Question 1

Segregation of duties has an important role in providing for good quality internal controls. Which of the following segregation of duties improve controls over the inventory and distribution cycle?
A) the purchasing department should not be responsible for updating the economic order quantity
B) the accounting staff should not be responsible for the data entry of supplier invoice detail
C) the inventory transaction processing systems should not be accessible to the receiving department
D) the purchasing department should not be responsible for authorizing the acquisition of or receiving the goods

Accepted Answer

Segregation of duties in the inventory and distribution cycle requires that the purchasing department should not be responsible for authorizing the acquisition of or receiving the goods. This ensures that there is a check and balance in the process, reducing the risk of errors, fraud or irregularities. All other options do provide segregation of duties, but do not specifically improve controls over the inventory and distribution cycle.

Question 2

ZyCo has recently converted to a new online accounts payable system. To test that only authorized vendors have been converted to the vendor master file (occurrence), the auditor would
A) conduct cutoff tests for receiving reports and vendor invoices.
B) on a test basis, agree vendor file details for each vendor from the new (online) system to the old (batch) system.
C) on a test basis, agree vendor file details for each vendor from the old (batch) system to the new (online) system.
D) conduct tests of programs to verify that programs in the new systems are functioning as designed.

Accepted Answer

Conducting a comparison of vendor file details between the old and new systems allows the auditor to verify that only authorized vendors have been converted to the new system. Cutoff tests for receiving reports and vendor invoices (A) and tests of programs (D) would not provide specific confirmation of authorized vendors in the vendor master file.

Question 3

The most common fraud in the acquisitions area is for the perpetrator to
A) alter the cheque payment file before it is printed so that the payee name is changed.
B) issue payments to fictitious vendors and deposit the cheques to a fictitious account.
C) change the optical characters at the bottom of a cheque to alter the account to be credited.
D) issue duplicate payments for invoices and then pocket the second cheque.

Accepted Answer

Issuing payments to fictitious vendors and depositing the cheques to a fictitious account is the most common fraud in the acquisitions area. This allows the perpetrator to steal funds without detection as there is no legitimate payee to follow up with for confirmation. The other options listed are also forms of fraud but are less common.

Question 4

Before a new supplier is added into the supplier master file (or the purchasing master file), the company should
A) conduct a credit check on the new supplier.
B) have the supplier detail matched against the invoice detail.
C) ask the purchasing manager to verify the authenticity of the supplier.
D) have the accounting department enter the necessary detail about the supplier.

Accepted Answer

Conducting a credit check on the new supplier helps to determine their financial stability and creditworthiness. This reduces the risk of doing business with a supplier who may default on payment or go bankrupt. The other options listed are also important, but conducting a credit check is crucial for identifying potential financial risks.

Question 5

An important control in the accounts payable and information systems departments is to require that those personnel who record acquisitions do not have access to
A) lists of vendors' names and addresses.
B) cash, marketable securities, and other assets.
C) vendors' price lists.
D) the accounts payable master file.

Accepted Answer

Separating the duties of recording acquisitions from the access to cash, marketable securities, and other assets helps prevent fraud and errors by ensuring that the person who records transactions does not have the ability to manipulate or misappropriate assets.

Question 6

To protect against theft of physical assets (such as computer equipment), the company should
A) assign computers to specific individuals at the company.
B) assign computers to specific areas within the company.
C) use strong access controls (such as login passwords) to prevent access.
D) have equipment engraved or otherwise permanently labelled and a subsidiary ledger maintained.

Accepted Answer

Having equipment engraved or permanently labelled with a subsidiary ledger maintained can discourage theft as it makes it easier to identify and track stolen items. Assigning computers to specific individuals or areas within the company and using strong access controls can also help prevent theft but may not necessarily deter thieves.

Question 7

When accounts payable and purchasing systems are highly automated, more detail is included in the transaction files. This deeper level of detail is illustrated by including
A) economic order quantities for each item that is held in inventory, including delivery times.
B) quantities, prices, and item descriptions from each line of the supplier invoice.
C) sequentially numbered purchase requisitions and purchase orders (with matching numbers).
D) having receiving report numbers match the numbers on the supplier invoices for improved tracking.

Accepted Answer

When accounts payable and purchasing systems are highly automated, more detail is included in the transaction files. For instance, quantities, prices, and item descriptions from each line of the supplier invoice can be included. This more detailed information can help with tracking and managing inventory levels. Alternatively, while economic order quantities, purchase requisitions, and purchase orders are also part of the purchasing system, they are not directly related to the transaction files that are created during the accounts payable process. Finally, matching receiving report numbers to supplier invoice numbers is important for tracking, but it does not provide more detailed information about the transactions.

Question 8

One form of accounts payable fraud occurs when the accounts payable clerk or another employee steals a cheque made payable to a legitimate vendor. The purchaser's information is then resubmitted for payment and the second cheque sent to the vendor. How could such a theft be prevented?
A) Cancel supporting documents to prevent their being re-used.
B) Make sure that all payments are supported by valid documents.
C) Reconcile the transaction files to the accounts payable master file.
D) Have receiving reports authorized independently.

Accepted Answer

The answer of One form of accounts payable fraud occurs...

Question 9

To ensure that goods and services acquired are for authorized company purposes, and to help acquire only needed items
A) receiving reports should be independently signed and reconciled to the purchase order.
B) proper authorization for acquisitions and changes to the master file should take place.
C) purchase requisitions should be approved and matched to purchase orders.
D) account allocations of vendor invoices should be carefully checked.

Accepted Answer

The answer of To ensure that goods and services acquired...

Question 10

A document identifying the description, supplier, quantity, and related information for goods and services the company intends to purchase is the
A) purchases catalogue.
B) purchase requisition.
C) receiving report.
D) purchase order.

Accepted Answer

A purchase order is a document that outlines specific details about the goods or services a company intends to purchase, including the supplier, quantity, and other related information. It serves as a formal agreement between the buyer and the seller and is used to initiate the purchase process.

Question 11

One of the ways to prevent the use of fictitious suppliers to steal company funds is by
A) having adequate network access controls to prevent unauthorized access to transaction files.
B) ensuring that accounts payable programs are available only in source code.
C) having software automatically check for duplicate invoice numbers before payment.
D) having authorized personnel carefully scrutinize documentation supporting payments.

Accepted Answer

Having authorized personnel carefully scrutinize the supporting documentation before payment is the best way to prevent the use of fictitious suppliers to steal company funds. This ensures that every payment is made to legitimate suppliers only, and that the documentation is genuine and accurate. While the other options listed may also be helpful in preventing fraud, they are not as effective as having human oversight and scrutiny of payment documentation.

Question 12

Many companies have inventory that is easy to steal and is readily marketable. Which of the following controls helps to prevent theft and misuse of inventory?
A) physical control of inventory from time of receipt until use
B) proper access controls over the inventory master and transaction files
C) dual signatures required on all purchase orders over $10 000
D) purchase requisitions are to be approved by the production manager

Accepted Answer

Physical control of inventory from time of receipt until use is the best choice as it ensures that inventory is properly secured and monitored at all times, reducing the risk of theft and misuse. Proper access controls over the inventory master and transaction files, and dual signatures required on purchase orders over a certain amount, are also important controls, but they may not directly prevent theft and misuse of inventory. Purchase requisitions being approved by the production manager may help to ensure that inventory is being requested for legitimate business purposes, but it does not necessarily prevent theft or misuse of inventory.

Question 13

The proper recognition of accounts payable liabilities are crucial to ensure fair statement of the ending accounts payable balance. What documents are required to adequately support accounts payable?
A) receiving reports and bill of lading documents that indicate dates shipped
B) bill of lading documents matched to the internal purchase requisition
C) purchase requisition (authorized) matched with the purchase order to the supplier
D) supplier invoices matched to receiving reports and authorized purchase documents

Accepted Answer

To adequately support accounts payable, it is important to match supplier invoices to receiving reports and authorized purchase documents. This ensures that the invoice is valid and accurately reflects the items received and the amounts owed. The other options listed may be useful documents for tracking the shipment and receipt of goods, but they do not provide direct evidence of the amounts owed to suppliers.

Question 14

The major balance sheet account in the acquisition and payment cycle is
A) accounts payable.
B) purchases.
C) merchandise inventory.
D) common stock.

Accepted Answer

The acquisition and payment cycle involves the acquisition of goods and services from vendors and the subsequent payment of those vendors. As a result, the major balance sheet account in this cycle is accounts payable, which represents the amount owed to vendors for goods and services acquired but not yet paid for. While purchases and merchandise inventory are also important in this cycle, they are not major balance sheet accounts. Common stock is not relevant to the acquisition and payment cycle.

Question 15

After the supplier master file data has been entered, to best improve internal controls the
A) supplier master file data should be matched to the accounts payable files.
B) transaction file detail should be matched to the supplier master file.
C) data entry should be independently verified.
D) accounting department should file the new supplier authorization form sequentially.

Accepted Answer

Independent verification of data entry would help to ensure accuracy and prevent errors or fraud in the supplier master file. While matching the supplier master file data to the accounts payable files and filing new supplier authorization forms sequentially could also be helpful internal controls, they do not directly address the accuracy of data entry. Matching transaction file detail to the supplier master file would only be relevant after the supplier master file data has been deemed accurate.

Question 16

When automatic purchase orders are generated, to help make sure that goods are ordered for products that the company still needs, the company should
A) have all purchase orders approved by the purchasing manager.
B) have suppliers automatically replenish the shelves.
C) ensure that re-order points are monitored.
D) have receiving reports matched to the purchase order amounts.

Accepted Answer

To ensure that goods are ordered only for products that the company still needs, it is important to monitor re-order points. Re-order points are the minimum inventory levels that trigger the creation of purchase orders. By monitoring re-order points, the company can ensure that purchase orders are only created when there is a genuine need for the product, and not simply because the automatic purchasing system has a set schedule. The other options listed are also important in the purchasing process, but do not directly address the issue of ordering goods only for needed products.

Question 17

The purchase order, usually in writing, is a legal document that is
A) a non-binding agreement between client and vendor.
B) an offer to buy.
C) not enforceable if it is not in writing.
D) an acceptance of a vendor's catalogue offer to sell.

Accepted Answer

A purchase order is an offer made by the buyer to the vendor to purchase goods or services. It is a legally binding document that outlines the details of the transaction, including the quantity, price, and terms of payment. Once the vendor accepts the purchase order, a contract is formed between the buyer and the vendor. Therefore, the correct choice is B - an offer to buy.

Question 18

Which of the following areas are tested as part of the audit of the acquisition and payment cycle?
A) payment for raw materials, receipt of raw materials, shipment of goods to customers
B) processing of sales orders, production of goods for clients, and subsequent invoicing
C) processing supplier invoices, vendor master file changes, shipment of goods to customers
D) processing purchase orders, vendor master file changes, receiving goods and services

Accepted Answer

The acquisition and payment cycle deals with the purchase of goods and services, processing of invoices from vendors, and payment of these invoices. Processing purchase orders, changes in the vendor master file, and receiving goods and services are all part of this cycle. Payment for raw materials, receipt of raw materials, and shipment of goods to customers are part of the inventory and warehousing cycle. Processing sales orders, production of goods for clients, and subsequent invoicing are part of the revenue cycle. Processing supplier invoices, vendor master file changes, and shipment of goods to customers are not a cohesive process cycle.

Question 19

One of the ways to prevent the use of fictitious suppliers to steal company funds is to
A) have adequate network access controls to prevent unauthorized access to transaction files.
B) ensure that accounts payable programs are available only in source code.
C) establish controls to establish only approved vendors.
D) reconcile the accounts payable trial balance to the general ledger.

Accepted Answer

By establishing controls to approve vendors, the company can ensure that fictitious suppliers are not created and payments are only made to legitimate and approved vendors. This can include verifying vendor information and conducting background checks. While adequate network access controls, source code availability, and account reconciliation can also be effective control measures, they do not directly address the issue of fictitious suppliers.

Question 20

A) Describe each of the five business functions that comprise the acquisition and payment cycle.
B) Describe the key documents used in processing purchase orders for the acquisitions and payment cycle.
C) Discuss the key documents and records used in recognizing the liability function in the acquisitions and payment cycle.

Accepted Answer

The answer of A) Describe each of the five business...

Quiz 13: Audit of the Acquisition and Payment Cycle

Segregation of duties has an important role in providing for good quality internal controls. Which of the following segregation of duties improve controls over the inventory and distribution cycle?

ZyCo has recently converted to a new online accounts payable system. To test that only authorized vendors have been converted to the vendor master file (occurrence) , the auditor would

The most common fraud in the acquisitions area is for the perpetrator to

Before a new supplier is added into the supplier master file (or the purchasing master file) , the company should

An important control in the accounts payable and information systems departments is to require that those personnel who record acquisitions do not have access to

To protect against theft of physical assets (such as computer equipment) , the company should

When accounts payable and purchasing systems are highly automated, more detail is included in the transaction files. This deeper level of detail is illustrated by including

One form of accounts payable fraud occurs when the accounts payable clerk or another employee steals a cheque made payable to a legitimate vendor. The purchaser's information is then resubmitted for payment and the second cheque sent to the vendor. How could such a theft be prevented?

To ensure that goods and services acquired are for authorized company purposes, and to help acquire only needed items

A document identifying the description, supplier, quantity, and related information for goods and services the company intends to purchase is the

One of the ways to prevent the use of fictitious suppliers to steal company funds is by

Many companies have inventory that is easy to steal and is readily marketable. Which of the following controls helps to prevent theft and misuse of inventory?

The proper recognition of accounts payable liabilities are crucial to ensure fair statement of the ending accounts payable balance. What documents are required to adequately support accounts payable?

The major balance sheet account in the acquisition and payment cycle is

After the supplier master file data has been entered, to best improve internal controls the

When automatic purchase orders are generated, to help make sure that goods are ordered for products that the company still needs, the company should

The purchase order, usually in writing, is a legal document that is

Which of the following areas are tested as part of the audit of the acquisition and payment cycle?

One of the ways to prevent the use of fictitious suppliers to steal company funds is to