Question 1

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

Accepted Answer

Substantive analytical procedures are an important part of the audit process, but they alone may not provide sufficient evidence to support the auditor's conclusions. Additional audit procedures, such as tests of details and inquiry, may also be necessary to obtain persuasive audit evidence.

Question 2

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

Accepted Answer

During inventory observation, the auditor can physically observe the condition of inventory items and note any signs of obsolescence. This can provide valuable information regarding a client's inventory obsolescence. However, other sources of information such as discussions with management or reviewing sales history may also be necessary to fully evaluate the extent of inventory obsolescence.

Question 3

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

Accepted Answer

The inventory observation allows auditors to physically count and reconcile inventory with the client's records, which helps determine the accuracy of the client's counting procedures.

Question 4

During the counting process of inventory, 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."

Accepted Answer

This is known as the inventory freeze, where the client suspends all shipping and receiving activities during the counting process to ensure that all goods are accurately counted. Any goods received during this time are labeled and counted separately as "after inventory" to avoid confusion.

Question 5

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

Accepted Answer

The lower of cost or market assumption is important in valuation of inventory because it requires companies to write down the value of inventory if the market price falls below the cost of acquiring it. This results in a more conservative reporting of inventory value on the balance sheet.

Question 6

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

Accepted Answer

A walkthrough is a useful means of obtaining information about controls in the acquisition and payment cycle, as it allows auditors to understand and assess the processes and controls in place by observing them in action.

Question 7

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

Accepted Answer

The acquisition cycle begins with identifying the need for goods and services, selecting a vendor, and executing a purchase order. It ends with the receipt of goods, recording the transaction in the accounts payable ledger, and making payment through cash disbursements.

Question 8

Many frauds are committed by overstating inventory accounts.

Accepted Answer

Overstating inventory accounts can lead to financial statements being exaggerated and misrepresenting the true financial position of a company, which can ultimately result in fraud.

Question 9

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

Accepted Answer

Adequate internal control over the inventory account would necessitate periodic assessments of inventory items for potential impairment, expiration dates, and other factors that could affect their value and accounting treatment. This is critical for ensuring that the inventory account accurately reflects the company's financial condition and that obsolete or damaged items are accounted for appropriately.

Question 10

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

Accepted Answer

GAAS requires the auditor to observe the taking of physical inventory at year-end to ensure that inventory is valued accurately and no misstatements exist.

Question 11

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.

Accepted Answer

The statement is inaccurate. When auditing accounts payable, the auditor would review a sample of cash disbursements throughout the year end to determine whether disbursements for goods and services are accurately recorded in the correct period, not necessarily to determine whether they are applicable to the subsequent year.

Question 12

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

Accepted Answer

Legal expenses are subject to review by auditors for potential litigation risks and for proper accounting treatment under Financial Accounting Standards (FAS) 5, which outlines the criteria for accrual of contingencies.

Question 13

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

Accepted Answer

The auditor tests significant repairs and maintenance expenses to ensure that the expenses that should be considered as capital expenditures are not treated as expenses in the income statement.

Question 14

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

Accepted Answer

Test counts are used for both control testing and substantive testing. For control testing, they provide evidence of whether the client's count procedures are reliable and accurate. For substantive testing, they provide evidence of the existence and completeness of inventory.

Question 15

Valuation is the most complex assertion related to inventory.

Accepted Answer

Valuation of inventory involves not only determining the cost of goods sold but also considering factors like obsolescence, deterioration, and market fluctuations. It requires extensive knowledge of accounting principles and methods for inventory pricing, making it one of the most complex assertions related to inventory.

Question 16

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

Accepted Answer

Testing cash disbursements subsequent to the year under audit can help the auditor identify any payables that were not recorded in the financial statements for the year under audit. For example, if the auditor identifies a payment made for goods or services received during the audit year, but not recorded, the auditor can make an adjustment to the financial statements to ensure that the payables are properly reported. This type of testing is important to ensure that the financial statements are complete and accurate.

Question 17

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

Accepted Answer

Technological advances can make certain products or equipment obsolete, even if there is no physical damage or wear. For example, a company that produces cassette tapes may find that they become obsolete with the rise of digital music. As a result, the inventory of cassette tapes will become obsolete even if they are still in good physical condition.

Question 18

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

Accepted Answer

The auditor may test a manufacturing client's cost system to verify the accuracy of the inventory balance as the valuation of inventory is based on cost. Therefore, testing the cost system helps in substantiating the valuation of inventory.

Question 19

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

Accepted Answer

The cash account is a key part of the acquisitions and payment cycle as it involves recording cash receipts, disbursements, and other financial transactions.

Question 20

The auditor is required by generally accepted accounting principles (GAAP) to observe the taking of physical inventory.

Accepted Answer

GAAP does not require auditors to observe physical inventory; it is a requirement under Generally Accepted Auditing Standards (GAAS).

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