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

Question 1

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.

Answer 1

A

Question 2

At what point in the acquisition and payment cycle do most companies first recognize the acquisition and related liability on their records?

A) when the purchase requisition is received by the accounting department
B) when the purchase order is prepared
C) when the company receives the invoice from the vendor
D) when the company receives the goods or services from the vendor

Answer 2

D

Question 3

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

Answer 3

False

Question 4

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

Question 5

Which of the following is not one of the classes of transactions in the acquisition and payment cycle?

A) acquisition of common stock
B) acquisition of goods and services
C) cash disbursements
D) purchase returns and allowances and purchase discounts

Question 6

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

A) inventory
B) prepaid expenses
C) sales discounts
D) accounts payable

Question 7

Companies may deliberately understate accounts payable to overstate financial performance.

Question 8

Inadequate controls over purchases and accounts payable can result in opportunities to embezzle from the organization.

Question 9

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 10

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

Question 11

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 12

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 13

What typically initiates the acquisitions and payment cycle?

A) issuance of a purchase requisition or request for purchase of goods or services
B) issuance of payment to vendor
C) approval of a new vendor
D) purchase requisition

Question 14

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 15

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 16

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

Question 17

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 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

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 20

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.

Question 21

After a check prepared for payment to a vendor includes the signature of an authorized person, the check is now a liability.

Question 22

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 23

It is possible to use Electronic Data Interface (EDI) to process payments to vendors electronically using Electronic Funds Transfer (EFT) between the company's bank and the vendor's bank.

Question 24

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

Question 25

The acquisition and payment cycle ends with the receiving of the goods or services.

Question 26

Purchase returns and allowances and purchase discounts business functions are also part of the acquisition and payment cycle.

Question 27

Most companies maintain an accounts payable master file by vendor.

Question 28

List the following documents or records in the order they are typically processed with regards to purchase order processing: a. Purchase requisition
B) Purchase order
C) Receiving Report

A) c, b, a
B) a, b, c
C) b, a, c
D) c, a, b

Question 29

After a check is cashed by a vendor and clear's the vendors and the client's bank, the check is now a cancelled check and is no longer a liability, but now is a document.

Question 30

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 31

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 32

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

Question 33

For companies using Electronic Data Interface (EDI), the invoice is transmitted from the supplier electronically. EDI affects how the auditor evaluates audit evidence in this transaction cycle.

Question 34

Purchase returns and allowances and purchase discounts business functions are generally not significant in amount for most companies.

Question 35

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

Question 36

In the processing and recording of cash disbursements,

A) after a check includes the signature of an authorized person, it is a liability.
B) when a check cashed by the vendor has cleared the bank, it is called an outstanding check.
C) in many cases, the company submits payment to the vendor electronically through an electronic funds transfer (EFT) between the company's bank and the vendor's bank.
D) the accounts payable master file is a computer-generated file that includes all cash disbursement transaction processed by the accounting system for a period.

Question 37

The total of the unpaid individual account balances in the accounts payable master file should equal the total accounts payable balance in the general ledger.

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

Question 40

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 41

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 42

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 43

Which one of the following duties should not be assigned to the purchasing 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 44

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 45

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 46

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 47

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 48

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

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

Question 49

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) prepared by the receiving department.
D) an acceptance of a vendor's catalog offer to sell.

Question 50

A substantive test 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' invoices.
C) review the acquisitions journal for large or unusual amounts.
D) trace from a file of receiving reports to the acquisition journal.

Question 51

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 52

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 53

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 payable.

Question 54

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 55

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 56

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 57

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 58

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 59

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 60

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 61

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 62

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 63

Checks should be prenumbered to make it easier to account for all checks.

Question 64

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 65

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 66

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 67

One of important internal controls over cash disbursements should include not only the physical signing of checks, but also the approval of electronic funds transfers by individuals with proper authority.

Question 68

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

Question 69

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 70

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

Question 71

Auditors typically perform the acquisitions and cash disbursements tests at different times.

Question 72

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 that 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 73

For effective internal control purposes, the accounts 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 74

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 75

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

Question 76

Which of the following is a key internal control for the posting and summarization transaction-related audit objective?

A) Batch totals are compared with computer summary reports.
B) Documents are canceled.
C) Dates are internally verified.
D) The accounts payable master file contents are internally verified.

Question 77

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 78

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 79

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 the

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 80

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