The Acquisition and Expenditure Cycle

The Acquisition and Expenditure Cycle Multiple Choice Questions 1. When confirming accounts payable, emphasis should be put on what kind of accounts? A) Accounts with small or zero balances. B) All accounts should be equally emphasized. C) Accounts with large balances. D) Accounts listed in the accounts payable subsidiary. Answer: A 2. "Recorded vouchers (accounts payable entries) in the voucher register (e.g., purchases journal) supported by completed voucher documentation" is a specific example of which management assertion? A) Environment. B) Existence or occurrence. C) Completeness. D) Valuation or allocation. Answer: B 3. "All purchase orders are supported by requisitions from proper persons" is a specific example of which general assertion? A) Existence or occurrence. B) Completeness. C) Rights and obligations. D) Presentation and disclosure. Answer: A 4. "Observe the work habits of purchasing department personnel" is an audit procedure intended to satisfy which control assertion? A) Environment. B) Valuation or allocation. C) Accounting and posting. D) Existence or occurrence. Answer: A 5. Cash disbursements are authorized by A) purchase orders. B) invoices. C) receiving reports. D) vouchers. Answer: D 6. For the copy of the purchase order that goes to the receiving department, it is best to A) leave off the description of the goods ordered. B) leave off the quantity of the goods ordered. C) leave off the name of the vendor. D) have the receiving department forward all copies of the purchase order to accounts payable. Answer: B 7. Vouchers should be stamped PAID to A) prevent duplicate payment. B) generate a new purchase order. C) indicate posting in the voucher register. D) facilitate preparation of the bank reconciliation. Answer: A 8. A voucher is used to A) document receipt of inventory. B) document completion of services. C) document a purchase contract. D) provide a source document for recording the purchase of a good or service. Answer: D 9. An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to A) identify usually large purchases that should be investigated further. B) verify that cash disbursements were for goods actually received. C) determine that purchases were properly recorded. D) test whether payments were for goods actually ordered. Answer: C 10. The usual source for journal entries posted to the general ledger to record the purchase of inventory is A) sales invoices updated with cost data from the inventory records department. B) purchase invoices updated with cost data from the inventory records department. C) receiving reports updated with cost data from the accounts payable department. D) vouchers payable journal from the accounts payable department. Answer: D 11. Which of the following would detect the understatement of a purchase discount? A) Verify the arithmetic valuation or allocation of the purchase journal and the cash disbursements journal. B) Compare purchase invoice terms with disbursement records and checks. C) Compare approved purchase orders to receiving reports. D) Verify the receipt of items ordered and invoiced. Answer: B 12. Which of the following situations indicates a potential material weakness in internal control over acquisition and expenditure? A) Purchase orders are not prepared for services acquired directly under authorization of department heads. B) Voucher packages are authorized and checks are signed by the same person. C) Unacceptable goods are not scheduled on receiving reports. D) The same person signs checks and stamps vouchers "paid." Answer: B 13. Which of the following client control procedures is not usually performed in the vouchers payable (accounts payable) department? A) Determining the mathematical valuation or allocation of the vendors' invoices. B) Writing checks for the treasurer's signature to take advantage of purchase discounts. C) Controlling the mailing of the check and remittance advice. D) Checking the prices on the vendor's invoice. Answer: C 14. When auditing merchandise inventory at yearend, the auditor performs a purchase cutoff test to obtain evidence that A) all goods purchased before yearend are received before the physical inventory count. B) no goods held on consignment for customers are included in the inventory balance. C) no goods observed during the physical count are pledged or sold. D) all goods owned at yearend are included in the inventory balance. Answer: D 15. Auditors may conclude that depreciation charges are too small by noting A) insured values much larger than book values. B) large numbers of fully depreciated assets. C) frequent trade ins of relatively new assets. D) large and frequent losses on assets retired. Answer: D 16. The auditor decided to test accounts payable by sending open ended (blank) confirmations to selected vendors. The auditor's best approach in selecting the vendor accounts to confirm is to A) select vendor accounts with large balances. B) select vendor accounts at random in order to apply a statistical sampling procedure. C) select vendor accounts based on the number of purchases from vendors during the year. D) select vendor accounts that are past due. Answer: C 17. What evidence is appropriate to determine whether recorded purchase transactions are valid and the vendors charged the correct prices? A) Purchase requisitions and accounts payable entries. B) Receiving reports and purchase orders. C) Purchase requisitions and purchases orders. D) Purchase orders and bid quotes. Answer: B 18. Purchase cutoff procedures should be designed to produce evidence of whether merchandise is included in the inventory of the client company if the company A) has paid for the merchandise. B) has physical possession of the merchandise. C) holds legal title to the merchandise. D) holds the shipping documents for the merchandise issued in the company's name. Answer: C 19. Which of the following accounts would most likely be reviewed by the auditor to gain reasonable assurance that additions to the equipment (fixed asset) account are not understated? A) Depreciation expense. B) Gain on disposal of equipment. C) Accounts payable. D) Repairs and maintenance expense. Answer: D 20. Which of the following would not be included in the supporting documents for a voucher? A) Purchase order. B) Vendor invoice. C) Receiving report. D) Blank check. Answer: D 21. A voucher would typically contain A) a purchase requisition, purchase order, vendor invoice, receiving report, and check copy. B) a purchase requisition, purchase order, sales invoice, receiving report, and check copy. C) a purchase requisition, sales order, sales invoice, receiving report, and check copy. D) a purchase requisition, sales order, vendor invoice, receiving report, and check copy. Answer: A 22. When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be A) vendors with whom the entity has previously done business. B) amounts recorded in the accounts payable subsidiary ledger. C) payees of checks drawn in the month after the year-end. D) invoices filed in the entity's open invoice file. Answer: A 23. Which of the following procedures would an auditor most likely perform in searching for unrecorded payables? A) Reconcile receiving reports with related cash payments made just prior to yearend. B) Contrast the ratio of accounts payable to purchases with the prior year's ratio. C) Vouch a sample of creditor balances to supporting invoices, receiving reports, and purchase orders. D) Compare cash payments occurring after the balance sheet date with the accounts payable trial balance. Answer: D 24. An entity's internal control structure requires for every check request that there be an approved voucher, supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all A) purchase orders. B) canceled checks. C) receiving reports. D) approved vouchers. Answer: B 25. An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control procedures leave no audit trail of documentary evidence, the auditor most likely will test the procedures by A) confirmation and observation. B) observation and inquiry. C) analytical procedures and confirmation. D) inquiry and analytical procedures. Answer: B 26. Which of the following audit procedures is best for identifying unrecorded trade accounts payable? A) Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period. B) Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports. C) Examining unusual relationships between monthly accounts payable balances and recorded cash payments. D) Reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date. Answer: A 27. To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is A) supported by a vendor's invoice. B) stamped "paid" by the check signer. C) prenumbered and accounted for. D) approved for authorized purchases. Answer: B 28. Cutoff tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year most likely would provide assurance about management's assertion of A) valuation or allocation. B) existence or occurrence. C) completeness. D) presentation and disclosure. Answer: C 29. When auditing PPE, the auditor's approach is generally to A) Examine evidence supporting the amounts in the ending balance. B) Examine evidence supporting additions during the year. C) Follow a reliance strategy, testing internal controls and analytical procedures. D) Concentrate on finding unrecorded assets. Answer: B 30. Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities? A) Trace a sample of accounts payable entries recorded just before year-end to the unmatched receiving report file. B) Compare a sample of purchase orders issued just after year-end with the year-end accounts payable trial balance. C) Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices. D) Scan the cash disbursements entries recorded just before year-end for indications of unusual transactions. Answer: C 31. In performing a search for unrecorded retirements of fixed assets, an auditor most likely would A) inspect the property ledger and the insurance and tax records, and then tour the client's facilities. B) tour the client's facilities, and then inspect the property ledger, and the insurance and tax records. C) analyze the repair and maintenance account, and then tour the client's facilities. D) tour the client's facilities, and then analyze the repair and maintenance account. Answer: A 32. A weakness in internal control over recording retirements of equipment may cause an auditor to A) inspect certain items of equipment in the plant and trace those items to the accounting records. B) review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year. C) trace additions to the "other assets" account to search for equipment that is still on hand but no longer being used. D) select certain items of equipment from the accounting records and locate them in the plant. Answer: D 33. Failure to record a liability generally results in A) an understatement of profit B) an understatement of current ratio C) an overstatement of profit D) An overstatement of assets. Answer: C 34. Improperly capitalizing an expense item results in. A) understatement of profit in the current year and overstatement in future years. B) understatement of profit in the current year and in future years C) overstatement of profit in the current year and understatement in future years D) overstatement of profit in the current year and in future years. Answer: C 35. A liability for a long term purchase contract should generally be recognized when A) the contract is signed B) the goods are shipped. C) the goods are received. D) the goods are sold to match the cost. Answer: C 36. Which of the following expense accounts would not normally be tested by listing all debits and examining any significant items? A) Legal expense. B) Miscellaneous expense. C) Repairs and Maintenance. D) Payroll expense. Answer: D 37. Which of the following would be an indicator of potential fraud? A) Photocopies of invoices in the voucher file. B) Vendor invoices in numerical order. C) Vendors with only post office box addresses. D) All of the above indicate potential fraud. Answer: D 38. Which of the following fraud detection steps could not be performed by CAATTs? A) Look for photocopies in invoice files. B) Look for vendor invoices in numerical order. C) Look for vendor invoices slightly below the approval threshold. D) Look for duplicate vendor numbers. Answer: A Essay Questions 39. Explain why auditors must put greater emphasis on the completeness and obligation assertion when auditing payables and contrast this with the audit of asset accounts. Answer: The emphasis on completeness is rightly placed because companies typically are less concerned about timely recording of expenses and liabilities. Generally they are more concerned with the timely recording of revenues and assets. For asset accounts, the emphasis therefore is on the existence and rights assertions. Ample evidence is usually available to verify that an asset exists. However, less evidence usually exists for unrecorded liabilities. 40. Jack, CPA, is the auditor of Jill Corporation. Jack plans to follow last year's work papers in selecting accounts payable to be confirmed. Confirmations were mailed to 50 of Jill's 200 suppliers. The sample was designed to select accounts with the largest balances. Jack and Jill spent a lot of time reconciling minor differences between the confirmation amounts and the accounts payable trial balance. Required: Do you believe Jack should use the same sample design for accounts payable confirmations this year? If not, what suggestions can you give to improve the design? Answer: Because of the concern for understatement of liabilities, auditors are more concerned with the completeness and obligations assertions for accounts payable. Auditors place an emphasis on accounts payable that are more likely understated. Therefore, small and zero balances should be included in the sample design. Also, vendors with high activity during the year might be selected. 41. The internal control questionnaire for purchases and accounts payable includes the following questions. Next to each of the questions, indicate the letter of the related control assertion. A. B. C. D. E. F. Environment Existence or occurrence Completeness Rights and obligations Valuation or allocation Presentation and disclosure ___ 1. Are vendors' monthly statements reconciled with individual accounts payable accounts? ___ 2. Are all purchases made only on the basis of approved purchase requisitions? ___ 3. Are vendors' invoices listed immediately upon receipt? ___ 4. Are vendors' invoices matched against purchase orders and receiving reports before a liability is recorded? ___ 5. Is the purchasing department independent of the accounting, receiving, and shipping departments? ___ 6. Is the accounts payable detail ledger balanced periodically with the general ledger control account? ___ 7. Does the accounting manual give instructions to date purchase entries on the date of receipt of goods? ___ 8. Are shipping documents authorized and prepared for goods returned to vendors? ___ 9. Is the accounts payable department notified of goods returned to vendors? Answer: 1. C or E, 2. B, 3. C, 4. B, 5. A, 6. F, 7. C, 8. B, 9. C 42. After checks are signed for vendor invoices, why should vouchers be marked "paid" or otherwise mutilated? Answer: To show they have been processed so they cannot be paid again. 43. This question requires knowledge of specific account balance assertions, general audit procedures, and trade accounts payable. You are assigned to audit the trade accounts payable of the Green Corporation, whose business is wholesale and retail trade. The company purchases products from 1,002,000 manufacturers ("vendors") and sells the products to its retail and wholesale customers. The general ledger shows a trade accounts payable control account balance as of the balance sheet date in the amount of $42 million (which is 70% of current liabilities, 50% of total liabilities, and 35% of total liabilities and owners' equity). Green's management accountants post the summary entries from the purchases journal and from the cash disbursements journal each month to the accounts payable control account. The accounts payable manager gave you a detailed trial balance that lists all the recorded unpaid invoices (recording date, vendor name, vendor invoice number, invoice date, and amount), subtotaled by vendor. Other members of the audit team have already decided to assess control risk at the maximum for the accounts payable work. The engagement manager gave you last year's audit working papers but said the audit program was missing (!). Thus, the first part of your assignment is to write the audit program for audit of the Green Corporation trade accounts payable. Required: For each of the general assertions EXISTENCE OR OCCURRENCE, COMPLETENESS, and VALUATION OR ALLOCATION, write two or more specific audit procedures designed to produce evidence related to the trade accounts payable balance of $42 million. (HINTS: (1) For each of the three general assertions, think about a specific assertion before you write a procedure to gather evidence. (2) Write specific procedures as adaptations of the general audit procedures: recalculation, observation, confirmation, document examination, inquiry, scanning, analytical procedures. (3) Most procedures are two part statements: "Select a sample of... [identify the population]...and "do something"... [specify an action].) Answer: EXISTENCE OR OCCURRENCE: (1.) Select a sample of recorded accounts payable and send confirmations to vendors. (2.) Select a sample of recorded accounts payable and vouch them to vendor statements received after the balance sheet date. (3.) Other _______________________________________________ COMPLETENESS: (1.) Select a sample of small and zero account payable balances and send confirmations to vendors. (2.) Select a sample of (or scan) cash disbursements recorded after year-end and determine whether they should have been recorded as accounts payable at yearend. (3.) List unmatched vendor invoices and determine when the good were received. Determine whether the invoices should have been recorded at year-end. (4.) Scan the open purchase order file for old orders that might have been received. Trace to the purchases journal. (5.) Study the accounts payable trial balance for indications of untimely recording or omission of vendors' invoices. (6.) Other _______________________________________________ VALUATION OR ALLOCATION: (1.) Interview the accounts payable manager for information about disputed accounts payable. (2.) Audit the confirmations returned for evidence of disputed balances. (3.) Obtain written client representations on the payables total. (4.) Study the attorney's response letter for indication of disputed accounts payable. (5.) Other _______________________________________________ 44. When performing procedures in a search of unrecorded liabilities, auditors can utilize various sources of evidence/information (e.g., documents, files, management and clerical personnel). Required: List at least five, but not more than seven, sources of evidence/information for the search for unrecorded liabilities. (Do not write procedures. Do not take time to write about particular evidence that can be obtained or reasons for using the sources.) Answer: Inquiry of client personnel, open purchase order file, unmatched vendor invoices listing, the unmatched receiving reports, and cash disbursements from the accounting period following the balance sheet date. Other possible sources are vendor statements or confirmations.