Deck 11: Auditing Inventory, goods and Services, and Accounts Payable: the Acquisition and Payment Cycle

Question 1

A purchase order identifies the quantity and description of products that have been received.

Answer 1

False

Question 2

Analytical review of related expense accounts when auditing accounts payable would be used when control risk is assessed as low.

Answer 2

True

Question 3

Inventory turnover is often calculated by the auditor for proper disclosure in client financial statements.

Answer 3

False

Question 4

Reconciliation of vendor statements to recorded payables provides assurance related to the completeness assertion.

Question 5

In an audit where there is a heightened risk of fraud related to inventory,the auditor may want to observe all inventory locations simultaneously.

Question 6

An individual outside of the purchasing department should be the only individual with access to the vendor tables in the database.

Question 7

Most organizations use a perpetual inventory system to manage inventory.

Question 8

The major accounts in the acquisition and payment cycle are inventory,cost of goods sold,accounts payable,and other expense accounts.

Question 9

The acquisition and payment cycle includes processes for identifying products or services to be acquired,purchasing goods and services,receiving the goods,approving payments,and paying for goods and services received.

Question 10

Management may intentionally misstate inventory balances by overvaluing items that are obsolete.

Question 11

Approval of items for payment usually involves a three-way match among the vendor invoice,the purchase order,and the receiving report.

Question 12

A major control benefit of a centralized purchasing department is the segregation of the authorization function from the custody and recording functions.

Question 13

The use of analytical review procedures applied to related expense accounts would not be used to determine if accounts payable were understated.

Question 14

The acquisition process begins with a purchase of goods or services.

Question 15

The auditor's primary concern with accounts payable is that of existence.

Question 16

Supply chain management has helped many companies improve the efficiency of operations.

Question 17

A networked software system linking a company's Web site to other vendors whose offerings and prices have been preapproved by appropriate management is call an automated purchasing system.

Question 18

The purchasing department should make sure that only authorized goods are received,the goods meet order specifications,an accurate count of the goods received is taken,and that accountability is established to assure that all receipts are recorded.

Question 19

For proper control,the receiving department should receive a copy of the purchase order that has the quantities blanked out.

Question 20

An indication of potential inventory fraud is that inventory levels are growing faster than sales.

Question 21

The inventory observation is performed for the purpose of determining the accuracy of client counting procedures.

Question 22

Testing cash disbursements subsequent to the year under audit allows the auditor to determine certain payables that may not have been recorded previously.

Question 23

Many frauds are committed by overstating inventory accounts.

Question 24

Sources of information regarding a client's inventory obsolescence can be partially noted during the inventory observation.

Question 25

When auditing accounts payable,the auditor would most likely review a sample of cash disbursements throughout the year end to determine whether disbursements for goods and services are applicable to the subsequent year.

Question 26

Valuation is the most complex assertion related to inventory.

Question 27

Legal expenses are reviewed by auditors for possible litigation and related FAS 5 treatment.

Question 28

The cash account is not part of the acquisitions and payment cycle.

Question 29

Prenumbered receiving documents establish the completeness of the population and are useful in determining that all goods are recorded in the correct period.

Question 30

The acquisition cycle begins with the receipt of goods and services and ends with their payment as reflected in cash disbursements.

Question 31

In order to gain an understanding of internal controls,an auditor will use walkthrough of the process,inquiry,observation,and review of the client's documentation.

Question 32

During the counting process of inventory,the client arranges not to ship or receive goods or segregates all goods received during the process to be labeled and counted as "after inventory."

Question 33

The auditor may test a manufacturing client's cost system to substantiate the valuation of inventory.

Question 34

Inventory may become obsolete because of technological advances even though there are no signs of physical wear.

Question 35

The auditor tests significant repairs and maintenance expenses to ensure that an item that should be capitalized has not been expensed.

Question 36

Test counts are performed by the auditor to give the impression of control and they are not used for substantive testing.

Question 37

The lower of cost or market assumption is not important to valuation of inventory.

Question 38

Proper internal control over the inventory account would require that inventory items should be reviewed for obsolescence and proper accounting treatment.

Question 39

The auditor is required by generally accepted accounting principles (GAAP)to observe the taking of physical inventory.

Question 40

Generally accepted auditing standards (GAAS)require the auditor to observe the taking of the physical inventory at year-end.

Question 41

In computerized purchase operations the computer matches three documents,the purchase order,the receiving report,and the monthly statement,and if the three match within a prespecified tolerable limit,the invoice is approved for payment.

Question 42

The tracing of a sample of receiving reports through the recording process tests the completeness assertion.

Question 43

Reduction of the risk of understated payables can be accomplished by focusing on which assertion?

A)Existence.
B)Rights.
C)Presentation and disclosure.
D)Completeness.

Question 44

The acquisition and payment process consists of each of the following phases except which of the following?

A)Receipts of goods and services.
B)Approval of items for payment.
C)Application of cash receipts.
D)Authorized request for goods and services.

Question 45

Which of the following would meet the need for additional control procedures when using computer-generated purchase orders?

A)Establishment of a maximum quantity limits that can be ordered within a given time period.
B)Automated acceptance for high dollar levels.
C)Purchase order copies sent by purchasing to receiving.
D)Accounts payable department entering new vendors into the system.

Question 46

Which of the following is NOT an example of fraud in the acquisition and payment cycle?

A)Theft of inventory by employees.
B)Inventory shrinkage.
C)Large manual adjustments to inventory accounts.
D)Excess inventory because of a production slowdown.

Question 47

During your audit of Brown Company you are trying to determine whether all accounts payable were recorded.Which assertion are you gathering evidence for?

A)Occurrence.
B)Presentation and Disclosure..
C)Completeness.
D)Valuation or allocation.

Question 48

The internal control that requires that "checks are pre-numbered and accounted for" satisfies which assertion?

A)Accuracy.
B)Existence.
C)Completeness.
D)Posting and summarization.

Question 49

What is the primary reason for management's ability to easily overvalue inventory without rapid detection by auditors?

A)The limited volume of transactions in the inventory accounts.
B)The auditor's assessment of inventory as a low-risk area.
C)Complexity in the valuation of inventory.
D)Consideration by the auditor of non-financial indicators of inventory fraud.

Question 50

Accounting for inventories is a major consideration for many companies because of its significance to which of the following financial statements?

A)Balance sheet.
B)Income statement.
C)Accounts receivable statement.
D)Both A and B.

Question 51

When a purchasing agent benefits personally by accepting payment from a vendor,the purchasing agent is guilty of which of the following?

A)Performing kiting.
B)Committing embezzlement.
C)Receiving kickbacks.
D)Stealing company assets.

Question 52

Which of the following is an example of a reasonableness test?

A)Estimate the account balance and determine whether that amount is close to what the client recorded.
B)Inquire whether significant changes have been made.
C)Tour the production facilities.
D)Send confirmations to major vendors.

Question 53

Stable relationships are expected between specific accounts (for example,cost of goods sold and sales)that can be investigated for unusual discrepancies.

Question 54

Which of the following is an example of the type of analytics that an auditor would use for inventory?

A)Number of day's sales in receivables compared to industry averages.
B)Inventory turnover for the previous five years.
C)Number of obsolete units this period compared to last.
D)Salaries of marketing personnel as a percent of total inventory.

Question 55

Which of the following management assertions is NOT relevant to inventory?

A)Existence or occurrence.
B)Completeness.
C)Rights and obligations.
D)Reporting.

Question 56

Substantive tests of accounts payable and related expense accounts for valuation usually involve simply verifying the mathematical accuracy of the accounts,and agreeing them to general ledger and supporting documentation.

Question 57

Which of the following is not a rationale that purchasing is a separate function in many organizations?

A)Purchasing promotes efficiency and effectiveness.
B)Purchasing eliminates potential favoritism.
C)Purchasing reduces the opportunity for fraud.
D)Purchasing decentralizes control.

Question 58

In observing the client's inventory at year-end the auditor makes test counts that are later traced into the client's inventory compilation.

Question 59

Which of the following accounts is NOT a major account in the acquisition and payment cycle?

A)Inventory.
B)Cost of goods sold.
C)Accounts payable.
D)All of the above are major accounts.

Question 60

Which of the following signals a potential fraud that may occur for the overstatement of inventory accounts?

A)Reserves for contingencies are reducing rapidly.
B)Inventory amounts are growing faster than sales.
C)Repairs and maintenance accounts have significant credit entries.
D)The purchase of manufacturing equipment is occurring at a rapid rate.

Question 61

A risk to the auditor due to the complexity of physical inventory includes the possibility of which of the following?

A)Overstatement of individual items across multiple locations for cutoff testing.
B)Utility of the items exceeding their cost for existence testing.
C)Movement of goods during existence testing.
D)Stocking of only one type of inventory in the warehouse for presentation and disclosure testing.

Question 62

The auditor may discover that the recorded cost of inventory exceeds the designated market price when testing which assertion?

A)Existence.
B)Cutoff.
C)Valuation.
D)Rights.

Question 63

An internal control benefit of centralized purchasing in an organization includes which of the following?

A)Separation of authorization from the custody and recording function.
B)Favorite vendors used multiple times.
C)Increased compensation of agents through side agreements.
D)Mathematically accurate vendor invoices.

Question 64

Which of the following procedures would the auditor perform in testing the completeness assertion for accounts payable?

A)Examine a sample of cash disbursements made after year end to determine whether the disbursements were for goods applicable to the previous year.
B)Reconcile vendor's statements with the accounts receivable trial balance.
C)Examine production equipment for useful lives.
D)Gather purchase orders immediately previous to and subsequent to year-end.

Question 65

Which of the following is NOT a procedure that the auditor should perform related to the physical inventory count?

A)Document the first and last tag numbers used.
B)Take notations of all items that appear to be obsolete or are in questionable condition.
C)Make counts of all items and record the counts for subsequent tracing into the client's inventory compilation.
D)Observe whether there is any physical movement of goods during the counting of the inventory.

Question 66

When auditing expense accounts,which of the following would the auditor be least likely to subject to a detailed test of transactions?

A)Legal expense.
B)Utilities expense.
C)Repairs and maintenance expense.
D)Travel expense.

Question 67

Which of the following is a reason why an automated purchasing system is beneficial?

A)Apply preloaded specifications and materials lists to the system to start the process.
B)Automatically flag invoices that do not reconcile with purchase orders.
C)Create change orders and analyze variances from purchase orders.
D)All of the above.

Question 68

A primary feature of automated control in the acquisition cycle includes which of the following?

A)That authorization is no longer required.
B)Limits as to the number of items that can be received by the warehouse.
C)Calculated order quantities based on set criteria.
D)Funds transfer at the request of the controller.

Question 69

Bar code scanning may best be utilized in the receiving process to accomplish which of the following?

A)Identify goods arriving automatically in conjunction with a count.
B)Notify the shipper that product has arrived.
C)Order new items on behalf of the purchasing department.
D)Record inventory that has been written off the books.

Question 70

Which of the following is NOT a reason why inventory is a complex accounting and auditing area?

A)Diversity of items in inventory.
B)Low volume of activity.
C)Easily transportable.
D)Difficulty in applying the lower of cost or market principle.

Question 71

Which assertion has the greatest emphasis when auditing accounts payable?

A)Existence.
B)Completeness.
C)Presentation.
D)Disclosure.

Question 72

Which of the following is NOT a system of internal financial accounting controls for inventory?

A)Authorization for all purchases.
B)Proper accounting for receipt of inventory.
C)Perpetual inventory system.
D)Rapid introduction of new products without market studies.

Question 73

Why should the client's legal expenses be examined?

A)To compare with previously released attorney's letters.
B)To determine the types of fraud occurring in the organization.
C)To ensure proper recording of vendor payables.
D)To determine if there is any litigation pending or threatened.

Question 74

Which of the following would the auditor most likely do when testing the valuation assertion?

A)Confirm inventory on consignment.
B)Examine receiving reports for inventory,tracing the recorded amounts.
C)Observe the taking of physical inventory.
D)Trace raw material purchases to vendor invoices.

Question 75

A perpetual inventory system is preferable to a periodic system if adequately controlled and maintained because of which of the following?

A)It requires that a full inventory count be taken at year-end by all warehouse employees.
B)It allows management to calculate cost of goods sold at year end.
C)It provides information to management where book inventory is continuously in agreement with inventory on hand within specified time periods.
D)It better controls the receipt of goods.

Question 76

Which of the following would the auditor most likely do when testing the existence assertion for inventory?

A)Observe the client's count of the annual physical inventory and test count.
B)Review vendor invoices for the amounts recorded.
C)Perform year-end tests of invoices received in the final month.
D)Trace raw material purchases to invoices and to the general ledger.

Question 77

Which of the following procedures will usually be performed by the auditor to actively determine obsolete inventory?

A)Confirmation of inventory with customers.
B)Footing the inventory subsidiary ledger.
C)Tracing inventory ordered by the client to receiving reports.
D)Analysis of inventory turnover and sales reports.

Question 78

Which one of the following accounts would an auditor most likely test by performing analytical procedures?

A)Sales commissions expense.
B)Legal expenses.
C)Repairs and maintenance expense.
D)Travel expense.

Question 79

Please indicate the proper sequence of the acquisition cycle: 1.Approval of items for payment. 2.Authorized requisition for goods or services. 3.Cash disbursements. 4.Receipt of goods and services. 5.Authorized purchase of goods or services.

A)2,5,4,1,3
B)2,4,5,1,3
C)2,1,4,5,3
D)2,5,1,4,3

Question 80

An auditor may best test commissions expense for salespeople when control risk is low by performing which of the following procedures?

A)Analytical procedures.
B)Tagging and tracing.
C)Alternative procedures.
D)Subsequent proof of cash.