Deck 13: Audit of the Acquisition and Payment Cycle

Question 1

When automatic purchase orders are generated, to help make sure that goods are ordered for products that the company still needs, the company should

A) have all purchase orders approved by the purchasing manager.
B) have suppliers automatically replenish the shelves.
C) ensure that re-order points are monitored.
D) have receiving reports matched to the purchase order amounts.

Answer 1

C

Question 2

One of the ways to prevent the use of fictitious suppliers to steal company funds is to

A) have adequate network access controls to prevent unauthorized access to transaction files.
B) ensure that accounts payable programs are available only in source code.
C) establish controls to establish only approved vendors.
D) reconcile the accounts payable trial balance to the general ledger.

Answer 2

C

Question 3

The major balance sheet account in the acquisition and payment cycle is

A) accounts payable.
B) purchases.
C) merchandise inventory.
D) common stock.

Answer 3

A

Question 4

After the supplier master file data has been entered, to best improve internal controls the

A) supplier master file data should be matched to the accounts payable files.
B) transaction file detail should be matched to the supplier master file.
C) data entry should be independently verified.
D) accounting department should file the new supplier authorization form sequentially.

Question 5

One of the ways to prevent the use of fictitious suppliers to steal company funds is by

A) having adequate network access controls to prevent unauthorized access to transaction files.
B) ensuring that accounts payable programs are available only in source code.
C) having software automatically check for duplicate invoice numbers before payment.
D) having authorized personnel carefully scrutinize documentation supporting payments.

Question 6

Segregation of duties has an important role in providing for good quality internal controls. Which of the following segregation of duties improve controls over the inventory and distribution cycle?

A) the purchasing department should not be responsible for updating the economic order quantity
B) the accounting staff should not be responsible for the data entry of supplier invoice detail
C) the inventory transaction processing systems should not be accessible to the receiving department
D) the purchasing department should not be responsible for authorizing the acquisition of or receiving the goods

Question 7

When accounts payable and purchasing systems are highly automated, more detail is included in the transaction files. This deeper level of detail is illustrated by including

A) economic order quantities for each item that is held in inventory, including delivery times.
B) quantities, prices, and item descriptions from each line of the supplier invoice.
C) sequentially numbered purchase requisitions and purchase orders (with matching numbers).
D) having receiving report numbers match the numbers on the supplier invoices for improved tracking.

Question 8

A) Describe each of the five business functions that comprise the acquisition and payment cycle.
B) Describe the key documents used in processing purchase orders for the acquisitions and payment cycle.
C) Discuss the key documents and records used in recognizing the liability function in the acquisitions and payment cycle.

Question 9

Which of the following areas are tested as part of the audit of the acquisition and payment cycle?

A) payment for raw materials, receipt of raw materials, shipment of goods to customers
B) processing of sales orders, production of goods for clients, and subsequent invoicing
C) processing supplier invoices, vendor master file changes, shipment of goods to customers
D) processing purchase orders, vendor master file changes, receiving goods and services

Question 10

Many companies have inventory that is easy to steal and is readily marketable. Which of the following controls helps to prevent theft and misuse of inventory?

A) physical control of inventory from time of receipt until use
B) proper access controls over the inventory master and transaction files
C) dual signatures required on all purchase orders over $10 000
D) purchase requisitions are to be approved by the production manager

Question 11

One form of accounts payable fraud occurs when the accounts payable clerk or another employee steals a cheque made payable to a legitimate vendor. The purchaser's information is then resubmitted for payment and the second cheque sent to the vendor. How could such a theft be prevented?

A) Cancel supporting documents to prevent their being re-used.
B) Make sure that all payments are supported by valid documents.
C) Reconcile the transaction files to the accounts payable master file.
D) Have receiving reports authorized independently.

Question 12

The proper recognition of accounts payable liabilities are crucial to ensure fair statement of the ending accounts payable balance. What documents are required to adequately support accounts payable?

A) receiving reports and bill of lading documents that indicate dates shipped
B) bill of lading documents matched to the internal purchase requisition
C) purchase requisition (authorized) matched with the purchase order to the supplier
D) supplier invoices matched to receiving reports and authorized purchase documents

Question 13

ZyCo has recently converted to a new online accounts payable system. To test that only authorized vendors have been converted to the vendor master file (occurrence), the auditor would

A) conduct cutoff tests for receiving reports and vendor invoices.
B) on a test basis, agree vendor file details for each vendor from the new (online) system to the old (batch) system.
C) on a test basis, agree vendor file details for each vendor from the old (batch) system to the new (online) system.
D) conduct tests of programs to verify that programs in the new systems are functioning as designed.

Question 14

To ensure that goods and services acquired are for authorized company purposes, and to help acquire only needed items

A) receiving reports should be independently signed and reconciled to the purchase order.
B) proper authorization for acquisitions and changes to the master file should take place.
C) purchase requisitions should be approved and matched to purchase orders.
D) account allocations of vendor invoices should be carefully checked.

Question 15

To protect against theft of physical assets (such as computer equipment), the company should

A) assign computers to specific individuals at the company.
B) assign computers to specific areas within the company.
C) use strong access controls (such as login passwords) to prevent access.
D) have equipment engraved or otherwise permanently labelled and a subsidiary ledger maintained.

Question 16

An important control in the accounts payable and information systems departments is to require that those personnel who record acquisitions do not have access to

A) lists of vendors' names and addresses.
B) cash, marketable securities, and other assets.
C) vendors' price lists.
D) the accounts payable master file.

Question 17

Before a new supplier is added into the supplier master file (or the purchasing master file), the company should

A) conduct a credit check on the new supplier.
B) have the supplier detail matched against the invoice detail.
C) ask the purchasing manager to verify the authenticity of the supplier.
D) have the accounting department enter the necessary detail about the supplier.

Question 18

A document identifying the description, supplier, quantity, and related information for goods and services the company intends to purchase is the

A) purchases catalogue.
B) purchase requisition.
C) receiving report.
D) purchase order.

Question 19

The purchase order, usually in writing, is a legal document that is

A) a non-binding agreement between client and vendor.
B) an offer to buy.
C) not enforceable if it is not in writing.
D) an acceptance of a vendor's catalogue offer to sell.

Question 20

The most common fraud in the acquisitions area is for the perpetrator to

A) alter the cheque payment file before it is printed so that the payee name is changed.
B) issue payments to fictitious vendors and deposit the cheques to a fictitious account.
C) change the optical characters at the bottom of a cheque to alter the account to be credited.
D) issue duplicate payments for invoices and then pocket the second cheque.

Question 21

Which of the following controls help to ensure that the receipt of raw materials for inventory is recorded in the correct period?

A) Supplier details are automatically retrieved from the supplier master file.
B) Receiving staff write down the date goods are received on the bill of lading.
C) Accounting staff record the date that goods are received in the accounting systems.
D) The transaction date entered must be the same as the system date.

Question 22

The internal control objective to determine that "existing acquisition transactions are recorded" describes the objective of

A) occurrence.
B) classification.
C) completeness.
D) accuracy.

Question 23

The test of details of balances procedure to "inspect the accounts payable trial balance and master file for related parties, notes, or other interest-bearing liabilities" satisfies the objective of

A) existence.
B) completeness.
C) classification.
D) detail tie-in.

Question 24

The main focus taken by the auditor in verifying liability balances is on the discovery of

A) liabilities posted to the wrong account.
B) overstated liabilities.
C) understated or omitted liabilities.
D) overstated or extraneous liabilities.

Question 25

The test of transactions that requires the recomputing of cash discounts satisfies the objective of

A) occurrence.
B) completeness.
C) accuracy.
D) posting and summarization.

Question 26

Because many of the types of errors and irregularities that may be found in the acquisition and payment cycle represent a misstatement of earnings and are of significant concern to the auditor, the tolerable exception rate selected by the auditor for attribute testing of this cycle will be

A) low.
B) high.
C) average.
D) 15% or less.

Question 27

The internal control that requires "new vendors and changes to vendor file be approved" satisfies the objective of

A) occurrence.
B) completeness.
C) accuracy.
D) posting and summarization.

Question 28

The analytical procedure that requires the auditor to "inspect the list of accounts payable for unusual or non-vendor payables" would have the best chance of discovering which possible error?

A) misstatement of accounts payable and expenses
B) classification error for non-trade liabilities
C) unrecorded accounts or misstatements
D) invalid accounts or misstatements

Question 29

When processing and recording cash disbursements, it is important to have a method of cancelling the supporting documents to prevent their reuse as support for another cheque at a later time. A common method is to

A) shred the documents so they can't be reused.
B) transfer possession of the documents to a bank vault such as a safety deposit box.
C) move the documents to a permanent off-site facility such as a warehouse.
D) write the cheque number and payment date on the supporting documents.

Question 30

Comparing expenses to prior years is an effective analytical procedure for accounts payable because expenses from year to year are

A) relatively stable.
B) erratic.
C) variable.
D) dynamic.

Question 31

The internal control that requires "approval of acquisitions at the proper level" satisfies the objective of

A) occurrence.
B) completeness.
C) accuracy.
D) posting and summarization.

Question 32

Because of the importance of tests of controls for acquisitions and cash disbursements, it is common in this audit area to use

A) attributes sampling.
B) variables sampling.
C) probability-proportional-to-size sampling.
D) block sampling.

Question 33

The internal control that requires an "independent verification of calculations and amounts" satisfies the objective of

A) occurrence.
B) completeness.
C) accuracy.
D) posting and summarization.

Question 34

An auditor learns that his client has paid a vendor twice for the same shipment, once based upon the original invoice and once based upon the monthly statement. A control procedure that should have prevented this duplicate payment is

A) attachment of the receiving report to the invoice only.
B) prenumbering of disbursement vouchers.
C) use of a limit or reasonableness test.
D) prenumbering of receiving reports.

Question 35

Which of the following situations would indicate increased inherent risk in the accounts payable and acquisition cycle?

A) good quality internal controls for cash handling
B) the use of packaged software for accounting (including accounts payable)
C) the use of clear, standard terms when negotiating supplier discounts
D) significant related party transactions

Question 36

Internal controls that are likely to prevent the client from including as a business expense those transactions that primarily benefit management or other employees rather than the entity being audited satisfy the control objective that

A) recorded acquisitions are for goods and services received.
B) existing acquisitions are recorded.
C) acquisitions are correctly valued.
D) acquisitions are correctly classified.

Question 37

ZyCo has recently converted to a new online accounts payable system. To test that all vendor balances have been converted to the vendor master file (completeness), the auditor would

A) conduct cutoff tests for receiving reports and vendor invoices.
B) on a test basis, agree vendor file details for each vendor from the new (online) system to the old (batch) system.
C) on a test basis, agree vendor file details for each vendor from the old (batch) system to the new (online) system.
D) conduct tests of programs to verify that programs in the new systems are functioning as designed.

Question 38

The control test that requires "the auditor to compare recorded transactions in the acquisitions journal with the vendor's invoice, receiving report, and other supporting documentation" satisfies the objective of

A) occurrence.
B) classification.
C) completeness.
D) accuracy.

Question 39

The internal control that requires receiving reports to be prenumbered and accounted for satisfies the objective of

A) occurrence.
B) classification.
C) completeness.
D) accuracy.

Question 40

Since the audit of accounts payable generally takes a considerable amount of audit time, effective and properly tested internal controls can significantly reduce audit costs by reducing

A) tests of controls.
B) confirmations.
C) tests of details of balances.
D) analytical procedures.

Question 41

The point at which most companies first recognize the acquisition and related liability on their records is when the

A) purchase requisition is completed.
B) purchase order is completed.
C) receiving report is completed.
D) vendor's invoice is paid.

Question 42

The purpose of the audit procedure to "examine underlying documentation for subsequent cash disbursements" is to

A) uncover liabilities on the balance sheet that should not have been recorded until a subsequent period.
B) find the documentation relating to a cash disbursement.
C) uncover payments made in a subsequent accounting period that represent liabilities at the balance sheet date.
D) uncover cash disbursements recorded in a subsequent accounting period that should be recorded in that period.

Question 43

An inventory acquisition is received late in the afternoon of December 31 after the physical inventory is completed. If the acquisition is included in accounts payable and purchases, but excluded from inventory, the result

A) is an understatement of net earnings.
B) is an overstatement of net earnings.
C) does not affect earnings.
D) is indeterminable from the information given.

Question 44

State each of the five specific transaction-related audit objectives for acquisitions and, for each objective, describe one common test of transactions.

Question 45

The tests of details of balances procedure for manufacturing equipment that requires the auditor to examine vendors' invoices of closely related accounts (such as repairs and maintenance) to uncover items that should be manufacturing equipment would satisfy the audit objective of

A) detail tie-in.
B) existence.
C) classification.
D) accuracy.

Question 46

The starting point for the verification of current-year acquisitions of manufacturing equipment is normally

A) the manufacturing equipment account in the general ledger.
B) the acquisitions journal.
C) the purchase requisitions file.
D) a client schedule of all acquisitions recorded during the year.

Question 47

In determining that the accounts payable cutoff is correct, it is essential that the cutoff tests be coordinated with the

A) confirmation of accounts payable.
B) tests on long-term liabilities.
C) observation of inventory.
D) cash count.

Question 48

When an acquisition is on an FOB (freight on board) origin basis, the inventory and related accounts payable must be recorded in the current period if the goods were

A) received prior to the balance sheet date.
B) shipped prior to the balance sheet date.
C) both shipped and received prior to the balance sheet date.
D) paid for.

Question 49

Describe the audit procedures typically used to test for out-of-period liabilities (also referred to as the search for unrecorded accounts payable).

Question 50

A set of records for each piece of equipment that includes descriptive information, date of acquisition, original cost, current year amortization, and accumulated amortization is the

A) capital asset master file.
B) file of purchase requisitions.
C) amortization schedule.
D) acquisitions journal.

Question 51

Estimated unpaid obligations for services or benefits that have been received prior to the balance sheet date are classified as

A) accounts payable.
B) accrued liabilities.
C) miscellaneous assets.
D) unearned revenues.

Question 52

Describe the three types of tests that need to be performed by the auditor when auditing a client's data conversion process.

Question 53

State six specific balance-related audit objectives for accounts payable and for each objective describe one common test of details of balances.

Question 54

The most important objectives for amortization expense are valuation and

A) accuracy.
B) classification.
C) cutoff.
D) understandability.

Question 55

A normal audit procedure is to analyze the current year's repairs and maintenance accounts to provide evidence in support of the audit proposition that

A) expenditures for capital assets have been recorded in the proper period.
B) capital expenditures have been properly authorized.
C) non-capitalizable expenditures have been properly expensed.
D) expenditures for capital assets have been capitalized.

Question 56

Ordinarily, it is unnecessary to test the valuation of capital assets recorded in prior periods because

A) it will not affect the current valuations.
B) they were verified in previous audits.
C) the related amortization calculations for the current period are more important.
D) the emphasis of the audit is on the income statement items, not the balance sheet items.

Question 57

The purpose of the audit procedure to "trace receiving reports issued before year-end to related vendors' invoices" is to determine that all

A) merchandise received is included in accounts payable.
B) merchandise received is included in inventory.
C) merchandise was received.
D) invoices have been paid.

Question 58

Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because

A) this is a duplication of cutoff tests.
B) accounts payable balances at the balance sheet date may not be paid before the audit is completed.
C) correspondence with the audit client's lawyer will reveal all legal action by vendors for nonpayment.
D) there is likely to be other reliable external evidence available to support the balances.

Question 59

It is normal for the auditor to verify large and unusual transactions for the entire year as well as a representative sample of typical additions. The size of the sample for substantive testing depends on the auditor's

A) sampling selection methodology used.
B) assessed control risk and assessed inherent risks.
C) understanding of the nature of internal controls.
D) availability of client resources to pull supporting documentation.

Question 60

When verifying current-year additions to manufacturing equipment, the two major objectives for this part of the audit are

A) accuracy and classification.
B) detail tie-in and cutoff.
C) disclosure and completeness.
D) rights and existence.

Question 61

Discuss the audit tests the auditor would use to audit capital assets acquired in prior years.

Question 62

Describe the two objectives that are most important in auditing accumulated amortization. Explain why these objectives are important.

Question 63

Discuss the key internal controls related to the disposal of manufacturing equipment.

Question 64

State each of the six specific balance-related audit objectives for manufacturing equipment additions and describe one common test of details of balances for each objective.