Deck 11: Auditing Inventory, Goods and Services, and Accounts Payable: the Acquisition and Payment Cycle

Question 1

In an audit where there is a heightened risk of fraud related to inventory,the auditors may want to observe all inventory locations simultaneously.

Answer 1

True

Question 2

The use of substantive analytical procedures applied to related expense accounts would not be used to determine if accounts payable were understated.

Answer 2

False

Question 3

Inventory turnover is often calculated by the auditor for proper disclosure in client financial statements.

Answer 3

False

Question 4

Management may intentionally misstate inventory balances by overvaluing items that are obsolete.

Question 5

The purchasing department should make sure that only authorized goods are received,the goods meet order specifications,an accurate count of the goods received is taken,and that accountability is established to assure that all receipts are recorded.

Question 6

Approval of items for payment usually involves a three-way match among the vendor invoice,the purchase order,and the receiving report.

Question 7

A purchase order identifies the quantity and description of products that have been received.

Question 8

Reconciliation of vendor statements to recorded payables provides assurance related to the completeness assertion.

Question 9

Auditors should consider the inherent risk that management is more likely to understate,rather than overstate,accounts payable and expenses.

Question 10

Analytical review of related expense accounts when auditing accounts payable would be used when control risk is assessed as low.

Question 11

The acquisition process begins with a purchase of goods or services.

Question 12

The auditor's primary concern with accounts payable is that of existence.

Question 13

A new vendor should be added to an authorized vendor database by an individual in the purchasing department.

Question 14

Supply chain management has helped many companies improve the efficiency of operations.

Question 15

A networked software system linking a company's information system to vendors whose offerings and prices have been preapproved by appropriate management is called an automated purchasing system.

Question 16

The major accounts in the acquisition and payment cycle are inventory,cost of goods sold,accounts payable,and other expense accounts.

Question 17

An indication of potential inventory fraud is that inventory levels are growing faster than sales.

Question 18

Understatement of either purchases or ending inventory will result in a lower cost of goods sold and higher net income.

Question 19

Cycle counts involve periodic testing of the accuracy of the perpetual inventory records.

Question 20

The acquisition and payment cycle includes processes for identifying products or services to be acquired,purchasing goods and services,receiving the goods,approving payments,and paying for goods and services received.

Question 21

It is likely in the acquisition and payment cycle that audit evidence from substantive analytical procedures alone will be sufficient for the auditor.

Question 22

The auditor may test a manufacturing client's cost system to substantiate the valuation of inventory.

Question 23

Legal expenses are reviewed by auditors for possible litigation that would require recording or disclosure.

Question 24

The auditor tests significant repairs and maintenance expenses to ensure that an item that should be capitalized has not been expensed.

Question 25

Many frauds are committed by overstating inventory accounts.

Question 26

Valuation is the most complex assertion related to inventory.

Question 27

When auditing accounts payable,the auditor would most likely review a sample of cash disbursements throughout the year to determine whether disbursements for goods and services are applicable to the subsequent year.

Question 28

Auditing standards require the auditor to observe the client taking physical inventory.

Question 29

During the inventory counting process,the client arranges not to ship or receive goods or segregates all goods received during the process to be labeled and counted as "after inventory."

Question 30

Test counts are performed by the auditor only when it is not possible for the auditor to observe the client taking a physical inventory.

Question 31

Testing cash disbursements subsequent to the year under audit allows the auditor to determine certain payables that may not have been recorded previously.

Question 32

Sources of information regarding a client's inventory obsolescence can be partially noted during the inventory observation.

Question 33

Inventory may become obsolete because of technological advances even though there are no signs of physical wear.

Question 34

The acquisition cycle begins with the receipt of goods and services and ends with their payment as reflected in cash disbursements.

Question 35

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

Question 36

One reason for observing inventory is to determine the accuracy of client counting procedures.

Question 37

Auditors observe the client taking physical inventory at year-end primarily to obtain assurance about the value of inventory.

Question 38

The lower of cost or market assumption is not important to valuation of inventory.

Question 39

A walkthrough is typically not a useful means of obtaining information about controls in the acquisition and payment cycle.

Question 40

Proper internal control over the inventory account would require that inventory items should be reviewed for obsolescence and proper accounting treatment.

Question 41

Which of the following is a significant risk related to purchasing?

A)Competitive bids are not required for purchases below a specified dollar amount.
B)Purchase orders are generated electronically.
C)Purchasing agents may enter into kickback arrangements with vendors.
D)All of the above are significant risks.

Question 42

Which of the following is an example of the type of analytical procedures that an auditor would use for inventory?

A)Number of day's sales in receivables compared to industry averages.
B)Inventory turnover for the previous five years.
C)Days outstanding in accounts payable.
D)Salaries of marketing personnel as a percent of total inventory.

Question 43

Prenumbered receiving documents establish the completeness of the population and are useful in determining that all goods are recorded in the correct period.

Question 44

Accounting for inventories is a major consideration for many companies because of its significance to which of the following financial statements?

A)Balance sheet.
B)Income statement.
C)Statement of cash flows.
D)Both A and B.

Question 45

In computerized purchasing operations,the computer matches three documents-the purchase order,the receiving report,and the monthly statement-and if the three match within a prespecified tolerable limit,the invoice is approved for payment.

Question 46

Reducing the risk of understated payables can be accomplished by focusing on which assertion?

A)Existence.
B)Rights.
C)Presentation and disclosure.
D)Completeness.

Question 47

Stable relationships are expected between specific accounts (for example,cost of goods sold and sales)that can be investigated for unusual discrepancies.

Question 48

Which of the following signals a potential fraud that may cause the overstatement of inventory accounts?

A)Reserves for contingencies are reducing rapidly.
B)Inventory amounts are growing faster than sales.
C)Repairs and maintenance accounts have significant credit entries.
D)The purchase of manufacturing equipment is occurring at a rapid rate.

Question 49

Which of the following is a major factor in management's ability to overvalue inventory without rapid detection by auditors?

A)The limited volume of transactions in the inventory accounts.
B)The auditor's assessment of inventory as a low-risk area.
C)Complexity in the valuation of inventory.
D)Consideration by the auditor of non-financial indicators of inventory fraud.

Question 50

When a purchasing agent benefits personally by accepting payment from a vendor,the purchasing agent is guilty of which of the following?

A)Performing kiting.
B)Committing embezzlement.
C)Receiving kickbacks.
D)Stealing company assets.

Question 51

Which of the following accounts is not a major account in the acquisition and payment cycle?

A)Inventory.
B)Cost of goods sold.
C)Accounts payable.
D)All of the above are major accounts.

Question 52

Which of the following is not an indicator of fraud in the acquisition and payment cycle?

A)Theft of inventory by employees.
B)Inventory shrinkage.
C)Large manual adjustments to inventory accounts.
D)Excess inventory because of a production slowdown.

Question 53

In observing the client's inventory at year-end,the auditor makes test counts that are later traced into the client's inventory compilation.

Question 54

Which relationship might suggest a heightened risk of fraud in the acquisition and payment cycle?

A)Unexpected increases in the number of suppliers.
B)A reduction in raw material costs.
C)Maturing capital assets with no plan for replacement.
D)Sales expenses growing in proportion to sales revenue.

Question 55

The tracing of a sample of receiving reports through the recording process tests the completeness assertion.

Question 56

Which of the following would meet the need for additional control procedures when using computer-generated purchase orders?

A)Establishment of maximum quantity limits that can be ordered within a given time period.
B)Automated acceptance for high dollar levels.
C)Purchase order copies sent by purchasing to receiving.
D)Accounts payable department entering new vendors into the system.

Question 57

The internal control that requires that "checks are pre-numbered and accounted for" satisfies which assertion?

A)Accuracy.
B)Existence.
C)Completeness.
D)Posting and summarization.

Question 58

Which of the following is not a management assertion relevant to inventory?

A)Existence or occurrence.
B)Completeness.
C)Rights and obligations.
D)Accuracy.

Question 59

Substantive tests of accounts payable and related expense accounts for valuation usually involve simply verifying the mathematical accuracy of the accounts and agreeing them to general ledger and supporting documentation.

Question 60

Which of the following activities is not included in the acquisition and payment cycle?

A)Receipt of goods and services.
B)Approval of items for payment.
C)Application of cash receipts.
D)Authorized request for goods and services.

Question 61

Which of the following is NOT a reason why inventory is a complex accounting and auditing area?

A)Diversity of items in inventory.
B)Low volume of activity.
C)Easily transportable.
D)Difficulty in applying the lower of cost or market principle.

Question 62

Which one of the following accounts would an auditor most likely test by performing analytical procedures?

A)Sales commissions expense.
B)Legal expenses.
C)Repairs and maintenance expense.
D)Travel expense.

Question 63

Bar code scanning may best be utilized in the receiving process to accomplish which of the following?

A)Match incoming goods with purchase orders.
B)Notify the shipper that product has arrived.
C)Order new items on behalf of the purchasing department.
D)Record inventory that has been written off the books.

Question 64

A primary feature of automated control in the acquisition cycle includes which of the following?

A)Authorization is no longer required.
B)Limits as to the number of items that can be received by the warehouse.
C)Calculated order quantities based on set criteria.
D)Funds transfer at the request of the controller.

Question 65

During your audit of Brown Company you are trying to determine whether all accounts payable were recorded. Which assertion are you gathering evidence for?

A)Occurrence.
B)Presentation and disclosure.
C)Completeness.
D)Valuation or allocation.

Question 66

Which of the following procedures would the auditor perform in testing the completeness assertion for accounts payable?

A)Examine a sample of cash disbursements made after year-end to determine whether the disbursements were for goods acquired in the previous year.
B)Reconcile vendor's statements with the accounts receivable trial balance.
C)Examine production equipment for useful lives.
D)Gather purchase orders immediately previous to and subsequent to year-end.

Question 67

Why should the client's legal expenses be examined?

A)To compare with previously released attorneys' letters.
B)To determine the types of fraud occurring in the organization.
C)To ensure proper recording of vendor payables.
D)To determine if there is any litigation pending or threatened.

Question 68

Which of the following is not an element of internal control for inventory?

A)Authorization for all purchases.
B)Proper accounting for receipt of inventory.
C)Perpetual inventory system.
D)Rapid introduction of new products without market studies.

Question 69

An auditor may best test commissions expense for salespeople when control risk is low by performing which of the following procedures?

A)Analytical procedures.
B)Tagging and tracing.
C)Alternative procedures.
D)Subsequent proof of cash.

Question 70

Which of the following is not an inherent risk associated with inventory?

A)Inventory accounts typically have a high volume of activity.
B)Inventory is easily transportable.
C)Inventory may become obsolete.
D)Inventory costing methods frequently change from one year to the next.

Question 71

Which of the following would the auditor most likely do when testing the existence assertion for inventory?

A)Observe the client's count of the annual physical inventory and perform test counts.
B)Review vendor invoices for the amounts recorded.
C)Review open purchase orders at year-end.
D)Trace raw material purchases to invoices and to the general ledger.

Question 72

Which of the following might an auditor do in testing for the existence of accounts payable?

A)Review client's financial statement disclosure.
B)Review long-term purchase commitments.
C)Perform a cutoff test of purchases and cash disbursements.
D)Perform analytical review of related expense accounts.

Question 73

When auditing expense accounts,which of the following would the auditor be least likely to subject to a detailed test of transactions?

A)Legal expense.
B)Utilities expense.
C)Repairs and maintenance expense.
D)Travel expense.

Question 74

Which assertion has the greatest emphasis when auditing accounts payable?

A)Existence.
B)Completeness.
C)Presentation.
D)Obligations.

Question 75

Which of the following is a required disclosure for inventory?

A)Inventory valuation method used (FIFO,LIFO,moving average)and percentage of inventory valued under each method.
B)LIFO or current cost if the inventory is valued using FIFO.
C)Type of inventory system used (periodic or perpetual).
D)All of the above.

Question 76

Which of the following would the auditor most likely do when testing the valuation assertion for inventory?

A)Confirm inventory on consignment.
B)Examine receiving reports for inventory,tracing the recorded amounts.
C)Observe the taking of physical inventory.
D)Vouch inventory purchases to vendor invoices.

Question 77

A perpetual inventory system is preferable to a periodic system if adequately controlled and maintained because of which of the following?

A)It requires that a full inventory count be taken at year-end by all warehouse employees.
B)It allows management to calculate cost of goods sold at year-end.
C)It provides information to management where book inventory is continuously in agreement with inventory on hand within specified time periods.
D)It better controls the receipt of goods.

Question 78

The auditor may discover that the recorded cost of inventory exceeds the designated market price when testing which assertion?

A)Existence.
B)Cutoff.
C)Valuation.
D)Rights.

Question 79

Which of the following procedures will usually be performed by the auditor to determine if obsolete inventory exists?

A)Confirmation of inventory with customers.
B)Footing the inventory subsidiary ledger.
C)Tracing inventory ordered by the client to receiving reports.
D)Analysis of inventory turnover and sales reports.

Question 80

Authorized purchase of goods or services.

A)2,5,4,1,3
B)2,4,5,1,3
C)2,1,4,5,3
D)2,5,1,4,3