Deck 10: Auditing Purchases, Payabland Payroll

Question 1

In the audit of payroll, one of the key issuis to ensure that the payroll expense has been properly recorded and the associated deductions for income tax, employee benefits, and related liabilitiare properly recorded as liabilities.

Answer 1

True

Question 2

Employeare generally hired by the purchasing department in the company.

Answer 2

False

Question 3

The specific audit objective "accounts payable are liabilitiof the entity at the balance date" is derived from the:

A) completeness assertion.
B) valuation or measurement assertion.
C) presentation or disclosure assertion.
D) rights and obligations assertion.

Answer 3

D

Question 4

Purchase requisitions may originate from:

A) personnel manager, for plant and equipment.
B) the warehouse, for inventory.
C) purchases for a delivery vehicle
D) b. and c.

Question 5

Even though an employee's supervisor may initiate a request for payroll change, such as a change in job classification or wage rate increase, all changshould be authorized in writing by the personnel department before being entered into the personnel data master file.

Question 6

The receiving department should be instructed to accept no goods without having on file a properly authorized:

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

Question 7

A substantive audit procedure for verifying accounts payable should include tracing the opening balance to the previous year's working papers.

Question 8

The auditor knows that overstatements of payroll may result from unintentional errors or fraud through payments to fictitious employees, payments to actual employefor hours not worked, and payments to actual employeat higher than authorized rates.

Question 9

The segregation of receiving goods from the requisitioning and purchasing of those goods prevents those making requisitions from ordering goods directly from suppliers and also prevents the purchasing department from gaining access to goods improperly ordered.

Question 10

Accounts payable is usually the smallest current liability on the balance sheet and a insignificant factor in the evaluation of an entity's short-term solvency, especially when the accounts payable is affected by a high volume of transactions and thus is susceptible to misstatements.

Question 11

A copy of the receiving report should be sent directly by the receiving department to the:

A) accounts (receivable) department.
B) chief financial controller
C) purchasing department.
D) accounts (payable) department.

Question 12

The occurrence objective for purchases, payabland payroll requirthat accounts payable and payroll liabilitiinclude all amounts owed by the entity to suppliers of goods and servicat the end of the reporting period.

Question 13

Purchase and payroll transactions account for the major expensincurred by a business, and so are a major component in the determination of profit, and also relate to the acquisition of major classof asset including inventoriand capital assets.

Question 14

A purchase order is a form issued by the supplier detailing the goods or servicsupplied and the amount owing.

Question 15

A check by the auditor on the numeric sequence of prenumbered receiving reports to determine that a supplier's invoice was recorded for each relatto the:

A) existence or occurrence assertion.
B) completeness assertion.
C) presentation or disclosure assertion.
D) rights and obligations assertion.

Question 16

The quantity ordered may not be displayed on the copy of the purchase order sent directly to the:

A) requesting department.
B) vouchers payable department.
C) receiving department.
D) accounts receivable department.

Question 17

Which of these is not directly affected by purchasand payments transactions?

A) plant assets.
B) work-in-process inventory.
C) accounts payable.
D) prepaid expenses.

Question 18

Accounts payable is affected by purchase transactions that increase the account balance and payment transactions that decrease the balance, and thus, detection risk for payablassertions is affected by the inherent and control risk factors related to both these transaction classes.

Question 19

Purchase orders become part of the transaction trail of documentary evidence that directly supports which assertion for purchase transactions?

A) existence or occurrence.
B) rights and obligations.
C) accuracy or valuation.
D) presentation and disclosure.

Question 20

A proper cut-off of payment transactions at the year end, such as verifying and examining the date of chequoutstanding as at the end of the reporting period, is essential to the correct presentation of cash and accounts payable at the end of the reporting period.

Question 21

Segregation of the functions of payroll and personnel do all of the following, except:

A) reduce the risk of payments to fictitious employees.
B) reduce the risk of payments to terminated employees.
C) restrict the recording of new employee data to the payroll department.
D) restrict the payment of wages to the payroll department.

Question 22

Prior to recording purchastransactions, supplier's invoicare checked and approved in the accounts department. Controls over this function include all of the following except:

A) marking all supporting documentation as "paid".
B) approving the supplier's invoice for payment by having an authorized person sign the invoice.
C) agreeing the details of the supplier's invoice with the related receiving report and purchase order.
D) determining the mathematical accuracy of the supplier's invoice.

Question 23

Wage rate increasshould be authorized in writing by the:

A) payroll department.
B) personnel department.
C) finance department.
D) data entry department.

Question 24

Which of the following is not a factor that tends to increase the inherent risk for purchasand payables?

A) the number of directors.
B) A high volume of transactions.
C) issues over costs being capitalized versus expensed
D) all are factors that tend to increase the inherent risk for purchases and payables.

Question 25

An important consideration in assessing inherent risk for purchase transactions is any motivation management may have to misstate expenditure. Which of the following is not a factor that may contribute to misstatement?

A) the need to achieve announced profitability targets.
B) the need to disclose concern over control problems.
C) temptations for employees to make unauthorized purchases.
D) temptations for employees to misappropriate purchased assets.

Question 26

Payroll functions include all of the following except:

A) hiring employees.
B) deciding on the number of workers required to work on a particular day.
C) preparing the payroll.
D) protecting unclaimed wages.

Question 27

For the purchasing firm the processing of purchasand payment transactions requirall of the following functions except:

A) requisitioning goods and services.
B) preparing purchase invoices.
C) preparing the cheque requisition.
D) all of the functions are required.

Question 28

Payroll functions include all of the following except:

A) preparing attendance and timekeeping data.
B) authorized payroll changes.
C) terminating employees.
D) all of the above are payroll functions

Question 29

A responsibility not normally assigned to receiving department personnel is to:

A) compare goods received with description of goods ordered.
B) prepare a prenumbered receiving report for every order received.
C) enter cheque requisition data and verify the batch total.
D) file the purchase order copy pending arrival of goods.

Question 30

A special supervisor's password is required in order to add a new employee to the personnel data master file. This control relatprimarily to the:

A) existence or occurrence assertion.
B) completeness assertion.
C) presentation and disclosure.
D) valuation or measurement assertion.

Question 31

Responsibility for determining that unpaid supplier's invoicare processed for payment on their due datgenerally liwith the:

A) warehouse department.
B) accounts department.
C) purchasing department.
D) internal audit department.

Question 32

Test data may be used to test application controls over accepting and recording data for unpaid suppliers' invoices. Which of the following conditions would not be relevant:

A) numeric characters in an alphanumeric field.
B) missing or invalid supplier numbers.
C) missing due date or payment terms.
D) alphabetical characters in a numeric field.

Question 33

The batching of payroll documents is normally done in the:

A) timekeeping department.
B) payroll department.
C) data entry department.
D) personnel department.

Question 34

Controls over the preparation and signing of chequinclude all of the following except:

A) authorized personnel in the accounting department should be responsible for signing the cheques.
B) the cheque requisition and supporting documents should be cancelled (stamped) when the cheque is signed.
C) the signed cheque and the supporting documents should be returned to the accounts payable clerk for review and mailing.
D) prenumbered cheques should be used.

Question 35

Responsibility for updating of the personnel data master file should rest with authorized employein the:

A) personnel department.
B) payroll department.
C) controller's department.
D) employee's operating department.

Question 36

For proper control, unclaimed payroll chequshould be stored by the:

A) finance department.
B) payroll department.
C) personnel department.
D) timekeeping department.

Question 37

Controls specific to the recording of cash payments include which of the following?

A) an independent check by the accounting supervisor of the agreement of the amounts authorized and posted to accounts payable with the cheque summary received from the general accounts department
B) an independent check of the agreement of the total of cheques issued with a batch total of the vouchers processed for payment.
C) limits on access to blank cheques
D) all of the above.

Question 38

A programmed routine in the edit run for payroll lists all employewho worked more than 50 hours during the week for review. This is an example of a:

A) reasonableness test.
B) validity test.
C) sequence test.
D) self-checking test.

Question 39

In most modern organizations, employee timekeeping data is recorded via:

A) employee badges.
B) time-clock cards.
C) security identification cards.
D) sign-in/sign-off book.

Question 40

Controls applicable to paying the payroll and protecting unclaimed waginclude all of the following except:

A) payroll cheques and bank transfers should be signed or authorized by finance office personnel involved in preparing or recording the payroll.
B) payroll cheques, where used should be distributed to employees by finance office personnel not involved in preparing or recording the payroll.
C) any unclaimed payroll cheques should be stored in a safe or vault in the finance office.
D) finance office personnel should check the agreement of the names and amounts on cheques or bank transfers with payroll register entries.

Question 41

Which of the following is not an initial procedure for verifying accounts payable?

A) trace the opening balance to the prior year's working papers (if applicable).
B) review activity in the general ledger account for any unusual entries.
C) reconcile accounts to monthly supplier's statements.
D) obtain a listing of amounts owed at the balance sheet date.

Question 42

Which of these is not a source of potential misstatement for the function of recording a payment?

A) a cheque may be issued for unauthorised purchases.
B) a cheque may not be recorded promptly.
C) errors may be made in recording cheques.
D) all of the above are sources of potential misstatement for the function of recording a payment

Question 43

Tests of details of transactions for payablbalancinclude:

A) vouching recorded payables to supporting documentation.
B) confirming payables with major suppliers by reviewing the accounts payable ledger or accounts payable master file.
C) comparing financial statement presentation with applicable regulations and accounting standards.
D) verifying directors' and executive officers' remuneration.

Question 44

In witnessing a payroll distribution, the auditor would not be expected to observe that:

A) segregation of duties exist between the preparation and payment of payroll.
B) the correct payroll entries are made in the firm's ledger and journal
C) there is proper control and disposal of unclaimed cheques.
D) each employee receives only one cheque or pay envelope.

Question 45

Confirmation of accounts payable will provide the least amount of evidence for the:

A) existence or occurrence assertion.
B) completeness assertion.
C) valuation or measurement assertion.
D) rights and obligations assertion.

Question 46

What could motivate management to misstate expenditures? What other factors may lead to misstatements?

Question 47

Factors relating to the internal control environment that the auditor needs to consider when assessing control risk for purchase, payment and payroll transactions include all of these except:

A) integrity and ethical values.
B) management's commitment to competence.
C) design of substantive procedures.
D) assignment of authority and responsibility.

Question 48

List three tests of details of balancfor accounts payable and two for payroll balances.

Question 49

Identify the need for controls over hiring employees, authorising payroll changand preparing attendance and timekeeping data.

Question 50

Identify key controls that ought to be in place for the preparation and signing of cheques.

Question 51

Describe the audit process for purchase transactions, indicating the audit risks that need to addressed and the mitigating controls that can be implemented.

Question 52

Explain the nature, and use, of an imprest payroll account.

Question 53

Which of these is not a procedure for identifying unrecorded liabilities?

A) examination of the subsequent period's purchase and payment transactions.
B) analytical procedures for expense and liability balances.
C) examination of contractual commitments.
D) confirmation of accounts payable.

Question 54

With regards to control risk assessment for purchase transactions, align the potential misstatements in the following chart with their possible tests of operating effectiveness.

Question 55

Tests of details of balancfor payablinclude all of the following except:

A) reconciling payables with monthly statements received by the entity from suppliers.
B) confirming accounts payable.
C) searching for unrecorded liabilities.
D) verifying directors' and executive officers' remuneration.

Question 56

Identify and describe three key issurelevant to the audit of purchases, payabland payroll.

Question 57

Following is a description of Out of Control corporations' inventory purchasprocess for skateboard wheels. Identify the weaknessin the controls, and suggest possible improvements. When stock falls below 100 the computer automatically produca purchase requisition for more stock from the supplier. If there is a special promotion coming up, John (the marketing manager) might put in an extra purchase requisition for promotional stock. The computer numbers the dockets in sequence and sends them to the purchasing department. The purchasing department issua purchase order with their standard supplier when they receive an authorised purchase requisition. John used to work in purchasing, and is good friends with Frank who now managthe purchasing department. John sometimcovers a shift for Frank when he has a day off. When the order arrivat the warehouse receiving dock, the purchase order is compared to the goods received: The personnel check that the right typof wheels are included, the right number of wheels is included, and that they are undamaged. They then prepare a prenumbered receiving report and forward it to accounting along with the suppliers invoice. Accounting then enters the amounts from the supplier invoicinto the system.

Question 58

1. On what basis are the tests of details of balancplanned? 2. What are the stagin applying analytical procedurto payables?

Question 59

Why are directors' and executive officers' remuneration considered to be audit sensitive? What procedure could be used to check directors' and executive officers' remuneration?

Question 60

Which of these is the least likely risk factor for payroll?

A) Payments to fictitious employees.
B) Payments to actual employees for hours less than they worked.
C) Payment to actual employees for hours not worked.
D) Payments to actual employees at higher than authorized rates

Question 61

Describe the audit process for payroll transactions, indicating the audit risks that need to addressed and the mitigating controls that can be implemented.