Question 1

To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is

Accepted Answer

Stamping vouchers "paid" by the check signer is a control measure to ensure that vouchers are submitted and paid only once, preventing duplicate payments.

Question 2

A liability for a long-term purchase contract should generally be recognized when

Accepted Answer

A liability for a long-term purchase contract is generally recognized when the goods are received, as this is when the obligation to pay arises and the company takes ownership of the goods.

Question 3

Failure to record a liability generally results in

Accepted Answer

Failure to record a liability means that expenses associated with that liability have not been recognized. This would result in an overstatement of profit, as expenses that should have been recognized are not being subtracted from revenue.

Question 4

The permanent reference files (master files) in a personnel and payroll database ordinarily do not include which of the following?

Accepted Answer

The employee earning record is typically a part of the transaction files rather than the permanent reference or master files. Permanent reference files like deduction table, payroll master, and compensation table contain static information that doesn't change with every transaction, whereas employee earning records are updated each pay period, reflecting the dynamic nature of transactions.

Question 5

Which of the following situations represents an internal control weakness in the payroll department?

Accepted Answer

Paychecks being distributed by the employees' immediate supervisor is a potential internal control weakness because it can create an opportunity for fraudulent practices, such as ghost employees or inflated salaries. The other options represent internal control strengths: the rotation of personnel maintains segregation of duties and reduces the risk of fraud, reconciling payroll records with tax reports ensures accuracy and completeness, and having an independent timekeeping function reduces the risk of errors or misrepresentations.

Question 6

Tracing a sample of time clock cards to payroll registers (journals) is a procedure designed to obtain evidence about the transaction assertion(s) of

Accepted Answer

Tracing time clock cards to payroll registers is a procedure to ensure that all recorded payroll transactions are complete, meaning that all time worked has been recorded and processed in the payroll system.

Question 7

In performing a search for unrecorded retirements of fixed assets, an auditor most likely would

Accepted Answer

Inspecting the property ledger and the insurance and tax records would provide information on the assets that are still on the books, while touring the client's facilities would allow the auditor to physically observe whether any assets are missing or have been retired. Analyzing the repair and maintenance account alone may not provide enough evidence regarding retirements of fixed assets.

Question 8

When auditing PP&E, the auditor's approach is generally to

Accepted Answer

Auditors typically focus on examining evidence supporting additions during the year to ensure that all capital expenditures are properly recorded and that the PP&E balance is accurate.

Question 9

An auditor wishes to perform tests of controls on a client's purchasing procedures. If the control activities leave no audit trail of documentary evidence, the auditor most likely will test the procedures by

Accepted Answer

If there is no audit trail of documentary evidence, the auditor can't perform confirmation or analytical procedures. Therefore, the best choice would be observation and inquiry, which involve observing the client's procedures being performed and inquiring of the client's personnel about the procedures being followed.

Question 10

Improperly capitalizing an expense item results in.

Accepted Answer

Improperly capitalizing an expense item results in overstatement of profit in the current year because the expense is not being recognized as an expense, but rather as an asset. This results in an understatement of expenses and an overstatement of assets, thereby overstating profit. In future years, when the asset is depreciated or amortized, the expense will be recognized, resulting in an understatement of profit.

Question 11

An entity's internal control structure requires for every check request that there be an approved voucher, supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all

Accepted Answer

Canceled checks are the best source for testing because they represent the actual disbursement of funds, allowing the auditor to verify whether each disbursement was authorized and supported by the required documentation (approved voucher, purchase order, and receiving report).

Question 12

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be

Accepted Answer

Vendors with whom the entity has previously done business are the appropriate population for using confirmations to provide evidence about the completeness assertion for accounts payable. This is because these vendors reflect outstanding balances for goods or services already received or billed, and therefore, they are the most relevant population to confirm completeness. The other options - amounts recorded in the accounts payable subsidiary ledger, payees of checks drawn in the month after the year-end, and invoices filed in the entity's open invoice file - may not necessarily capture all outstanding balances and do not represent a complete and representative population.

Question 13

Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?

Accepted Answer

Vouching a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices is a procedure aimed at identifying liabilities that were incurred before the end of the year but not recorded until after. This helps in ensuring that all liabilities are recorded in the period in which they are incurred, adhering to the accrual basis of accounting.

Question 14

Which of the following expense accounts would not normally be tested by listing all debits and examining any significant items?

Accepted Answer

Payroll Expense is typically tested through other audit procedures such as examining payroll records, testing controls over payroll processing, and substantive testing of payroll transactions. Unlike the other categories, which might involve significant individual transactions that could be examined on a case-by-case basis, payroll expenses involve numerous transactions that are more efficiently tested in aggregate or through sampling.

Question 15

Which of the following fraud detection steps could not be performed by CAATs?

Accepted Answer

CAATs (Computer Assisted Audit Techniques) are designed to analyze digital data and cannot physically examine documents to identify photocopies in invoice files.

Question 16

Which of the following audit procedures is best for identifying unrecorded accounts payable?

Accepted Answer

Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period is the best way to identify unrecorded accounts payable. This procedure helps to identify payments made after the balance sheet date that relate to invoices received before the balance sheet date but were not recorded.

Question 17

Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?

Accepted Answer

The auditor would compare cash payments occurring after the balance sheet date with the accounts payable trial balance to identify any payments made for expenses that were not recorded as payables at year-end, which would indicate unrecorded payables. A, B, and C are not relevant procedures for searching for unrecorded payables.

Question 18

Which of the following would be an indicator of potential fraud?

Accepted Answer

Each option listed can be an indicator of potential fraud. Photocopies of invoices might suggest manipulation or duplication of payments. Vendor invoices in strict numerical order could indicate fictitious invoices, as real invoices typically do not arrive in perfect sequence. Vendors with only post office box addresses might be fake companies created to siphon funds.

Question 19

A weakness in internal control over recording retirements of equipment may cause an auditor to

Accepted Answer

Selecting certain items of equipment from the accounting records and locating them in the plant can help the auditor determine whether the equipment has been retired and removed from the plant or is still in use. This will enable the auditor to identify any weakness in the internal control over recording retirements of equipment. Inspecting certain items of equipment in the plant and tracing those items to the accounting records, reviewing the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year, and tracing additions to the "other assets" account to search for equipment that is still on hand but no longer being used are all audit procedures that may help identify weaknesses in internal control over recording retirements of equipment, but they are not as focused on the specific control weakness described.

Question 20

Cutoff tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year most likely would provide assurance about management's assertion of

Accepted Answer

Cutoff tests are designed to test the completeness assertion of management, which ensures that all transactions and events that should have been recorded have been recorded. Specifically, cutoff tests aim to detect transactions that should have been recorded in one period but were recorded in another period, which is a test for the completeness assertion. Therefore, the choice is C, completeness. The other assertions are not directly related to cutoff tests. Valuation or allocation concerns the accuracy and appropriateness of financial statement amounts, existence or occurrence tests whether the recorded transactions actually occurred, and rights and obligations ensure that the entity has legal rights to the assets and liabilities shown in the financial statements.

Quiz 8: Acquisition and Expenditure Cycle 336