Chapter 14 Exam 2

Identify which of the following procedures are performed to test controls.

1) test IT application controls 2) verify a sample of postings to the A/P control account

The basic auditing steps for accrued liabilities include examining any __________ or other documents on hand that provide the basis for the accrual.

Contracts

T or F: Auditors may test controls by vouching a sample of postings through the audit trail both from the posting to the source document, and in reverse order from the source document up to the general ledger posting.

True

T or F: Auditors often confirm vendors' accounts with zero balances at year-end.

True

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

Search for unrecorded liabilities

T or F: A company's receiving department should be independent of its purchasing department.

True

When auditors find unrecorded liabilities, before adjusting they must consider_______.

Materiality

T or F: Since it is difficult to detect unrecorded liabilities, auditors rely primarily on the client's representations that no unrecorded liabilities exist.

False

T or F: The audit procedure of confirmation by direct communication is just as important for accounts payable as it is for accounts receivable.

False

T or F: To overstate net income requires the recording of an improper accounting entry.

False

The audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts payable because:

accrued liabilities usually pertain to services of a continuing nature while accounts payable are the result of completed transactions.

The search for unrecorded liabilities must be made __________ the BS date.

after

Auditors will obtain a trial balance of accounts payable and reconcile it with the general ledger. The purpose of this substantive procedure does not include:

providing absolute proof of the total indebtedness

The principal working papers for accounts payable include all of the following except:

purchase requisitions

In an effective purchasing system, a stores or inventory control department will prepare and approve the issuance of a purchase requisition that will be sent to the ____________ department.

purchasing

All material ___________ payables should be disclosed in the financial statements.

related party

Property tax payments are typically ______ in number.

Few

Auditors need to consider _____ terms for determining ownership and whether a liability should be recorded.

Shipping

If test of controls indicate that the client has strong internal controls, this assessment of low control risk for accounts payable may result in minimizing ___________ for accounts payable.

Substantive procedures

A review of the procedures followed in accepting and returning deposits should be made by the auditors with a view to disclosing any shortcomings in:

internal control

Accrued expenses including interest, taxes, rent, and wages appear in the ___________ section of the balance sheet.

current liabilities

Auditors may perform test of controls by tracing a sample of general ledger postings to the ___________ register and cash disbursements journal.

Voucher

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.

Accounts payable _______ can be mailed to vendors from whom substantial purchases have been made.

Confirmations

Analytical procedures performed to accounts payable and related accounts include which of the following procedures? (Select all that apply) a. test sales discounts and compare to prior periods to determine changes in terms

1. compute ratios and compare to prior years 2. compare amounts owed to individual creditors to balances in prior years (testing purchase discounts, not sales)

Principal working papers include:

1. confirmation requests 2. lead schedule

In addition to accounts payable, other items classified as current liabilities include: (Select all that apply) a. prepaid expenses

1. unclaimed wages 2. customers' deposits 3. sales tax payable

Identify which of the following tasks auditors use to obtain an understanding of internal control over accounts payable.

1. use a questionnaire 2. perform a walk-through 3. prepare a flowchart

A client's procurement system ends with the assumption of a liability and the eventual payment of the liability. Which of the following best describes the auditors' primary concern with respect to liabilities resulting from the procurement system?

Accounts payable are not materially understated.

When searching for unrecorded liabilities, the auditors consider transactions recorded _____ year-end.

After

Which of following audit procedures is least likely to detect an unrecorded liability?

Analysis and recomputation of depreciation expense.

To avoid potential errors and fraud, well-designed internal control in the accounts payable area should include a separation of which of the following functions?

Cash disbursements and invoice verification.

When testing other accrued liabilities, auditors may independently calculate the amount and ______ it to management's estimate.

Compare

Which of the following is the most efficient audit procedure for the detection of unrecorded liabilities?

Compare cash disbursements in the subsequent period with the accounts payable trial balance at year-end.

Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. The existence of unrecorded accounts payable.

Comparing subsequent cash payments to the accounts payable trial balance.

A subsequent procedure that establishes existence and valuation is ___________ of accounts payable by direct correspondence with vendors.

Confirmation

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

Confirmation

The auditors will analyze the unclaimed wages account for the purpose of determining that the _____________ (debits/credits) represent only authorized payments to employees, remittances to the state under unclaimed property laws, or transfers back to general cash funds through approved transactions.

Debits

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

Detect accounts payable that are substantially past due

Auditors should be alert that deposits shown by the records as refunded to customers may in fact have been abstracted by ___________.

Employees

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

T or F: All unrecorded liabilities of the same dollar total have the same effect on the client's net income.

False

T or F: Auditors are concerned with the discovery of receivables from related parties, but not with the discovery of payables from related parties.

False

T or F: Companies typically send statements to vendors detailing their accounts payable to the vendors.

False

T or F: Confirmation of accrued liabilities is ordinarily a required audit procedure.

False

T or F: Most of the audit work on liabilities is ordinarily performed during the interim period.

False

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

Individual who signs the checks

Income taxes that are withheld from employees' pay and not remitted as of the balance sheet date will constituted a ____________ to be verified by the auditors.

Liabilitiy

Income taxes withheld from employees but not yet submitted to the government are considered to be a(n) _______.

Liability

When testing customer deposits, auditors typically review a(n) ______of the individual deposits.

List

Based on their understanding of the client and its environment, including internal controls over accounts payable, the auditors develop their planned assessed levels of the risks of ____________ for the assertions about accounts payable.

Material misstatement

Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. The existence of a fictitious account payable.

Vouching selected accounts payable on the trial balance.

Which of the following procedures relating to the audit of accounts payable would the auditors be most likely to delegate entirely to the clients' employees?

Prepare a schedule of accounts payable.

To gain overall assurance as to the reasonableness of accounts payable, the auditor may consider ________.

Ratios

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

Federal and state governments do not specify the exact _____to be maintained, but do specify the amounts to be withheld.

Records

Proper BS presentation of accounts payable requires that any material amounts payable to ____________ be listed separately from amounts payable to trade creditors.

Related parties (directors, principal stockholders, officers, employees)

Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. An improper cutoff of accounts payable.

Reviewing receiving reports issued near year-end.

Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. The existence of an unrecorded accrued payable.

Reviewing union contracts.

Match the error or fraud with the audit procedure that is most likely to detect the error or fraud. The existence of related party payables.

Reviewing unusual transactions during the year.

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

Search for unrecorded liabilities.

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

T or F: Accounts payable confirmation requests usually have the vendor indicate the amount of the payable from the client.

True

T or F: Accounts payable with debit balances should be reclassified as receivables.

True

T or F: Auditors may discover unrecorded liabilities by reconciling vendors' statements with the accounts payable trial balance.

True

T or F: In the audit of financial statements, the auditors are particularly concerned with possible understatement of liabilities and the possible overstatement of revenues.

True

T or F: Review of a client's cash payments subsequent to the balance sheet date is an important test of the completeness of recorded payables.

True

T or F: Unclaimed payroll checks should be voided and the amount should be recorded in a special liability account.

True

T or F: When testing the amount of pension liability, the auditors typically rely on a specialist.

True

Most of the inherent risks of accounts payable arise from ____________ risks faced by management.

business

Bell's accounts-payable clerk has a brother who is one of Bell's vendors. The brother will often invoice Bell twice for the same delivery. The accounts-payable clerk removes the receiving report for the first invoice from the paid voucher file and uses it for support of payment for the duplicate invoice. The most effective procedure for preventing this activity is to:

cancel vouchers and supporting papers when payment is made.

Payables to a corporation's __________ require particular attention by the auditors since they are not the result of arm's length bargaining by parties of opposing interests.

officers

Auditors may review the portion of accounts payable that is ____________ at YE and compare it to corresponding data for previous years.

past due

Items that would not be classified as current liabilities include:

prepaid expenses

In an effective purchasing system, receiving reports should be sent to the ___________ departments.

1. accounts payable 2. stores 3. purchasing

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

Creditor statements are not available and internal control over accounts payable is unsatisfactory.

T or F: Unless the auditors are engaged to prepare the client's tax return, there is no need for the auditors to review the return.

False

T or F: Vouching of selected accounts payable on the client's year-end trial balance is primarily a test of completeness of recorded accounts payable.

False

T or F: The amount of accrued payroll is typically verified by confirmation with selected employees.

False

Identify which of the following is the first objective of auditing accounts payable.

Use the understanding of the client and its environment to consider inherent risks

A substantive procedure that auditors perform when the risk of material misstatement of accounts payable is high is to reconcile accounts payable with monthly statements from ___________.

Vendors

In order to efficiently establish the accuracy of the accounts payable cutoff, the auditors will be most likely to:

coordinate cutoff tests with physical inventory observation.

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

detect accounts payable due to public versus non-public companies.

If any inherent risks of accounts payable are related to ___________, the auditors will make certain they understand the programs and controls established by management to control the risk.

fraud

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

Identify a type of obligation that should not be included in accounts payable.

interest-bearing obligations

The auditors cannot express an opinion on either the balance sheet or income statement of a corporation without first obtaining evidence that the provision for __________ has been properly computed.

income taxes

Auditors should test the reasonableness of sales tax payable by:

1. examining sales invoices to confirm customers are being charged correct amount of tax 2. applying sales tax rate to total taxable sales

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

Completeness

Sales tax collected from customers constitute ___________ of the business until they are remitted to the taxing authority.

current liabilities

For companies that use a voucher system, when subsequent procedures to verity the individual vouchers are made after the BS date, the client should:

prepare a list of YE unpaid vouchers

For most accrued liabilities, the audit approach will emphasize a:

review and test of management's process of developing estimates