Auditing - Chapter 14

For effective internal control, the accounts payable department should compare the information on each vendor's invoice with the:

Receiving report and the purchase order

A client erroneously recorded a large purchase twice. Which of the following internal control measures would be most likely to detect this error in a timely and efficient manner?

Reconciling vendors' monthly statements with subsidiary payable ledger accounts

Which of the following procedures is least likely to be completed before the balance sheet date?

Search for unrecorded liabilities

Voucher

A document authorizing a cash disbursement. A voucher usually provides space for initials of employees performing various approval functions. The term voucher may also be applied to the group of supporting documents used as a basis for recording liabilities or for making cash disbursements.

Voucher register

A journal used in a voucher system to record liabilities requiring cash payment in the near future. Every liability recorded in a voucher register corresponds to a voucher authorizing future payment.

Vendor's statement

A monthly statement prepared by a vendor (supplier) showing the beginning balance, charges during the month for goods or services, amounts collected, and ending balance. This externally created document should correspond (except for timing differences) with an account in the client's accounts payable subsidiary ledger.

Consignment

A transfer of goods from the owner to another person who acts as the sales agent of the owner.

Ordinarily, the most significant assertion relating to accounts payable is:

Completeness

In an audit, the valuation of year-end accounts payable is most likely addressed by:

Confirmation

Trade accounts payable

Current liabilities arising from the purchase of goods and services from trade creditors, generally evidenced by invoices or statements received from the creditors.

An audit of the balance in the accounts payable account is ordinarily not designed to:

Detect accounts payable that are substantially past due

Confirmation

Direct communication with vendors or suppliers to determine the amount of an account payable. Represents high-quality evidence because it is a document created outside the client organization and transmitted directly to the auditors.

Which of the following is the best audit procedure for determining the existence of unrecorded liabilities?

Examine selected cash disbursements in the period subsequent to year-end

In performing a test of controls, the auditors vouch a sample of entries in the purchases journal to the supporting documents. Which assertion would this test of controls most likely test?

Existence

Compare the auditors' approach to the verification of liabilities with their approach to verification of assets.

For liabilities, auditors are concerned with their possible understatement and with assets, auditors are concerned with their possible overstatement. Additionally, during an audit, auditors with regard to liabilities are primarily concerned with completeness and existence. Whereas with assets their primary concern is asset valuation.

If a corporation overstates its earnings, are its liabilities more likely to be overstated or understated? Explain.

If a corporation overstates its earnings, liabilities more likely will be understated. According to the reading, an understatement of liabilities will exaggerate the financial strength of a company and is usually accompanied by the understatement of expenses and the overstatement of net income.

The auditors usually find in the client's possession documentary evidence, such as invoices, supporting both accounts receivable and accounts payable. Is there any difference in the quality of such evidence for accounts receivable and for accounts payable? Explain.

In an accounts payable department, an auditor can find external documentation created by the client's vendors. Such documentation includes invoices and monthly statements. For accounts receivable, the auditor must rely on internally created documentation; invoices and confirmations sent.

To determine that each vendor is submitted and paid only once, when the payment is approved, supporting documents should be canceled by the:

Individual who signs the checks

Confirmation of AR

Primary Audit Objective: Existence Other Evidence Available: Internal evidence (i.e., sales invoices, receiving reports) Confirmation Generally Required?: Yes

Primary concern

Possibility of understatement or omission of liabilities: 1) exaggerates the financial strength of company 2) conceals fraud as effectively as overstatement of assets 3) accompanied by understatement of expenses and overstatement of net income

Confirmation of AP

Primary Audit Objective: Completeness Other Evidence Available: External evidence held by client (i.e., vendors' invoices and statements) Confirmation Generally Required?: No

When confirming accounts payable, the approach is most likely to be one of:

Selecting the accounts of companies with whom the client has previously done the most business, plus a sample of other accounts

The least likely approach in auditing management's estimate relating to an accrued liability is to:

Send confirmations relating to the estimate

Accrued liabilities (accrued expenses)

Short-term obligations for services of continuing nature that accumulate over time. Examples include interest, taxes, rent, salaries, and pensions. They generally are not evidenced by invoices or statements.

Subsequent period

The time extending from the balance sheet date to the date of the auditors' report.

What is the purpose of the auditors' review of cash payments subsequent to the balance sheet date?

The purpose of auditors' review of cash payments subsequent to the balance sheet date is to discover unrecorded liabilities. These omissions must be reviewed and a decision must be made as to their materiality and whether or not it warrants an adjusting entry. This decisions hinges to an important extent on whether the transaction affects net income.

Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because:

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