Question 1

From an audit perspective, transactions are far more significant than related balance sheet accounts in the payroll and personnel cycle.

Accepted Answer

Transactions in the payroll and personnel cycle, such as employee hiring, termination, timekeeping, and payroll processing, are more likely to be subject to errors or fraud, which could result in material misstatements in the financial statements. Therefore, auditors typically focus on testing transactions and controls in this cycle to ensure the accuracy and completeness of payroll expenses and related liabilities. While balance sheet accounts such as salaries payable and accrued payroll taxes are also important, they are often derived from underlying transactions and thus require a reliable transaction processing system to be correctly stated.

Question 2

To test for proper purchases cutoff, an auditor would obtain the number of the last shipping document (bill of lading)issued during the period under audit and verify that the item received had been included in the inventory listing.

Accepted Answer

The proper purchases cutoff test involves verifying that purchases are recorded in the correct accounting period, not just checking if items are included in the inventory listing.

Question 3

In the audit of inventory, the client is responsible for actually making and recording the count of physical inventory; the auditor's responsibility is to evaluate and observe the client's procedures and draw conclusions about the adequacy of the physical inventory.

Accepted Answer

The statement accurately reflects the roles and responsibilities of the client and the auditor in the audit of inventory. The client has the primary responsibility for physically counting the inventory and recording the quantities and values, while the auditor evaluates and observes the client's procedures and tests the accuracy and completeness of the inventory records.

Question 4

The audit procedure 'observe whether inventory movement takes place during the inventory count' provides assurance mainly for the completeness objective for physical inventory observation.

Accepted Answer

The audit procedure of observing whether inventory movement takes place during the inventory count ensures that all inventory items present during the count have been included and none has been omitted, which is the objective of completeness in physical inventory observation. Therefore, the statement is true.

Question 5

Performing the physical count of inventory on a cycle basis throughout the year is acceptable for both perpetual and periodic inventory systems.

Accepted Answer

The answer of Performing the physical count of inventory on...

Question 6

A comparison of the current year's inventory turnover ratio with that of previous years may indicate the presence of obsolete inventory.

Accepted Answer

If the inventory turnover ratio has decreased significantly from previous years, it may indicate that there is obsolete inventory that is not being sold and that should be identified and possibly disposed of.

Question 7

To test for proper sales cutoff, an auditor would obtain the number of the last shipping document (bill of lading)issued during the period under audit and verify that the item shipped had been excluded from the inventory listing.

Accepted Answer

This statement is true. An auditor could obtain the number of the last shipping document issued during the period under audit and verify that the item shipped had been excluded from the inventory listing to test for proper sales cutoff. This helps ensure that sales are recorded in the appropriate period and not carried over to the next period.

Question 8

When the client's perpetual inventory master files are inadequate, the auditor will probably choose to test the physical inventory prior to the balance sheet date.

Accepted Answer

The answer of When the client's perpetual inventory master files...

Question 9

When perpetual inventory master files are accurate, the physical inventory can be tested before the balance sheet date.

Accepted Answer

Perpetual inventory systems continuously track inventory levels, which means that the balance in the inventory account should be up-to-date and accurate. This makes it possible to perform physical inventory count tests before the balance sheet date, as any discrepancies can be identified and adjusted in real-time. In contrast, periodic inventory systems only update inventory balances periodically, which means that there may be a time lag between physical inventory counts and adjustments to the inventory account.

Question 10

The audit procedure 'foot the inventory listing schedules for raw materials, work-in-process, and finished goods' provides assurance mainly for the accuracy objective of inventory pricing and compilation.

Accepted Answer

The audit procedure of footing the inventory listing schedules for raw materials, work-in-process, and finished goods provides assurance mainly for the completeness and existence objectives of inventory rather than the accuracy objective of inventory pricing and compilation. By performing a footing, the auditor confirms that all items have been properly included and that the total agrees with the general ledger balance. However, this procedure does not necessarily provide evidence that the individual items have been properly priced or compiled.

Question 11

Verifying acquisitions as part of the tests of the acquisition and payment cycle provides evidence about the accuracy of raw materials acquired and all manufacturing costs except labour.

Accepted Answer

Verifying acquisitions provides evidence about the accuracy of raw materials acquired and all manufacturing costs except labour, which includes inspection of documentation such as purchase orders, receiving reports, and vendor invoices. This helps ensure that the company is correctly recording its inventory and cost of goods sold, which are important financial statement assertions.

Question 12

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 statement is true. Companies typically recognize the liability related to the acquisition of goods at the time when the goods are received. This is because the company has an obligation to pay for the goods and owes the supplier for the amount of the purchase.

Question 13

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

Accepted Answer

The answer of Commission expense is calculated as a percentage...

Question 14

Analytical procedures and tests of details of balances are the most important means of auditing the payroll and personnel cycle.

Accepted Answer

Analytical procedures involve understanding and making comparisons of financial information, whereas tests of details of balances focus on verifying the monetary amounts of transactions and balances. While these methods are important in auditing, for the payroll and personnel cycle, tests of controls and substantive tests of transactions are typically more crucial due to the inherent risks and potential for fraud in payroll transactions.

Question 15

Discuss each of the four business functions that comprise the acquisition and payment cycle.

Accepted Answer

The answer of Discuss each of the four business functions...

Question 16

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

Accepted Answer

The allocation of costs to inventory can be complex and subjective, making it difficult to verify the reasonableness of these allocations. This is a common challenge in the verification of inventory cost records.

Question 17

Misstatements in payroll are rarely material.

Accepted Answer

Misstatements in payroll are often not material because payroll expenses are typically well-documented and controlled, making significant errors less likely. However, this can vary depending on the size and complexity of the organization.

Question 18

For proper internal control, the person(s)responsible for signing the payroll cheques should not have access to timekeeping or be otherwise involved in the preparation of payroll.

Accepted Answer

This is true. Separation of duties is an important component of internal control, and ensuring that the person responsible for signing payroll cheques does not have access to timekeeping or payroll preparation helps to prevent fraud or errors in the process.

Question 19

When auditing the payroll and personnel cycle, tests of controls are rarely performed.

Accepted Answer

Tests of controls should be performed when auditing the payroll and personnel cycle to ensure the effectiveness of the client's internal controls. This includes testing whether appropriate procedures are in place for hiring, terminating, and assessing employees' performance, and whether payroll calculations and processes are accurate and properly authorized.

Question 20

State the primary determinants of the amount of time needed to perform the physical observation of inventory.

Accepted Answer

The answer of State the primary determinants of the amount...

Quiz 15: Audit of transaction cycles and financial statement balances I