Question 1

Describe the audit procedures typically used to test for out- of- period liabilities (also referred to as the search for unrecorded accounts payable).

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Question 2

The audit procedure 'Compare pay rates with the workplace agreement' is normally performed when testing the completeness objective for payroll.

Accepted Answer

This procedure is typically performed to test the accuracy objective, ensuring that employees are paid the correct rates according to the workplace agreement.

Question 3

State five specific balance- related audit objectives for inventory pricing and compilation and, for each objective, describe one common test of details of balances related to that objective.

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Question 4

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

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Question 5

Failure to record the acquisition of goods and services directly affects the balance in accounts payable and may result in an overstatement of net income and owner's equity.

Accepted Answer

If the acquisition of goods and services is not recorded, it will not be reflected in the accounts payable balance, leading to an understatement or omission of expenses. This can result in an overstatement of net income and owner's equity.

Question 6

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.

Accepted Answer

The document described is known as an invoice, not a voucher. A voucher is a document used by a company’s accounts payable department to gather and file all of the supporting documents needed to approve the payment of a liability.

Question 7

A substantive test of transactions commonly used to test the accuracy objective for acquisitions is 'compare paid cheques with the acquisitions journal and cash payments journal'.

Accepted Answer

Comparing paid cheques with the acquisitions journal and cash payments journal is a substantive test of transactions commonly used to test the accuracy objective for acquisitions. This test ensures that all acquisitions have been properly recorded and that the applicable amounts have been paid in a timely and accurate manner.

Question 8

State the six specific transactions- related audit objectives as related to payroll, and for each objective, state one common substantive test of transactions that can be used to test the objective.

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Question 9

Discuss the four aspects of the audit of cost accounting with which the auditor is most concerned.

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Question 10

State each of the six specific transaction- related audit objectives for cash payments and, for each objective, describe one common substantive test of transactions.

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Question 11

State each of the eight specific balance- related audit objectives for accounts payable and, for each objective, describe one common test of details of balances.

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Question 12

State five specific balance- related audit objectives for physical inventory observation and, for each objective, describe one common test of details of balances related to that objective.

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Question 13

State each of the six specific transaction- related audit objectives for acquisitions and, for each objective, describe one common substantive test of transactions.

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Question 14

Discuss each of the four business functions in a typical payroll and personnel cycle.

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Question 15

The use of statistical sampling is less common for the audit of accounts payable than for accounts receivable because it is more difficult to define the population and determine the population size in accounts payable.

Accepted Answer

Accounts payable may include a wide variety of transactions, such as purchase orders, invoices, and payments, which may make it more challenging to determine the population and size for sampling purposes. Accounts receivable, on the other hand, typically involves a more uniform population of individual customer balances, which may make it easier to define and sample from.

Question 16

Most companies first recognise the liability related to the acquisition of goods at the time when the goods are received by the company.

Accepted Answer

This is because the liability for the cost of goods acquired is typically recognised at the time the goods are received and accepted by the company, as this is when the company becomes legally responsible for paying for the goods.

Question 17

Commission expense is calculated as a percentage of sales and compared with previous years.

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Question 18

A major difficulty in the verification of inventory cost records is determining the reasonableness of cost allocations.

Accepted Answer

Determining the reasonableness of cost allocations can be a challenge in verifying inventory cost records as there can be various methods used to allocate costs, such as first-in-first-out (FIFO), last-in-first-out (LIFO), and weighted average. It is important to ensure that the chosen method is consistent and reasonable in order to accurately reflect the true cost of inventory.

Quiz 15: Audit of Transaction Cycles and Financial Statement Balances I