Question 1

Which of the following is a significant risk related to purchasing?

Accepted Answer

Purchasing agents entering into kickback arrangements with vendors can lead to unethical behavior, conflicts of interest, and potential fraud. The other options do not pose significant risks.

Question 2

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

Accepted Answer

Inventory turnover for the previous five years is a common analytical procedure used by auditors to assess the reasonableness of inventory balances. This involves comparing the inventory turnover ratio to industry averages and historical trends to identify any potential issues or inconsistencies. The other options listed are not related to inventory and would not provide relevant information for the audit of inventory.

Question 3

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 can help ensure that all goods received are recorded and accounted for in the correct time period, thereby establishing the completeness of the population.

Question 4

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

Accepted Answer

Inventories are included as a current asset on the balance sheet and are also a significant cost item for many companies that affects their cost of goods sold and gross profit, which are reported on the income statement. Therefore, inventories impact both the balance sheet and income statement.

Question 5

In computerized purchasing 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

In computerized purchasing operations, the computer typically matches the purchase order, the receiving report, and the invoice, not the monthly statement, to approve payment.

Question 6

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

Accepted Answer

The completeness assertion focuses on ensuring that all relevant and necessary information is included in financial statements. In the case of payables, understated payables could indicate that invoices or other obligations have been omitted, leading to an incomplete picture of the company's liabilities. Therefore, reducing the risk of understated payables involves a focus on completeness.

Question 7

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

Accepted Answer

Stable relationships between accounts are expected, meaning that they tend to have consistent patterns and ratios over time. These relationships can be used to investigate discrepancies and potential errors or fraud.

Question 8

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

Accepted Answer

If inventory is growing faster than sales, it may indicate that the company is overvaluing its inventory or not properly accounting for and reducing obsolete or damaged inventory. This can lead to an overstatement of inventory accounts and potentially fraudulent financial reporting.

Question 9

Which of the following is a major factor in management's ability to overvalue inventory without rapid detection by auditors?

Accepted Answer

Complexity in the valuation of inventory can make it easier for management to manipulate inventory values without being easily detected by auditors. This is because complex valuation methods may require more judgment and estimation, allowing management to use their discretion to overvalue inventory. Additionally, the complexity may make it more difficult for auditors to fully understand the inventory valuation process and identify any potential misstatements.

Question 10

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 is when a purchasing agent benefits personally by accepting payment from a vendor. Kiting is a fraudulent accounting practice, embezzlement involves stealing money from the company, and stealing company assets refers to taking physical goods without permission.

Question 11

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

Accepted Answer

All the options listed (Inventory, Cost of Goods Sold, and Accounts Payable) are major accounts in the acquisition and payment cycle, which involves purchasing inventory, recognizing the cost of goods sold when sales occur, and managing accounts payable.

Question 12

Which of the following is not an indicator of fraud in the acquisition and payment cycle?

Accepted Answer

Excess inventory because of a production slowdown is not necessarily an indicator of fraud in the acquisition and payment cycle. It may simply be a result of a temporary decrease in demand or an unforeseen disruption in the supply chain. However, the other three options (theft of inventory by employees, inventory shrinkage, and large manual adjustments to inventory accounts) could all potentially be indicators of fraud in the acquisition and payment cycle.

Question 13

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 is a standard audit procedure known as physical inventory observation and tracing of counts to the inventory compilation ensures the accuracy of inventory valuation on the balance sheet.

Question 14

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

Accepted Answer

A sudden increase in the number of suppliers could indicate that the company is not properly vetting their suppliers or is intentionally creating fictitious suppliers to divert funds to themselves through fraudulent invoices.

Note: The other options do not necessarily suggest a heightened risk of fraud in the acquisition and payment cycle. A reduction in raw material costs could indicate negotiating better prices or finding more efficient suppliers. Maturing capital assets with no plan for replacement could suggest a potential issue in the depreciation and capitalization process but does not necessarily indicate fraud in the acquisition and payment cycle. Sales expenses growing in proportion to sales revenue could be a legitimate business expense.

Question 15

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 ensures that all received items have been properly recorded, and tests the completeness assertion of the financial statements.

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 excessive ordering and ensures control over inventory levels, addressing the need for additional control procedures.

Question 17

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

Accepted Answer

Pre-numbering and accounting for checks ensure that all transactions are recorded and none are omitted, addressing the completeness assertion by verifying that all items that should be recorded are indeed recorded.

Question 18

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

Accepted Answer

Accuracy is not typically classified as a management assertion relevant to inventory in the context of financial reporting. Management assertions related to inventory commonly include existence (the inventory exists), completeness (all inventory items that should be recorded are recorded), and rights and obligations (the entity has the right to the inventory and it is correctly recorded in terms of ownership). Accuracy, while important in the context of financial information, is more broadly related to the correct measurement and recording of transactions and balances, rather than being an assertion directly applied to inventory.

Question 19

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 20

Which of the following activities is not included in the acquisition and payment cycle?

Accepted Answer

The acquisition and payment cycle is primarily concerned with the purchase of goods and services and the subsequent payment for them. The receipt of cash receipts is not a part of this cycle, as it involves the collection and deposit of funds received from customers. Therefore, option C is the correct answer. Options A, B, and D are all activities that are included in the acquisition and payment cycle.

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