ACCT 405

Observe to ensure that payroll checks are distributed by a person not involved in processing or recording payroll. I. Identify the primary management assertion addressed . 1. Existence or Occurrence 2. Rights and Obligations 3. Completeness 4. Valuation 5. Presentation and Disclosure II. Identify the specific account(s) being tested . a. Accounts Payable b. Accrued Liabilities c. Income Taxes Expense/Payable d. Payroll Expense/Liability e. Unearned Revenue

1, d

Are purchase orders above a certain level approved by an officer? 1. Specify one test of controls auditors could use to determine whether the control was operating effectively Examine entries for approval initials. For a sample of cash disbursements, vouch to approval signatures on invoices, receiving reports and purchase orders. Observe client personnel making comparisons between source documents noting that amounts match. Examine initials for approval. Review correcting journal entries that result from the comparison. Select a sample of invoices and agree them to the receiving report. Observe receiving department counting receipts. 2. Choose a substantive procedure that could find errors or frauds that could result from the absence or ineffectiveness of the control items Select a sample of current-year debits in accounts (e.g., inventory, fixed assets, expenses), and vouch them to supporting documents. Observe the client's inventory account and test the reconciliation of the count to the perpetual inventory. Reperform comparison on a test basis. Select a sample of recorded journal entries and reperform calculations and review for appropriate accounts.

2, a

Are purchase orders above a certain level approved by an officer? 1. Specify one test of controls auditors could use to determine whether the control was operating effectively Examine entries for approval initials. For a sample of cash disbursements, vouch to approval signatures on invoices, receiving reports and purchase orders. Observe client personnel making comparisons between source documents noting that amounts match. Examine initials for approval. Review correcting journal entries that result from the comparison. Select a sample of invoices and agree them to the receiving report. Observe receiving department counting receipts. 2. Identify an example of an error or fraud that could occur if the control were absent or ineffective The company might override controls to create fraudulent entries. Purchases or other liabilities may be recorded for transactions at incorrect amounts. Costs and expenses might be incurred and the company may pay for goods that are not in compliance with company policy resulting in both fraudulent purchases as well as noncompliance with manufacturing specifications or contracts with customers. Vendors could bill for quantities greater than the amount actually shipped, overstating costs or expenses.

2, c

Read the board of director's minutes to identify material lawsuits and determine whether any adjustments for a contingent loss liability is needed. I. Identify the primary management assertion addressed . 1. Existence or Occurrence 2. Rights and Obligations 3. Completeness 4. Valuation 5. Presentation and Disclosure II. Identify the specific account(s) being tested . a. Accounts Payable b. Accrued Liabilities c. Income Taxes Expense/Payable d. Payroll Expense/Liability e. Unearned Revenue

3, b

A furniture company ordered 84 tables from a supplier. The supplier accidentally sent only 48 tables, but the receiving department at the furniture company accepted the tables. The invoice was eventually received but was for the original 84 tables. The furniture company paid the entire amount. Which of the following controls would have been least likely to have prevented this erroneous payment? a. Personnel in the furniture company's purchasing department should compare the purchase requisition with the purchase order. b. Personnel in the furniture company's accounts payable department should compare the receiving report to the purchase invoice before creation of the voucher. c. The copy of the purchase order sent to the furniture company's receiving department should not have shown an expected quantity. d. Personnel in the furniture company's cash disbursements department should compare the check that is prepared to all of the backup documentation.

a

An auditor wishes to perform tests of controls on a client's purchasing procedures. If the control activities leave no audit trail of documentary evidence, the auditor most likely will test the procedures by a. observation and inquiry. b. inquiry and analytical procedures. c. confirmation and observation. d. analytical procedures and confirmation.

a

Auditors should inspect the "unmatched receiving report" file to determine whether the liability for the receipt of goods has been recorded. a. True b. False

a

Confirm accounts payable with vendors, especially regular suppliers showing small or zero balances in the year‑end accounts payable. Be sure to verify the vendors' addresses so that confirmations will not be misdirected, perhaps to conspirators in a scheme to understate liabilities. Would the audit procedure described above be effective in detecting potentially unrecorded liabilities? a. Yes. b. No. c. Not enough information.

a

The accounts payable department reconciles the vendor invoice, purchase order, and receiving report prior to approving the payment to the vendor. a. True b. False

a

Use a checklist of accrued expenses to determine whether the company has been conscientious about expense and liability accruals including accruals for wages, interest, utilities, sales and excise taxes, payroll taxes, income taxes, real property taxes, rent, sales commissions, royalties, and warranty and guarantee expense. Would the audit procedure described above be effective in detecting potentially unrecorded liabilities? a. Yes. b. No. c. Not enough information.

a

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

a

Acquisition and expenditure activities include (1) purchasing goods and services, (2) receiving the goods or services, (3) recording the asset or expense and related liability, and (4) depreciating assets purchased. a. True b. False

b

An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing in order to: a. Verify that payroll taxes are deducted from employees' gross pay. b. Identify potential liabilities for unpaid payroll taxes. c. Determine whether internal control activities are operating effectively. d. Uncover fictitious employees who are receiving payroll checks.

b

For which of the following accounts would the matching concept be least applicable? a. Cost of goods sold. b. Impairment loss. c. Sales. d. None of the above.

b

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

b

In order to ensure appropriate segregation of duties, the supervisor in each department handles the custody of the payroll checks. a. True b. False

b

Select major additions for the year and a random sample of other additions and inspect the physical assets. a. Presentation and Disclosure. b. Existence or Occurrence. c. Valuation and Allocation. d. Rights and Obligations. e. Completeness.

b

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. Purchase orders. b. Receiving reports. c. Canceled checks. d. None of the above.

b

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

b

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

b

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

c

An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal. The purpose of this substantive audit procedure most likely was to a. verify that cash disbursements were for goods actually received. b. identify usually large purchases that should be investigated further. c. determine that purchases were properly recorded. d. test whether payments were for goods actually ordered.

c

In testing controls over cash disbursements, an auditor most likely would determine that the person who signs checks also: a. Is denied access to the supporting documents. b. Returns the checks to accounts payable. c. Is responsible for mailing the checks. d. Reviews the monthly bank reconciliation.

c

When verifying debits to the perpetual inventory records of a nonmanufacturing company, auditors would be most interested in examining a sample of purchase a. approvals. b. orders. c. invoices. d. requisitions.

c

Which of the following is not a major control risk in the payroll cycle? a. Paying fictitious "employees" b. Overpaying for time or production c. Losing employees to competitors d. Incorrect accounting for costs or expenses

c

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

c

Which of the following tests of details most likely would help an auditor determine whether accounts payable have been misstated? a. Reviewing bank transfers recorded as cash received from customers. b. Searching for customer-returned goods that were not reported as returns. c. Examining vendor statements for amounts not reported as purchases. d. Examining reported purchase returns that appear too low.

c

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

A client's purchasing system ends with the recording of a liability and its eventual payment. Which of the following best describes auditors' primary concern with respect to liabilities resulting from the purchasing system? a. Acquisition of materials is not made from one vendor or one group of vendors. b. Authority to incur liabilities is restricted to one designated person. c. Commitments for all purchases are made only after established competitive bidding procedures are followed. d. Accounts payable are not materially understated.

d

A furniture company ordered 84 tables from a supplier. The supplier accidentally sent only 48 tables, but the receiving department at the furniture company accepted the tables. The invoice was eventually received but was for the original 84 tables. The furniture company paid the entire amount. Which of the following controls would have been least likely to have prevented this erroneous payment? a. The copy of the purchase order sent to the furniture company's receiving department should not have shown an expected quantity. b. Personnel in the furniture company's accounts payable department should compare the receiving report to the purchase invoice before creation of the voucher. c. Personnel in the furniture company's cash disbursements department should compare the check that is prepared to all of the backup documentation. d. Personnel in the furniture company's purchasing department should compare the purchase requisition with the purchase order. e. All of the above.

d

A weakness in internal control over recording retirements of equipment may cause an auditor to a. trace additions to the "other assets" account to search for equipment that is still on hand but no longer being used. b. review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year. c. inspect certain items of equipment in the plant and trace those items to the accounting records. d. select certain items of equipment from the accounting records and locate them in the plant.

d

An audit team would most likely examine the detail support for charges to which of the following accounts? a. Miscellaneous Expense.. b. Supplies expense. c. Legal expense. d. Both a and c. e. None of the above.

d

An audit team would most likely examine the detail support for charges to which of the following accounts? a. Payroll expense. b. Cost of goods sold. c. Supplies expense. d. None of the above.

d

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

d

Small Corporation uses a Wages Clearing Account for its payroll disbursements. At the end of February, a reasonably large debit balance remained in this account. The most likely reason for this is that a. not enough cash had been transferred to the bank account. b. more labor cost had been assigned to the expense accounts than had been paid. c. some employees had not yet cashed their checks. d. some labor cost had not been properly classified in the expense accounts.

d

Which of the following accounts appear in the acquisition and expenditure cycle? a. Cash. b. Purchases returns. c. Prepaid insurance. d. All of the above.

d