Question 1

Which of the following signals a potential fraud that may occur for the overstatement of inventory accounts?

Accepted Answer

When inventory amounts are growing faster than sales, it is a potential signal of overstatement of inventory accounts, which can be a result of fraudulent practices such as counting obsolete items, including items not yet received, or inflating values of inventory by adding nonexistent items. Reserves for contingencies reducing rapidly, repairs and maintenance accounts with significant credit entries, and purchase of manufacturing equipment occurring at a rapid rate do not directly signal potential fraud in inventory accounts.

Question 2

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.

Accepted Answer

The computer typically matches the purchase order, the receiving report, and the invoice, not the monthly statement, to approve payment.

Question 3

The internal control that requires that "checks are pre-numbered and accounted for" satisfies which assertion?

Accepted Answer

This internal control satisfies the completeness assertion as it ensures that all checks are accounted for and none are missing.

Question 4

In observing the client's inventory at year-end the auditor makes test counts that are later traced into the client's inventory compilation.

Accepted Answer

This statement is true. The auditor conducts test counts to verify the accuracy of the client's inventory and later traces these counts into the inventory compilation to ensure that the final inventory figures are reliable.

Question 5

Which of the following is an example of the type of analytics that an auditor would use for inventory?

Accepted Answer

Inventory turnover for the previous five years is a relevant analytics an auditor would use for inventory. It measures how many times a company has sold and replaced its inventory over a specified period, giving insight into the efficiency of its inventory management. This analytical technique helps identify inventory-related risks or discrepancies that need to be addressed by the enterprise. The other options (A, C, and D) are either unrelated or not relevant to inventory.

Question 6

Which relationship might suggest a heightened risk of fraud in the acquisition and payment cycle?

Accepted Answer

Unexpected increases in the number of suppliers can suggest a heightened risk of fraud in the acquisition and payment cycle. This is because it can indicate that there is a lack of proper vendor management and due diligence, making it easier for fraudulent or fictitious suppliers to be added to the system and paid for goods or services that were never actually provided.

Question 7

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

Accepted Answer

Tracing a sample of receiving reports through the recording process involves checking that all receiving reports have been recorded, which tests the completeness assertion.

Question 8

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

Accepted Answer

The risk of understated payables can be reduced by focusing on the completeness assertion, which ensures that all payables have been recorded in the financial statements. This assertion ensures that there are no unrecorded liabilities that will cause an understatement of payables.

Question 9

Which of the following is not a management assertion relevant to inventory?

Accepted Answer

Reporting is not a management assertion relevant to inventory. The other three assertions (existence or occurrence, completeness, rights and obligations) are relevant because they relate to whether the inventory actually exists, is complete, and belongs to the company. Reporting, on the other hand, refers to the presentation and disclosure of financial information and is not directly related to the inventory itself.

Question 10

Substantive tests of accounts payable and related expense accounts for valuation usually involve simply verifying the mathematical accuracy of the accounts, and agreeing them to general ledger and supporting documentation.

Accepted Answer

The answer of Substantive tests of accounts payable and related...

Question 11

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

Accepted Answer

The acquisition and payment process includes the authorized request for goods and services, approval of items for payment, and receipt of goods and services. However, the application of cash receipts is not a part of the acquisition and payment process. It belongs to the cash receipts and disbursement process.

Question 12

Accounting for inventories is a major consideration for many companies because of its significance to which of the following financial statements?

Accepted Answer

Accounting for inventories impacts both the balance sheet and income statement. On the balance sheet, inventories are reported as current assets and their value affects the calculation of working capital and current ratio. On the income statement, the cost of goods sold (COGS) is directly impacted by the value of ending inventory, which affects gross profit and net income.

Question 13

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

Accepted Answer

Receiving kickbacks refers to the act of accepting payment or other benefits from vendors in exchange for purchasing their goods or services. It is a form of corruption and a violation of ethical and legal standards. Performing kiting, committing embezzlement, and stealing company assets are all different forms of financial fraud that do not necessarily involve vendor relationships.

Question 14

Which of the following is NOT an example of fraud in the acquisition and payment cycle?

Accepted Answer

Excess inventory because of a production slowdown is not an example of fraud in the acquisition and payment cycle. Theft of inventory by employees, inventory shrinkage, and large manual adjustments to inventory accounts are all potential fraud risks in this cycle.

Question 15

Stable relationships are expected between specific accounts (for example, cost of goods sold and sales) that can be investigated for unusual discrepancies.

Accepted Answer

This statement is true. Expected relationships between specific accounts, such as cost of goods sold and sales, are known as "accounting principles" and are used as a basis for analyzing financial statements. Any discrepancies from these expected relationships can indicate potential issues or discrepancies in the financials.

Question 16

Which of the following would meet the need for additional control procedures when using computer-generated purchase orders?

Accepted Answer

Establishing maximum quantity limits helps prevent over-ordering and ensures that purchases are within budgetary constraints, providing an additional control measure.

Question 17

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

Accepted Answer

Prenumbered receiving documents serve as evidence that all goods received by the organization have been recorded in the correct period. It is a control measure to ensure completeness of the population.

Question 18

Which of the following accounts is NOT a major account in the acquisition and payment cycle?

Accepted Answer

All of the listed accounts are major accounts in the acquisition and payment cycle, as they are directly involved in the process of acquiring goods and services and making payments for them.

Question 19

What is the primary reason for management's ability to easily overvalue inventory without rapid detection by auditors?

Accepted Answer

Inventory can be complex to value because it involves not only the physical counting of goods but also requires a valuation of the goods on hand, which can be impacted by various factors such as cost of production, market demand, obsolescence, and other economic factors. This complexity can create opportunities for management to manipulate inventory valuations, which may not be quickly detected by auditors.

Question 20

Which of the following is not a rationale for purchasing to be a separate function?

Accepted Answer

The rationale for purchasing to be a separate function includes promoting efficiency and effectiveness, eliminating potential favoritism, and reducing the opportunity for fraud. However, purchasing centralizes control rather than decentralizing it, as it ensures that all purchases are made by a designated department or individual, rather than allowing various departments to make their own purchases without coordination or oversight.

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