Deck 12: Auditing the Purchases Cycle and Payroll Cycle

Question 1

A shipping report is one of the important documents and records used in processing purchase adjustments in traditional or Evaluated Receipts Settlement (ERS) systems.

Answer 1

True

Question 2

As inherent risk factors vary from industry to industry, from client to client, and from year to year, each audit should be identical to address unique risks.

Answer 2

False

Question 3

An entity's purchasing process consists of _______.

A)activities related to the acquisition of, and payment for, goods and services.
B)activities related to the selling of, and payment received for, goods and services.
C)repurchasing shares of stock from shareholders
D)refinancing loans and notes payable with a bank

Answer 3

activities related to the acquisition of, and payment for, goods and services.

Question 4

A Cash Disbursements Journal is a daily report showing checks written or electric funds transferred to vendors and amounts paid.

Question 5

A Purchase Return Authorization is a form showing the description, quantity, and other data pertaining to the goods the vendor has authorized the purchaser to return.

Question 6

The purchase cutoff test involves determining that purchase transactions occurring near the balance sheet date are recorded in the proper period.

Question 7

The expenditure process is particularly prone to a risk of employee fraud through unauthorized disbursements of cash

Question 8

Many frauds can be avoided with strong controls over the vendor master files, determining the appropriateness of support for payments to vendors before recording a liability (voucher), and the willingness to dispute inappropriate items with vendors.

Question 9

An approved vendor master file is a computer file containing pertinent information on vendors and suppliers that have been approved to purchase services from and make payments to.

Question 10

The transaction flow in a typical purchases process for a client purchasing goods includes approving purchases, shipping goods, recording purchases and recording accounts payable

Question 11

Electronic Invoice Presentment and Payment (EIPP) systems use an independent third party to settle business to business (B2B) transactions.

Question 12

Purchasing goods and services and making payments are NOT considered core purchase transactions.

Question 13

A cash disbursements journal is a daily report showing checks written or electronic funds transferred to vendors and amounts paid.

Question 14

A voucher is an external document indicating the vendor, the amount due, and payment terms for the purchases received.

Question 15

An entity's purchasing process consists of activities related to the acquisition of, and payment for, goods and services.

Question 16

A strong tone at the top about the importance of accurate financial reporting encourages the understatement of expenses and liabilities.

Question 17

The purchasing or procurement process involves selecting customers, establishing payment terms, negotiating contracts, purchasing goods, receiving goods, and recording of purchases and payment of liabilities.

Question 18

The first category of misstatements that is relevant to the purchasing and payroll cycles is "expense (payroll, selling, general, administration, other) recording issues."

Question 19

Prior experience in accounts payable turnover days combined with knowledge of current purchases can be useful in estimating current payables.

Question 20

Many Evaluated Receipt Systems (ERS) use Electronic Invoice Presentment and Payment (EIPP) systems.

Question 21

Relevant assertions relating to purchases of materials or goods are _______.

A)occurrence, completeness, accuracy, cutoff, classification
B)going concern, completeness, accuracy, cutoff, classification
C)occurrence, completeness, accuracy, cutoff, verifiability
D)occurrence, completeness, accuracy, comparability

Question 22

The net operating cycle represents _______.

A)the gross operating cycle reduced by accounts payable turnover days, the amount of time that an entity's customers will let it use trade credit before requiring payment for goods and services
B)the gross operating cycle reduced by accounts receivable turnover days, the amount of time that an entity's suppliers will let it use trade credit before requiring payment for goods and services
C)the gross operating cycle reduced by accounts payable turnover days, the amount of time that an entity's suppliers will let it use trade credit before requiring payment for goods and services
D)the gross financing cycle reduced by accounts payable turnover days, the amount of time that an entity's suppliers will let it use trade credit before requiring payment for goods and services

Question 23

Which of the following is in an assertion of relevant account balances of a key purchase transaction?

A)Valuation and allocation at historical cost
B)Accounts payable
C)Purchase returns and allowances
D)Purchase returns

Question 24

The purchasing or procurement process involves _______.

A)selecting customers, establishing payment terms, negotiating contracts, purchasing goods, receiving goods, and recording of purchases and payment of liabilities
B)selecting vendors, establishing payment terms, negotiating contracts, purchasing goods, receiving goods, and recording of purchases and payment of liabilities
C)selecting vendors, establishing payment terms, negotiating contracts, selling goods, receiving goods, and recording of purchases and payment of liabilities
D)selecting vendors, establishing payment terms, negotiating contracts, purchasing goods, shipping goods, and recording of purchases and payment of liabilities

Question 25

If a company is growing, it is common to expect purchases, inventory, and _______.

A)accounts receivable to grow at different rates
B)accounts payable to grow at different rates
C)accounts payable to grow at approximately the same rates
D)accounts receivable to grow at approximately the same rates

Question 26

For a manufacturer or retailer, the gross operating cycle is estimated by _______.

A)the average number of days it takes to turn over receivables and collect receivables
B)the average number of days it takes to turn over inventory and collect receivables
C)the average number of days it takes to turn over payables and collect receivables
D)the length of time it takes to request and receive funds for a loan

Question 27

With respect to the purchasing cycle, it is particularly important for the auditor _______.

A)to closely check the revenue and associated contra-revenue accounts
B)to be knowledgeable about the entity, the types of sales the entity makes, and how those sales support the earnings generation of the entity
C)to be knowledgeable about the entity, the types of purchases the entity makes, and how those purchases support the earnings generation of the entity
D)to determine the net realizable value of accounts receivable

Question 28

If discounts are taken for early payment, _______.

A)purchase discounts are deferred when recording the cash disbursement
B)purchase discounts are recorded when recording the cash disbursement
C)accounts receivable should be debited for the amount of the discount
D)accounts payable should be credited for the amount of the discount

Question 29

An entity's net operating cycle represents _______.

A)the time from using cash to purchasing goods or services to collecting cash from the sale of goods or services
B)the time from receiving cash to purchasing goods or services to collecting cash from the sale of goods or services
C)the time from using cash to selling goods or services to collecting cash from the sale of goods or services
D)the time from using cash to purchase property, plant, and equipment to collecting on the sale of receivables.

Question 30

Which of the following refer to making payments?

A)Cash disbursement transactions
B)Transactions
C)Net sale transactions
D)Purchase adjustments

Question 31

If a company receives goods but waits to record the transaction until a vendor's invoice is received, _______.

A)purchases and accounts payable will be understated
B)purchases and accounts payable will be overstated
C)purchases will be overstated and accounts payable will be understated
D)purchases will be understated and accounts payable will be overstated

Question 32

The purchasing or procurement process typically involves _______.

A)the revenue and receivables accounts
B)selecting vendors, establishing payment terms, negotiating contracts, selling goods, receiving goods, and recording of purchases and payment of liabilities
C)selecting vendors, establishing payment terms, negotiating contracts, purchasing goods, receiving goods, and recording of purchases and payment of liabilities
D)the revenue and cost of goods sold accounts

Question 33

Every business has _______.

A)different market forces that place differing demands on the company's cash flow
B)identical market forces that place differing demands on the company's cash flow
C)different market forces that place identical demands on the company's cash flow
D)identical market forces that place similar demands on the company's cash flow

Question 34

The "classification and understandability" assertion describing relevant disclosures is part of which of the following?

A)Key purchasing cycle assertions
B)Cash and purchase discounts
C)Purchase returns and allowances
D)Purchase transactions

Question 35

Purchasing/procurement is concerned with _______.

A)acquiring all of the goods and services that are vital to an organization
B)selling all of the goods and services that are vital to an organization
C)disposing of all of the goods and services that are vital to an organization
D)acquiring all of the goods and services that are vital to an organization's customers

Question 36

Key assertions relating to accounts payable account balances are _______.

A)existence, rights and obligations, completeness, valuation and allocation
B)existence, rights and obligations, truthfulness, valuation and allocation
C)existence, rights and obligations, going concern, valuation and allocation
D)presentability, rights and obligations, completeness, valuation and allocation

Question 37

For companies that purchase goods on account, the transaction should _______.

A)record purchases and accounts payable upon ordering of the goods
B)record purchases and accounts payable upon the receipt of goods
C)be input into the ledger by the auditor once it has been reviewed
D)overstate equity until the goods are paid for

Question 38

The rights and obligations assertion with respect to accounts payable relates to whether the _______.

A)accounts receivable reflect the recorded asset of the entity
B)accounts receivable reflect the recorded liability of the entity
C)accounts payable reflect the recorded liability of the entity
D)accounts payable reflect the recorded asset of the entity

Question 39

Purchases of inventory on credit should involve _______.

A)debits to inventory and credits to payables
B)debits to payables and credits to inventory
C)debits to payables and credits to expenses
D)debits to expenses and credits to cash

Question 40

Key assertions relating to relevant disclosures for payables are _______.

A)going concern, completeness, classification and understandability, accuracy and valuation
B)occurrence and rights and obligations, completeness, classification and understandability, accuracy and valuation
C)occurrence and rights and obligations, completeness, classification and understandability, note disclosure
D)credibility, completeness, classification and understandability, accuracy and valuation

Question 41

When auditors perform analytical procedures during the risk assessment for purchases and payables, they should _______.

A)develop a skill in analyzing the likely assertions that might be misstated based on the data
B)develop a skill in analyzing the likely assertions that might be correctly stated based on the data
C)specifically request the help of the internal auditors
D)report any misstatements immediately to the SEC

Question 42

A risk related to what can go wrong with respect to receiving goods is _______.

A)that purchases have been made from unauthorized vendors
B)that purchases have been made from authorized vendors
C)goods received may not have been ordered
D)goods received may have been ordered

Question 43

In assessing inherent risk for the purchasing process assertions, the auditor should consider pervasive factors that _______.

A)influence the understatement or overstatement of payables and expenses
B)influence the understatement of expenses only
C)influence the overstatement of payables only
D)lead to risk factors associated with purchases

Question 44

When reviewing the results of analytical procedures, the auditor needs to bring an appropriate level of _______.

A)professional skepticism
B)professional confidence
C)statistical sampling
D)nonstatistical sampling

Question 45

The category of misstatements relevant to the purchasing and payroll cycles that consists of error or irregularities in approach, theory, or calculation associated with the expensing of assets or understatement of liabilities is ______.

A)expense recording issues
B)liabilities and payables
C)accrual estimate failure
D)reserve recording issues

Question 46

Many clients build in redundant controls _______.

A)so if one control does not find a misstatement, another control will detect the problem
B)so if one control does not find a misstatement, another control will also not detect the problem
C)to increase automation and reduce human error
D)due to their large size and lack of communication across the organization

Question 47

The second category of misstatements is "_______," which includes the failure to record deferred revenue obligations or normal accruals.

A)liabilities, payables, reserves, and accrual estimate failure
B)expenses, payables, and reserves
C)expense recording issues
D)debt and equity issues

Question 48

Which of the following purchases must be managed aggressively to minimize inventory obsolescence?

A)Electronic computer manufacturing
B)Hotels and motels
C)Universities and colleges
D)Supermarkets and grocery stores

Question 49

The expenditure process is particularly prone to a risk of employee fraud through _______.

A)unauthorized receipts of cash.
B)authorized disbursements of cash.
C)unauthorized disbursements of cash.
D)authorized receipts of cash.

Question 50

In assessing inherent risk for purchasing process assertions, the auditor should _______.

A)rely on the opinions formed by the internal audit function
B)consider pervasive factors influencing the understatement or overstatement of payables and expenses.
C)consider pervasive factors influencing the understatement or overstatement of receivables and expenses.
D)consider pervasive factors influencing the correct statement of payables and expenses.

Question 51

A strong tone at the top about the importance of accurate financial reporting _______.

A)discourages the under accrual of expenses and liabilities
B)discourages the over accrual of expenses and liabilities
C)encourages the under accrual of expenses and liabilities
D)encourages the over accrual of expenses and liabilities

Question 52

Management and the auditor have to be alert to the risk of collusion with _______.

A)vendors and vendor kickbacks to employees
B)customers and vendor kickbacks to employees
C)customers and customer kickbacks to employees
D)vendors and vendor kickbacks to stockholders

Question 53

Many analytical procedures focus on _______.

A)the relationship between purchases and accounts payable
B)the relationship between purchases and accounts receivable
C)the relationship between sales and accounts payable
D)the relationship between sales and purchases

Question 54

Steps used in developing an audit strategy for management assertions include _______.

A)understanding the flow of transactions in a given transaction cycle
B)assessing whether controls exist to mitigate what can go wrong
C)determining an audit strategy at the assertion level
D)All of these answer choices are correct

Question 55

The quality of entity level controls is important to _______.

A)the ineffective functioning of transaction level controls
B)the effective functioning of transaction level controls
C)the differences between book and taxable income
D)the quantity of transaction level controls

Question 56

What is the procurement process?

A)A process that involves selecting vendors, establishing payment terms, negotiating contracts, purchasing goods, receiving goods, and recording of purchases and payment of liabilities.
B)A process in which a significant increase in the current ratio compared to prior years' experience may indicate completeness problems.
C)A process in which a significant decline in payables as a percent of total assets may indicate completeness problems.
D)The purchase returns process involving return of goods.

Question 57

A risk related to what can go wrong with respect to authorizing purchases relates to _______.

A)purchases being made from unauthorized vendors
B)purchases being made from authorized vendors
C)goods received that were not ordered
D)foods ordered that have not been received

Question 58

When an auditor updates his or her understanding of the entity and its environment, _______.

A)each audit should be viewed identically to previous audits
B)each audit should be viewed independently from previous audits
C)each audit should be viewed with respect to the current audit of other clients
D)the auditor should be sure that senior management agrees with the auditor's understanding, and modify appropriately if not

Question 59

Pervasive factors that might motivate management to misstate purchases process assertions include _______.

A)pressure to understate expenses in order to report achieving announced profitability targets or industry norms, which were not achieved in reality
B)pressure to understate payables in order to report a higher level of working capital when the entity is experiencing liquidity problems
C)pressure to understate payables in order to report a higher level of working capital when the entity is experiencing going concern doubts
D)All of these answer choices are correct

Question 60

Which of the following may NOT be significantly affected by price increase for purchased goods?

A)Purchases made by colleges, universities, and professional schools
B)Purchases made by hotels and motels
C)Purchases made by supermarkets
D)Purchases made by electronic computer manufacturing firms

Question 61

Upon the receipt of goods, _______.

A)the purchaser should match the goods shipped per the receiving report, to the purchase order, and advanced shipping notice (ASN)
B)the purchaser should match the goods received per the receiving report, to the purchase order, and advanced shipping notice (ASN)
C)the client should immediately debit the payable account and credit the cash account
D)the client should accrue a related receivable

Question 62

Why does the client prepare independent bank reconciliation?

A)To check for the completeness, existence, and valuation of cash balances
B)To check accounts payable
C)To record purchase returns and allowances
D)To validate purchase returns

Question 63

A company should make all payments by _______.

A)cash
B)check or electronic funds transfer
C)cash or electronic funds transfer
D)liquidating investments

Question 64

Which of the following describes a purchases database?

A)Electronic files that accumulate data on purchases, accounts payable, and cash disbursements.
B)The check (EFT) information with purchase order and receiving.
C)The check (EFT) information with the underlying information on the voucher.
D)Electronic files that contain information on the cash disbursements journal with the related voucher information.

Question 65

The master vendor file should be reviewed _______.

A)on a regular basis to remove old vendors or potential duplicate vendors
B)every five years to remove old vendors or potential duplicate vendors
C)on a regular basis to remove new vendors or potential duplicate vendors
D)every five years to remove new vendors or potential duplicate vendors

Question 66

Key assertions related to cash disbursements are _______.

A)completeness, occurrence, accuracy, and cutoff
B)verifiability, occurrence, accuracy, and cutoff
C)going concern, occurrence, accuracy, and cutoff
D)completeness, occurrence, accuracy, and comparability

Question 67

Which of the following assertions is tested by comparing information on the cash disbursements journal with the related voucher information?

A)Classification of cash disbursements
B)Cutoff of cash disbursements
C)Completeness of cash disbursements
D)Completeness, existence, and valuation of cash balances

Question 68

What is a voucher?

A)It is an internal document used to record a purchase on account and has information about the vendor, amount due, payment date, and due date.
B)It is an electronic file that accumulates data on purchases, accounts payable, and cash disbursements.
C)The journal of original entry where each purchase is recorded.
D)It is the bill from the vendor stating the number of items shipped or services rendered, the amount due, the payment terms, and the date billed.

Question 69

The cash disbursements process involves which two following sub-processes?

A)approving cash disbursements and recording cash disbursements.
B)approving cash receipts and recording cash disbursements.
C)approving cash disbursements and recording cash receipts.
D)approving cash receipts and recording cash receipts.

Question 70

The transaction flow in a typical purchasing process for a client purchasing goods includes _______.

A)approving purchases, shipping goods, and recording purchases and accounts payable
B)approving purchases, receiving goods, and recording purchases and accounts payable
C)approving purchases, receiving goods, and recording purchases and accounts receivable
D)approving sales, receiving goods, and recording purchases and accounts receivable

Question 71

Which of the following is included in a three-way match?

A)Voucher
B)Accuracy of purchases
C)Receiving report
D)Occurrence of purchases

Question 72

When management grants greater latitude to a department in initiating transactions, _______.

A)strong budget and accountability controls over a department's expenditures are usually established
B)weak budget and accountability controls over a department's expenditures are usually established
C)strong budget and accountability controls over a department's receipts are usually established
D)weak budget and accountability controls over a department's receipts are usually established

Question 73

A treasury or cash management function is responsible for determining that _______.

A)unpaid payables are processed for payment on their due dates
B)paid payables are processed for payment on their due dates
C)unpaid receivables are processed for payment on their due dates
D)unpaid dividends are processed for payment on their due dates

Question 74

The purchase requisition is often prepared _______.

A)manually, and it represents the end of the transaction trail of documentary evidence in support of management's assertion of occurrence of purchase transactions
B)electronically, and it represents the end of the transaction trail of documentary evidence in support of management's assertion of occurrence of purchase transactions
C)electronically, and it represents the start of the transaction trail of documentary evidence in support of management's assertion of occurrence of purchase transactions
D)manually, and it represents the start of the transaction trail of documentary evidence in support of management's assertion of occurrence of purchase transactions

Question 75

If the purchasing department establishes strong controls over putting authorized vendors on an authorized vendor list, _______.

A)it is easy for employees to initiate transactions with fictitious vendors
B)it is difficult for employees to initiate transactions with fictitious vendors
C)it is difficult for employees to initiate transactions with legitimate vendors
D)it is easy for employees to initiate transactions with legitimate vendors

Question 76

Common documents and files that are found in the process of buying goods include_______.

A)purchase requisition
B)approved vendor master file
C)purchase order
D)All of these answer choices are correct.

Question 77

The client should receive both a bank statement from the bank and a statement from vendors on a _______.

A)weekly basis
B)quarterly basis
C)monthly basis
D)yearly basis

Question 78

The accuracy of purchases can be verified by which of the following processes?

A)A computer starts with the population of daily vouchers and compares quantities with the underlying receiving report, compares prices to the underlying purchase order, and checks the mathematical accuracy of the voucher.
B)A computer starts with the population of daily receiving reports and develops a one for one match with vouchers to ensure that each receiving report results in a voucher (the recording of a payable).
C)A computer starts with the population of daily vouchers and compares the date on the voucher with the date on the underlying receiving report.
D)Identifying what can go wrong (WCGW) from initiating the transaction to recording it in the general ledger.

Question 79

The cash disbursements process involves the following sub-processes: _______.

A)approving cash receipts and recording cash disbursements.
B)approving cash disbursements and recording cash disbursements.
C)approving cash receipts and recording cash receipts.
D)approving payables disbursements and recording cash disbursements.

Question 80

In the United States, many businesses _______.

A)continue to write checks to stockholders for payment of goods received
B)continue to write checks to vendors
C)continue to write checks to their customers
D)continue to write checks to employees in order to account for cost of goods sold