Quiz 10

Accrued liabilities generally differ from accounts payable in that accrued liabilities a. Accumulate over time b. Are usually confirmed at year-end c. Depend upon the existence of a transaction for original recording of the account d. Are never included in cost of goods sold

A Need to remember that accrued liabilities are often estimates which involve some judgement by management

Ordinarily, the most significant assertion relating to accounts payable is: a. Completeness b. Existence c. Presentation d. Valutaion

A Primary concern of auditor is understatement of accounts payable (completeness assertion)

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

B A and D could be interim procedures if internal controls are really good For C, an inventory count typically will occur at year-end However, the search for unrecorded liabilities has to occur after year-end

Which of the following is not a substantive audit procedure that would test management's assertion related to valuation of accounts payable? a. Perform analytical procedures b. Perform procedures to identify accounts payable to related parties c. Reconcile the client's recorded liabilities with creditors' monthly statements d. Vouch balances per the accounts payable subsidiary ledger to source documentation

B A would detect unusual changes C reconciliations would detect errors related to valuation D is jointly testing existence and valuation when vouching to source documents

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? a. footing the purchases journal b. Reconciling vendor's monthly statements with subsidiary payable ledger accounts c. Tracing totals from the purchases journal to the ledger accounts d. Sending written quarterly confirmation to all vendors

B Reconciliations are great controls to detect errors, also very efficient

When confirming accounts payable, the approach is most likely to be one of: a. Selecting the accounts with the largest balances at year-end, plus a sample of other accounts b. Selecting the accounts of companies with whom the client has previously done the most business, plus a sample of other accounts c. Selecting a random sample of accounts payable at year-end. d. Confirming all accounts

B usually choose suppliers with whom the client has done the most business because that is the largest potential for an understatement due to high established levels of credit

Which of the following best describes a voucher prepared under good internal control? a. A document prepared by Stores that indicates amount to be purchased b. A document prepared by Receiving that indicated the quantity received and approves payment. c. A document prepared by Accounts Payable authorizing a cash disbursement d. A document received by Purchasing, from a supplier, indicating quantity of goods purchased and amount due

C

With properly designed internal control, the same employee should not be permitted to: a. Sign checks and cancel supporting documents b. Receive merchandise and prepare a receiving report c. Prepare disbursement vouchers and sign checks d. Initiate a request to order merchandise and approve merchandise received

C

Which of the following manipulations would understate accounts payable on the financial statements? a. Overstatement of purchases b. Closing the cash disbursements journal prior to year-end c. Leaving the cash receipts journal open after year-end d. Overstating purchase returns

D A would lead to higher accounts payable B payments against liabilities wouldn't show until next period C. Cash receipts don't have to do anything with accounts payable

Which of the following is the best audit procedure for determining the the existence of unrecorded liabilities a. Examine confirmation requests returned by creditors whose accounts appear on a subsidiary trial balance of accounts payable b. Examine unusual relationships between monthly accounts payable balances and recorded purchases c. Examine a sample of invoices a few days prior to and subsequent to year-end to ascertain whether they have been properly recorded d. Examine selected cash disbursements in the period subsequent to year-end

D All liabilities must eventually be paid, and will therefore be reflected in the accounts when paid if not when incurred. By close study of payments made subsequent to the balance sheet date, the auditors may find items that should have appeared in the balance sheet.

TRUE or FALSE: The primary audit objective of the search for unrecorded liabilities is to examine management's assertion related to the valuation of accounts payable

False

TRUE or FALSE: Confirmation of accounts payable is a required generally accepted auditing procedure

False Auditors are not required to confirm accounts payable, though they likely will do so. Remember that the auditor will find reliable evidence (external) evidence of accounts payable in the client's possession (i.e. vendor invoices).

TRUE or FALSE: For effective internal control over accounts payable, the purchasing department should approve invoices for payment

False Segregation of duties!

TRUE or FALSE: The primary objective of the auditors' examination of accounts payable is to determine whether payments are made on a timely basis

False The primary concern is understatement of accounts payable (completeness and valuation assertions)

TRUE or FALSE: The confirmation of existing accounts payable does not prove the completeness of recorded accounts payable

True Confirmations are a more effective procedure for establishing existence and valuation of accounts payable. They can provide some evidence of completeness (but not proves) and provide more evidence if the confirmation is blank form

TRUE or FALSE: The auditor may be able to uncover unrecorded liabilities related to professional services by reviewing corporate minutes

True Corporate minutes are transcripts of what was discussed at meetings

TRUE or FALSE: Auditors generally consider the evidence regarding accounts payable in the client's possession as more reliable than that for accounts receivable.

True Evidence for accounts payable are generated by outsides parties (vendors) whereas evidence for accounts receivables are created by the client

TRUE or FALSE: When the client enters into a consignment contract with a vendor, the client does not assume liability for the merchandise until it is sold to a third party.

True In a consignment sale, the consignee (here the audit client) does not assume liability for the merchandise until it is sold to a third party