Deck 15: Auditing Purchases, Payables and Payroll

Question 1

The receiving department should be instructed to accept no goods without having on file a properly authorised:

A) purchase requisition.
B) invoice.
C) receiving report.
D) purchase order.

Answer 1

D

Question 2

Prior to recording purchases transactions, supplier's invoices are checked and approved in the accounts department. Controls over this function include all of the following except:

A) marking all supporting documentation as "paid".
B) approving the supplier's invoice for payment by having an authorised person sign the invoice.
C) agreeing the details of the supplier's invoice with the related receiving report and purchase order.
D) determining the mathematical accuracy of the supplier's invoice.

Answer 2

A

Question 3

Purchase orders become part of the transaction trail of documentary evidence that directly supports which assertion for purchase transactions?

A) existence or occurrence.
B) rights and obligations.
C) accuracy or valuation.
D) presentation and disclosure.

Answer 3

A

Question 4

Payroll functions include all of the following except:

A) hiring employees.
B) deciding on the number of workers required to work on a particular day.
C) preparing the payroll.
D) protecting unclaimed wages.

Question 5

Which of these is not directly affected by purchases and payments transactions?

A) plant assets.
B) work-in-process inventory.
C) accounts payable.
D) prepaid expenses.

Question 6

A responsibility not normally assigned to receiving department personnel is to:

A) compare goods received with description of goods ordered.
B) prepare a prenumbered receiving report for every order received.
C) enter cheque requisition data and verify the batch total.
D) file the purchase order copy pending arrival of goods.

Question 7

Segregation of the functions of payroll and personnel do all of the following, except:

A) reduce the risk of payments to fictitious employees.
B) reduce the risk of payments to terminated employees.
C) restrict the recording of new employee data to the payroll department.
D) restrict the payment of wages to the payroll department.

Question 8

Payroll functions include all of the following except:

A) preparing attendance and timekeeping data.
B) authorising payroll changes.
C) terminating employees.
D) all of the above are payroll functions

Question 9

A copy of the receiving report should be sent directly by the receiving department to the:

A) accounts (receivable) department.
B) chief financial controller
C) purchasing department.
D) accounts (payable) department.

Question 10

Responsibility for updating of the personnel data master file should rest with authorised employees in the:

A) personnel department.
B) payroll department.
C) controller's department.
D) employee's operating department.

Question 11

For the purchasing firm the processing of purchases and payment transactions requires all of the following functions except:

A) requisitioning goods and services.
B) preparing purchase invoices.
C) preparing the cheque requisition.
D) all of the functions are required.

Question 12

The quantity ordered may not be displayed on the copy of the purchase order sent directly to the:

A) requesting department.
B) vouchers payable department.
C) receiving department.
D) accounts receivable department.

Question 13

Controls over the preparation and signing of cheques include all of the following except:

A) authorised personnel in the accounting department should be responsible for signing the cheques.
B) the cheque requisition and supporting documents should be cancelled (stamped) when the cheque is signed.
C) the signed cheque and the supporting documents should be returned to the accounts payable clerk for review and mailing.
D) prenumbered cheques should be used.

Question 14

The specific audit objective "accounts payable are liabilities of the entity at the balance date" is derived from the:

A) completeness assertion.
B) valuation or measurement assertion.
C) presentation or disclosure assertion.
D) rights and obligations assertion.

Question 15

Wage rate increases should be authorised in writing by the:

A) payroll department.
B) personnel department.
C) finance department.
D) data entry department.

Question 16

A special supervisor's password is required in order to add a new employee to the personnel data master file. This control relates primarily to the:

A) existence or occurrence assertion.
B) completeness assertion.
C) presentation and disclosure.
D) valuation or measurement assertion.

Question 17

Controls specific to the recording of cash payments include which of the following?

A) an independent check by the accounting supervisor of the agreement of the amounts journalised and posted to accounts payable with the cheque summary received from the general accounts department
B) an independent check of the agreement of the total of cheques issued with a batch total of the vouchers processed for payment.
C) limits on access to blank cheques
D) all of the above.

Question 18

In most modern organisation employee timekeeping data is recorded via:

A) employee badges.
B) time-clock cards.
C) security identification cards.
D) sign-in/sign-off book.

Question 19

Responsibility for determining that unpaid supplier's invoices are processed for payment on their due dates generally lies with the:

A) warehouse department.
B) accounts department.
C) purchasing department.
D) internal audit department.

Question 20

A check by the auditor on the numeric sequence of prenumbered receiving reports to determine that a supplier's invoice was recorded for each relates to the:

A) existence or occurrence assertion.
B) completeness assertion.
C) presentation or disclosure assertion.
D) rights and obligations assertion.

Question 21

Identify key controls that ought to be in place for the preparation and signing of cheques.

Question 22

In witnessing a payroll distribution, the auditor would not be expected to observe that:

A) segregation of duties exist between the preparation and payment of payroll.
B) the correct payroll entries are made in the firm's ledger and journal
C) there is proper control and disposal of unclaimed cheques.
D) each employee receives only one cheque or pay envelope.

Question 23

An important consideration in assessing inherent risk for purchase transactions is any motivation management may have to misstate expenditure. Which of the following is not a factor that may contribute to misstatement?

A) the need to achieve announced profitability targets.
B) the need to disclose concern over control problems.
C) temptations for employees to make unauthorised purchases.
D) temptations for employees to misappropriate purchased assets.

Question 24

Which of these is not a procedure for identifying unrecorded liabilities?

A) examination of the subsequent period's purchase and payment transactions.
B) analytical procedures for expense and liability balances.
C) examination of contractual commitments.
D) confirmation of accounts payable.

Question 25

Test data may be used to test application controls over accepting and recording data for unpaid suppliers' invoices. Which of the following conditions would not be relevant:

A) numeric characters in an alphanumeric field.
B) missing or invalid supplier numbers.
C) missing due date or payment terms.
D) alphabetical characters in a numeric field.

Question 26

Which of the following is not a factor that tends to increase the inherent risk for purchases and payables?

A) the number of directors.
B) A high volume of transactions.
C) issues over costs being capitalised versus expensed
D) all are factors that tend to increase the inherent risk for purchases and payables.

Question 27

Factors relating to the internal control environment that the auditor needs to consider when assessing control risk for purchase, payment and payroll transactions include all of these except:

A) integrity and ethical values.
B) management's commitment to competence.
C) design of substantive procedures.
D) assignment of authority and responsibility.

Question 28

List three tests of details of balances for accounts payable and two for payroll balances.

Question 29

The batching of payroll documents is normally done in the:

A) timekeeping department.
B) payroll department.
C) data entry department.
D) personnel department.

Question 30

For proper control, unclaimed payroll cheques should be stored by the:

A) finance department.
B) payroll department.
C) personnel department.
D) timekeeping department.

Question 31

Tests of details of transactions for payables balances include:

A) vouching recorded payables to supporting documentation.
B) confirming payables with major suppliers by reviewing the accounts payable ledger or accounts payable master file.
C) comparing financial statement presentation with applicable regulations and accounting standards.
D) verifying directors' and executive officers' remuneration.

Question 32

A programmed routine in the edit run for payroll lists all employees who worked more than 50 hours during the week for review. This is an example of a:

A) reasonableness test.
B) validity test.
C) sequence test.
D) self-checking test.

Question 33

Controls applicable to paying the payroll and protecting unclaimed wages include all of the following except:

A) payroll cheques and bank transfers should be signed or authorised by finance office personnel involved in preparing or recording the payroll.
B) payroll cheques, where used should be distributed to employees by finance office personnel not involved in preparing or recording the payroll.
C) any unclaimed payroll cheques should be stored in a safe or vault in the finance office.
D) finance office personnel should check the agreement of the names and amounts on cheques or bank transfers with payroll register entries.

Question 34

Identify and describe three key issues relevant to the audit of purchases, payables and payroll.

Question 35

Confirmation of accounts payable will provide the least amount of evidence for the:

A) existence or occurrence assertion.
B) completeness assertion.
C) valuation or measurement assertion.
D) rights and obligations assertion.

Question 36

Which of these is not a source of potential misstatement for the function of recording a payment?

A) a cheque may be issued for unauthorised purchases.
B) a cheque may not be recorded promptly.
C) errors may be made in recording cheques.
D) all of the above are sources of potential misstatement for the function of recording a payment

Question 37

Which of the following is not an initial procedure for verifying accounts payable?

A) trace the opening balance to the prior year's working papers (if applicable).
B) review activity in the general ledger account for any unusual entries.
C) reconcile accounts to monthly supplier's statements.
D) obtain a listing of amounts owed at the balance sheet date.

Question 38

Which of these is the least likely risk factor for payroll?

A) Payments to fictitious employees.
B) Payments to actual employees for hours less than they worked.
C) Payment to actual employees for hours not worked.
D) Payments to actual employees at higher than authorised rates

Question 39

Following is a description of Out of Control corporations' inventory purchases process for skateboard wheels. Identify the weaknesses in the controls, and suggest possible improvements.
When stock falls below 100 the computer automatically produces a purchase requisition for more stock from the supplier. If there is a special promotion coming up, John (the marketing manager) might put in an extra purchase requisition for promotional stock. The computer numbers the dockets in sequence and sends them to the purchasing department.
The purchasing department issues a purchase order with their standard supplier when they receive an authorised purchase requisition. John used to work in purchasing, and is good friends with Frank who now manages the purchasing department. John sometimes covers a shift for Frank when he has a day off.
When the order arrives at the warehouse receiving dock, the purchase order is compared to the goods received: The personnel check that the right types of wheels are included, the right number of wheels is included, and that they are undamaged. They then prepare a prenumbered receiving report and forward it to accounting along with the suppliers invoice.
Accounting then enters the amounts from the supplier invoices into the system.

Question 40

Tests of details of balances for payables include all of the following except:

A) reconciling payables with monthly statements received by the entity from suppliers.
B) confirming accounts payable.
C) searching for unrecorded liabilities.
D) verifying directors' and executive officers' remuneration.

Question 41

With regards to control risk assessment for purchase transactions, align the potential misstatements in the following chart with their possible tests of operating effectiveness.
$$\begin{array} { | l | l | } \hline \text { Patential Misstatenent } & \text { Passible Tests d Operating Eifectiveness } \\\hline \begin{array} { l } \text { Goods rnay be requisitioned for urauthorised } \\\text { puposes. }\end{array} & \text { Inspect sigred irventory receipts. } \\\hline \begin{array} { l } \text { Purchases may be made for urauthorised } \\\text { puposes. }\end{array} & \begin{array} { l } \text { Exarnine supporting documentation for } \\\text { irvoices. }\end{array} \\\hline \text { Goods received may not have beer ordered. } & \begin{array} { l } \text { Exarnine receiving report for matchirg } \\\text { purchase order. }\end{array} \\\hline \begin{array} { l } \text { Stores clerks may deny taking custody of } \\\text { purchased goods. }\end{array} & \begin{array} { l } \text { Exarnine purchase orders far approved } \\\text { requisitions. }\end{array} \\\hline \begin{array} { l } \text { Irvoices may be recorded for goods not } \\\text { ordered. }\end{array} & \begin{array} { l } \text { Exarnirue evidence of independent check, or } \\\text { re-perfonm independent check }\end{array} \\\hline \begin{array} { l } \text { Irvoices may be recorded incorrectly or not } \\\text { recorded. }\end{array} & \text { Enquire about procedures. }\\\hline\end{array}$$

Question 42

1. On what basis are the tests of details of balances planned?
2. What are the stages in applying analytical procedures to payables?

Question 43

What could motivate management to misstate expenditures? What other factors may lead to misstatements?

Question 44

Identify the need for controls over hiring employees, authorising payroll changes and preparing attendance and timekeeping data.

Question 45

Explain the nature, and use, of an imprest payroll account.

Question 46

Why are directors' and executive officers' remuneration considered to be audit sensitive?
What procedure could be used to check directors' and executive officers' remuneration?