Deck 18: Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Accounts Payable

Question 1

After a purchase requisition is approved, a ________ must be initiated to purchase the goods or services.

A)purchase order
B)vendor order
C)call order
D)vendor invoice

Answer 1

A

Question 2

The overall objective in the audit of the acquisition and payment cycle is:

A)to ensure the reliability of the affected accounts.
B)to ensure the accuracy of the affected accounts.
C)to evaluate whether the affected accounts are fairly presented in accordance with accounting standards.
D)to evaluate whether fraudulent payments were made.

Answer 2

C

Question 3

The acquisition and payment cycle consists of one class of transactions.

Answer 3

False

Question 4

Which of the following business functions is not considered to be part of the acquisitions class of transactions?

A)Processing purchase orders
B)Recognizing liabilities
C)Receiving goods and services
D)Processing cash disbursements

Question 5

Which of the following accounts is not part of the acquisition and payment cycle?

A)Prepaid expenses
B)Accounts payable
C)Sales returns and allowances
D)Property, plant, and equipment

Question 6

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

Question 7

A document used by organizations to establish a formal means of recording and controlling acquisitions which usually contains a package of documents about the acquisition is the:

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

Question 8

The computer-generated file which records acquisitions, disbursements and allowances for each vendor is the:

A)Accounts payable master file.
B)Cash disbursements file.
C)Acquisitions transaction file.
D)Purchase approval file.

Question 9

Discuss each of the four business functions that comprise the acquisition and payment cycle.

Question 10

Which of the following accounts is not included in the acquisitions class of transactions?

A)Inventory
B)Prepaid expenses
C)Purchase discounts
D)Accounts payable

Question 11

Absent disputed amounts and minor timing differences, the vendor's statements should reconcile to the:

A)acquisition journal.
B)accounts payable master file.
C)cash disbursements amount for purchases.
D)vouchers payable amount for vendors.

Question 12

Smaller privately held companies may not maintain an accounts payable master file by vendor.These companies pay on the basis of:

A)vendors' monthly statements.
B)individual vendors' invoices.
C)the accounts payable account in the general ledger.
D)dunning letters.

Question 13

A document indicating a reduction in the amount owed to a vendor because of returned goods is:

A)a debit memo.
B)a credit memo.
C)a receiving report.
D)a contractual adjustment form.

Question 14

List the four business functions in the acquisition and payment cycle.

Question 15

Describe purchase requisitions and purchase orders.What is a key difference between the two documents?

Question 16

Auditing the acquisition and payment cycle often takes more time than any other cycle.

Question 17

A document generally received from the vendor which indicates a reduction in the amount owed due to the company granting an allowance is a:

A)vendor invoice.
B)debit memo.
C)credit adjustment form.
D)credit memo.

Question 18

What typically ends the acquisitions and payment cycle?

A)Issuance of a purchase requisition or request for purchase of goods/services
B)Issuance of a payment on accounts payable
C)Approval of a new vendor
D)Purchase requisition

Question 19

What typically initiates the acquisitions and payment cycle?

A)Issuance of a purchase requisition or request for purchase of goods/services
B)Issuance of payment to vendor
C)Approval of a new vendor
D)Purchase requisition

Question 20

Receiving reports are normally only used to document the receipt of goods and are not used to document the receipt of services.

Question 21

Which of the following is not a key control in the acquisition and payment cycle?

A)Authorization of purchases
B)Authorization of credit
C)Timely recording and independent review of transactions
D)Authorization of payments

Question 22

An auditor is gathering evidence on the completeness assertion.To do so she performs a test to verify that all goods received by the company have been recorded properly.The document population for this test would consist of all:

A)vendor invoices.
B)purchase orders.
C)receiving reports.
D)cash disbursements for accounts payables.

Question 23

A substantive tests of transactions for acquisitions that would be used to provide evidence regarding the occurrence assertion would be to:

A)compare the classification with the chart of accounts by referring to vendors' invoices.
B)recompute the clerical accuracy on the vendors' invoice.
C)review the acquisitions journal for large or unusual amounts.
D)trace from a file of receiving reports to the acquisition journal.

Question 24

The accounts payable department usually has responsibility for approving acquisitions for payment by comparing the details on the:

A)vendor's invoice and the receiving report.
B)vendor's invoice and the purchase requisition.
C)purchase order, receiving report, and vendor's invoice.
D)purchase requisition, purchase order, and receiving report.

Question 25

The auditor's internal control objective to determine that "recorded acquisitions are for goods and services received" satisfies the audit objective of:

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

Question 26

Which of the following is not an accurate statement regarding the acquisition and payment cycle?

A)The personnel in the receiving department should be independent of the storeroom personnel.
B)Goods received should be physically controlled from the time of their receipt until their use or disposal.
C)Accounting records should transfer responsibility for the goods each time they are moved.
D)The accounting department should be responsible for receiving goods and preparing the receiving report.

Question 27

When reviewing the controls and procedures in the acquisition and payment cycle:

A)companies cannot record the liability for the acquisition until the invoice is received from the vendor.
B)the purchasing department has the responsibility for verifying for appropriateness of the acquisition.
C)personnel who record the acquisitions should not have access to cash or other assets.
D)the accounts payable department should account for all receiving reports to assure that the occurrence objective is satisfied.

Question 28

You have been assigned to the accounts payable transaction cycle as part of your auditing responsibilities.You have decided to vouch a sample of entries in the accounts payable master file to supporting documents.Which assertion is this test of controls most likely to support?

A)Accuracy
B)Classification
C)Completeness
D)Occurrence

Question 29

A key internal control over the acquisition cycle is to ensure that the company requires recording transactions as soon as possible after the goods and services have been received.This satisfies the transaction-related audit objective of:

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

Question 30

Failure to record the acquisition of goods is a violation of which audit objective?

A)Accuracy
B)Occurrence
C)Authorization
D)Completeness

Question 31

When a client uses perpetual inventory records, the tests of details of balances for inventory can be significantly reduced if the auditor believes the records are accurate.The controls over the acquisitions included in the records are normally tested as a part of the:

A)tests of controls for acquisitions.
B)tests of controls and substantive tests of transactions for acquisitions.
C)tests of details of balances for acquisitions.
D)analytical procedures and tests of controls for acquisitions.

Question 32

The acquisition and payment cycle typically begins with the initiation of purchase requisition for goods and services from an authorized individual.

Question 33

Which one of the following duties should not be assigned the purchases department?

A)Finding the lowest cost vendor
B)Reviewing vendors' catalog descriptions and prices for standardized items
C)Designing the purchase order form
D)Authorizing the acquisition of goods

Question 34

A document received from the vendor indicating such things as the description and quantity of goods and services received, price including freight, cash discount terms, and date of billing is called the voucher.

Question 35

A vendor invoice is normally prepared at the time tangible goods are received and indicates the description of goods, the quantity received, the date received, and other relevant data.

Question 36

When testing the controls for the completeness transaction-related audit objectives:

A)failure to record the acquisition of goods or services will generally understate net income.
B)failure to record the acquisition of goods or services has no impact on the balance sheet.
C)it is generally easy for the auditor to determine whether unrecorded transactions exist.
D)the audit time for accounts payable can be reduced if the client has effective internal controls and the auditor properly tests those controls.

Question 37

A written purchase order is a contractual document that is:

A)an offer to buy goods or services.
B)not enforceable if it is not in writing.
C)a binding agreement between purchaser and vendor.
D)an acceptance of a vendor's catalog offer to sell.

Question 38

An acquisitions transaction file is a computer generated file that includes all information entered into the system regarding acquisition transactions.

Question 39

The internal control that requires that "checks are prenumbered and accounted for" satisfies the objective of:

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

Question 40

Which of the following is the most effective control procedure to detect vouchers that were prepared for the payment of goods that were not received?

A)Count goods upon receipt in storeroom.
B)Match purchase order, receiving report, and vendor's invoice for each voucher in accounts payable department.
C)Compare goods received with goods requisitioned in receiving department.
D)Verify vouchers for accuracy and approval in internal audit department.

Question 41

Matching the supplier's invoice, the purchase order, and the receiving report prior to preparing the voucher would normally be the responsibility of the:

A)warehouse receiving function.
B)purchasing function.
C)general accounting function.
D)treasury function.

Question 42

How do auditors determine the extent of testing of internal controls in the acquisition and payment cycle?

Question 43

Which of the following tests of controls is least useful in assessing the transaction-related audit objective related to occurrence?

A)Examine documents in voucher package for occurrence.
B)Examine supporting documents for indication of approval.
C)Account for sequence of vouchers.
D)Attempt to input transactions with valid and invalid vendors.

Question 44

Which of the following should sign checks under conditions of effective internal control?

A)Treasurer
B)Purchasing agent
C)Accounts payable clerk
D)Person preparing the checks

Question 45

The test of transactions which requires one to "reconcile recorded cash disbursements with the cash disbursements on the bank statement" satisfies the objective of:

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

Question 46

Significant audit efficiencies can be achieved on many audits when controls are operating effectively.

Question 47

Authorization for accepting goods in the receiving department should be based on the:

A)vendor invoice.
B)requisition request.
C)purchase order from the purchasing department.
D)vendor statement.

Question 48

With respect to a small company's system of purchasing supplies, an auditor's primary concern should be to obtain satisfaction that supplies ordered and paid for have been:

A)requested by and approved by the same individual.
B)used in the course of business and solely for business purposes during the year under audit.
C)received, counted, and checked to quantities and amounts on purchase orders and invoices.
D)properly recorded as assets and systematically amortized over the estimated useful life of the supplies.

Question 49

Listed below are some management assertions made for the acquisition and payment cycle.For each one give an example of how the auditor by using the documents normally found in the process can apply an auditing procedure to test the assertion.
Completeness
Timing
Accuracy

Question 50

An auditor is using audit sampling to test transactions in the acquisition and payment cycle.She would normally set the tolerable exception rate at what level?

A)Low
B)Medium
C)High
D)Indeterminate

Question 51

Discuss the key internal controls that should be present in the receiving goods and services function in the acquisitions and payment cycle.

Question 52

A CPA 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 disbursement report.
B)prenumbering of disbursement vouchers.
C)use of a limit or reasonableness test.
D)prenumbering of receiving reports.

Question 53

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

Question 54

For effective internal control purposes, the vouchers payable department generally should:

A)approve the purchase order.
B)have the authority to sign the checks.
C)establish the agreement of the vendor's invoice with the receiving report and purchase order.
D)supervise the preparation of the receiving report.

Question 55

Discuss the key internal controls that should be present in the processing purchase orders function in the acquisitions and payment cycle.

Question 56

What are the three most important controls over cash disbursements?

Question 57

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

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

Question 58

You are performing the audit of Jenkins and Company.Your tests of controls and tests of transactions for accounts payable demonstrate that the controls are operating effectively.This would normally allow you to:

A)eliminate the need for substantive testing of balances for accounts payable.
B)reduce the need for substantive testing of balances for accounts payable.
C)reduce control tests in other transactions cycles.
D)increase the need for substantive testing of balances for accounts payable.

Question 59

An auditor performs a test to determine whether all merchandise for which the client was billed was received.The population for this test consists of all:

A)merchandise received.
B)vendors' invoices.
C)canceled checks.
D)receiving reports.

Question 60

The audit procedure "Examine canceled check for authorized signature, proper endorsement, and cancellation by the bank" is used to test the occurrence objective for cash disbursements.

Question 61

Auditors need to distinguish between accounts payable and accrued liabilities in designing the appropriate control and substantive tests.A liability is properly accounted for as an account payable if:

A)the amount is known and owed as of the balance sheet date.
B)the amount can be estimated and is owed at the balance sheet date.
C)the amount is known at the balance sheet date and owed by the end of the next fiscal year.
D)the amount is estimated and owed within 90 days of the balance sheet date.

Question 62

Cutoff procedures for inventory purchased should be designed by companies to assure the company that:

A)inventory owned by the company has been received.
B)inventory included in the year end inventory count has been paid.
C)inventory received before year end was recorded before year end.
D)inventory was correctly valued at year end.

Question 63

The audit procedure "Test clerical accuracy by footing the journals and tracing postings to general ledger and to accounts payable and inventory master files" is used to test the posting and summarization objective for acquisitions.

Question 64

Auditors are normally more concerned about violations of the completeness objective for acquisitions than about violations of the occurrence objective for acquisitions.

Question 65

When determining the methodology for designing tests of details of balances for accounts payable:

A)supply-chain management activities has led to numerous changes in the design of systems used to initiate and record acquisition and payment activities.
B)it is relatively inexpensive to audit accounts payable.
C)performance materiality for accounts payable is set relatively low.
D)inherent risk is often set at low.

Question 66

You are the in-charge auditor and are designing audit procedures for accounts payable.Which of the following management assertions would you normally be most concerned about?

A)Occurrence
B)Accuracy
C)Completeness
D)Existence

Question 67

Describe the methodology for designing tests of details of balances for accounts payable.

Question 68

Since there are a large number of accounts involved in the acquisition and payment cycle, there is the potential for classification misstatements, some of which are likely to affect income.

Question 69

Because of the importance of tests of controls and substantive tests of transactions for acquisitions and cash disbursements, attributes sampling is commonly used when testing the acquisitions and cash disbursements cycle.

Question 70

Explain why auditors should compare current year expense totals with prior year expense totals as an analytical procedure for accounts payable.

Question 71

It is common in the acquisition and payment cycle for transactions to require significant judgment.

Question 72

Failure to record the acquisition of goods and services received overstates both accounts payable and net income.

Question 73

The overall objective in the audit of accounts payable is to determine whether accounts payable:

A)is fairly stated and properly disclosed.
B)is overstated.
C)is understated.
D)is accurately stated.

Question 74

A substantive test of transactions commonly used to test the completeness objective for acquisitions is "Trace from a file of receiving reports to the acquisitions journal."

Question 75

Auditors are especially concerned about the ________ and ________ balance-related audit objectives because of the potential for understatements in the account balance.

A)completeness, cutoff
B)completeness, accuracy
C)classification, realizable value
D)classification, cutoff

Question 76

The controls over acquisitions included in the perpetual inventory records are normally tested as a part of the test of controls and substantive tests of transactions for the sales and collection cycle.

Question 77

The auditor's ultimate substantive tests depend on the relative effectiveness of internal controls related to accounts payable.

Question 78

________ is a balance-related audit objective that is not applicable to liabilities.

A)Existence
B)Accuracy
C)Detail tie-in
D)Realizable value

Question 79

At what point do most companies recognize liabilities in the acquisition and payment cycle when the goods are shipped FOB destination?

A)When the purchase order is issued
B)When the vendor acknowledges receipt of the order
C)When the goods or services are received
D)When the vendor invoice is received

Question 80

The main focus taken by the auditor in verifying liability balances is on the discovery of: I.understated liabilities.
II) omitted liabilities.

A)I only
B)II only
C)both I and II
D)neither I nor II