Deck 11: Audit of Acquisition and Payment Cycle and Inventory

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

An auditor can utilize a cross-sectional analysis for a client operating in multiple locations to identify areas of further inventory testing.

Answer 3

True

Question 4

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

Question 5

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

Question 6

An individual outside of the purchasing department should be the only individual with access to the vendor tables in the database.

Question 7

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

Question 8

The acquisition and payment cycle typically begins with the cash disbursement for requested raw materials.

Question 9

A major control benefit of a centralized purchasing department is the segregation of the authorization function from the custody and recording functions.

Question 10

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

Question 11

In order for the auditor to perform an engagement on a manufacturing firm,it is important that the entire integrated process is understood.

Question 12

The acquisition process begins with a purchase of goods or services

Question 13

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

Question 14

Open invoice files are reviewed subsequent to the year under audit in order to locate expenses that should be reclassified on the income statement.

Question 15

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

Question 16

For proper control,the receiving department should receive a copy of the purchase order that has the quantities blanked out.

Question 17

The primary assertion to be tested on accounts payable is the existence assertion.

Question 18

Inventory is complex and typically considered a high-risk area in audits of service firms.

Question 19

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

Question 20

The auditor would most likely use attribute sampling to test transactions in the acquisition cycle for timeliness of recording transactions.

Question 21

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

Question 22

The inventory observation is performed for the purpose of determining the accuracy of client counting procedures.

Question 23

The auditor may observe the counting of physical inventory throughout the year under audit if perpetual inventory is used.

Question 24

Inventory valuation tends to have complexity for manufacturing and merchandising companies because of cost flow assumptions.

Question 25

Legal expenses are reviewed by auditors for possible litigation and related FAS 5 treatment.

Question 26

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

Question 27

Generally accepted auditing standards require the auditor to observe the taking of the physical inventory at year-end.

Question 28

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

Question 29

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

Question 30

Test counts are performed by the auditor to give the impression of control and they are not used for substantive testing.

Question 31

Quality control in the manufacturing process is an operational concern and does not apply to auditor assessment of internal control.

Question 32

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

Question 33

Many frauds are committed by overstating inventory accounts.

Question 34

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

Question 35

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

Question 36

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

Question 37

The auditor is required by GAAP to observe the taking of physical inventory.

Question 38

The auditor is responsible to take a physical inventory at the client location on behalf of the audit client.

Question 39

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

Question 40

An auditor would review the direct labor costs charged to inventory when auditing a manufacturing company.

Question 41

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

Question 42

What is the primary reason for management's ability to easily 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 43

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

A)performing kiting.
B)committing embezzlement.
C)receiving kickbacks.
D)stealing company assets.

Question 44

Which of the following is an example of the type of analytics 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)Number of obsolete units this period compared to last.
D)Salaries of marketing personnel as a percent of total inventory.

Question 45

Audits of payables and related cash disbursements provide indirect evidence about the correctness of expense accounts.

Question 46

Which of the following signals a potential fraud that may occur for 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 47

The need for additional control procedures when using computer-generated purchase orders would be met by

A)establishment of a 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 48

Purchasing is a separate function in many organizations due to all of the following rationale except which?

A)It promotes efficiency and effectiveness.
B)It eliminates potential favoritism.
C)It reduces the opportunity for fraud.
D)It decentralizes control.

Question 49

Management may have incentive to fraudulently overstate inventory balances in order to cover up

A)understated cost of goods sold
B)poor financial performance
C)poor internal control
D)taxable income

Question 50

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

Question 51

The acquisition and payment process consists of each of the following phases except

A)receipts of goods and services.
B)approval of items for payment.
C)application of cash receipts.
D)authorized request for goods and services.

Question 52

The acquisition and payment process consists of each of the following phases except

A)shipments of goods and services.
B)approval of items for payment.
C)cash disbursements.
D)authorized purchases of goods and services.

Question 53

Which one of the following control procedures would not apply to the automated receipt of goods?

A)defined procedures for counting the quantity of goods received
B)access,edit,and reasonableness controls built into the computerized accounting application
C)reconciliation of the purchaser's production data with the vendor's billing
D)a contract specifying terms of delivery,penalties,billing and payment terms,and a process for resolving differences

Question 54

The benefit of a cross sectional analysis of inventory across multiple stores includes

A)Auditor identification of locations for detailed testing of inventory.
B)Auditor detail as to specific units by month.
C)Auditor conclusions regarding the fair presentation of obsolescence.
D)Auditor evidence of physical existence.

Question 55

Which one of the following must the auditor best understand relative to the supply chain when auditing a manufacturing company?

A)Contract terms,the method of recording and title transfer.
B)Efficiency of operations,purchasing agent compensation and disbursement.
C)Productivity of equipment,cost of capital,and maintenance schedules
D)Quality of scrap,point of sale and carrying costs.

Question 56

Variations of the traditional purchase order include all of the following except

A)computer-generated purchase order
B)drop-shipment purchase order
C)supply-chain delivery contract
D)all of the above are variations

Question 57

In computerized purchase 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 58

In testing the reasonableness of expense accounts in auditing the acquisition cycle,when the auditor has concluded that internal control risk is high the major substantive tests may be gathering evidence through analytical procedures.

Question 59

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 60

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

A)existence
B)rights
C)presentation and disclosure
D)completeness

Question 61

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 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

Please indicate the proper sequence of the acquisition cycle: 1.Approval of items for payment.
2)Authorized requisition for goods or services.
3)Cash disbursements.
4)Receipt of goods and services.
5)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

Question 64

A system of internal financial accounting controls for inventory would include all of the following except

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 65

An auditor may best test commissions expense for salespeople when control risk is low by performing:

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

Question 66

Bar code scanning may best be utilized in the receiving process to

A)identify goods arriving automatically in conjunction with a count.
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 67

The client's legal expenses should be examined to

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

Question 68

When testing the valuation assertion,the auditor would most likely

A)confirm inventory on consignment.
B)examine receiving reports for inventory,tracing them recorded amounts.
C)observe the taking of physical inventory.
D)perform price tests to the related cost flow assumption.

Question 69

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

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 70

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 71

An internal control benefit of centralized purchasing in an organization includes

A)separation of authorization from accounting.
B)favorite vendors used multiple times.
C)increased compensation of agents through side agreements.
D)mathematically accurate vendor invoices.

Question 72

Receipt of materials for the production process bears a direct relationship to

A)recording of accounts payable.
B)vendor selection.
C)authorization of purchases.
D)obsolescence of inventory.

Question 73

A primary feature of automated control in the acquisition cycle includes

A)that 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 74

A risk to the auditor due to the complexity of physical inventory includes possible

A)overstatement of individual items across multiple locations for cutoff testing.
B)utility of the items exceeding their cost for existence testing.
C)movement of goods during existence testing.
D)stocking of only one type of inventory in the warehouse for presentation and disclosure testing.

Question 75

Inventory is a complex accounting and auditing area due to all of the following except

A)diversity of items in inventory.
B)high volume of activity.
C)potential difficulty in correctly valuing inventory.
D)ease in identifying obsolete inventory.

Question 76

A perpetual inventory system is preferable to a periodic system if adequately controlled and maintained because

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 about inventory that approaches real-time.
D)it better controls the receipt of goods.

Question 77

Inventory is a complex accounting and auditing area due to all of the following except

A)diversity of items in inventory.
B)low volume of activity.
C)potential difficulty in classifying inventory.
D)difficulty in applying the lower of cost or market principle.

Question 78

When auditing accounts payable,the greatest emphasis is placed on

A)the existence assertion.
B)the completeness assertion.
C)the presentation assertion.
D)the disclosure assertion.

Question 79

For testing the completeness assertion for accounts payable,the auditor would

A)examine a sample of cash disbursements made after year end to determine whether the disbursements were for goods applicable to 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 80

When testing the existence assertion for inventory,the auditor would most likely

A)observe the client's count of the annual physical inventory and test count.
B)review vendor invoices for the amounts recorded.
C)perform year-end tests of invoices received in the final month.
D)trace raw material purchases to invoices and to the general ledger.