining the number of the ______ issued in the current period.

last receiving report

When compared to accounts receivable confirmations, accounts payable confirmations are used ______ frequently by auditors.

less

To test cutoff of accounts payable, the auditor examines the receiving reports contained in the voucher packets to determine if the receipt of the goods is consistent with the recording of a(n) ______.

liability

Substantive tests may be difficult to distinguish from a test of controls because the specific audit procedure may both test the operation of a control procedure and ______.

monetary misstatement

The auditor is concerned with a misstatement caused by a cash disbursement being recorded in the entity's records when no payment has actually been made when considering the _____ assertion.

occurrence

The ______ is not usually processed through the purchasing process.

purchase of equipment for credit

Possible misstatements due to improper authorization include

purchase of unauthorized goods purchase of services at unauthorized prices

The person who approved the purchase and the authorization to buy a good or service is included on the

purchase order

In the purchasing process, substantive tests of transactions focus mainly on the ______.

purchases and cash disbursement transactions

The major control for preventing fictitious purchases is proper

segregation of duties

Effectively identifying accounts payable and accrual accounts that are misstated and providing evidence regarding the fairness of recorded accounts can be done using _____ _____ procedures.

substantive analytical

To test the reasonableness of purchase returns, the auditor generally performs

substantive analytical procedures

Categories of expenses classified in SFAC 5 are

systematic expenses product costs period costs

The second major test of the completeness assertion for accounts payable and accruals is concerned with ______.

unrecorded liabilities

1. The tests of details of account balances normally provides sufficient evidence as to the proper ______ of accounts payable. 2. Reviewing a bill for an accrual provides the auditor evidence of the ______ assertion of accruals. 3. The ______ of individual accounts payable is generally not a difficult assertion to test. 4. Examining the loan agreement and the interest rate provide evidence of the _____ of accruals.

valuation

1. Obtaining a listing of accounts payable, footing the listing, and agreeing it to the general ledger control account determines the ______ of accounts payable. 2. The second major test of the _____ assertion for accounts payable and accruals is concerned with unrecorded liabilities. To test cutoff of accounts payable, the auditor examines the receiving reports contained in the voucher packets to determine if the receipt of the goods is consistent with the recording of a(n) ______.

Completeness

Controls that ensure the _____ assertion is being met for purchases include accounting for the numerical sequences of purchase orders, receiving reports, and vouchers and matching receiving reports with vendor invoices.

completeness

The auditor analyzes the purchasing process in order to identify controls that ensure material misstatements that are prevented or detected or corrected as they can be relied upon by the auditor to reduce _____ risk.

control

The entity's organizational structure and its methods of assigning authority and responsibility are two factors that are particularly important when the auditor considers the _____ _____ and the purchasing process

control environment

\The auditor should analyze accounts payable misstatements discovered through the application of substantive procedures because these misstatement may provide additional evidence as to the _____ _____

control risk

Factors particularly important when the auditor considers the control environment and the purchasing process are

methods of assigning authority and responsibility. organizational structure

If the auditor decides to rely on controls to reduce control risk for the authorization assertion, then to verify that this control is operating effectively the auditor must

perform tests of controls

Use of a chart of accounts and independent approval and review of the general ledger accounts charged for acquisitions are controls for the _____ assertion.

classification

The primary control to prevent misstatements due to improper _____ is the use of a schedule or table that stipulates the amount that different levels of employees are allowed to purchase.

authorization

Audit procedures that may be used as part of the search for unrecorded liabilities include ______.

examining the files of unmatched purchase orders, receiving reports, and vendor invoices asking management about control activities used at the closing process vouching large-dollar items from the purchases journal and cash disbursements journal after year-end

1. Because entities seldom have an incentive to record liabilities they are not responsible for, there is little risk related to the assertion of ______. 2. A review of the voucher packets for adequate supporting documents relating liabilities to the entity provides sufficient evidence to support the ______ assertion.

rights and obligations

The major issues related to the presentation and disclosure assertion about accounts payable are ______.

segregating short-term and long-term payables ensuring that different types of payables are properly classified identifying and reclassifying any material debits contained in accounts payable

An entity usually prepares a document for purchase returns that reduces the amount of the vendor's accounts payable. This document is processed through the purchasing process in a manner

similar to the processing of a vendor invoice