Question 1

A good environmental control over purchases and payables would be to have ________.
A) the accounting department independent of the sales department
B) the purchasing department independent of the receiving department
C) the information systems department independent of the accounting department
D) the sales department independent of the shipping department

Accepted Answer

Having the purchasing department independent of the receiving department ensures that there is a proper segregation of duties and reduces the risk of fraudulent activities such as creating fictitious purchases or manipulating inventory records. This way, the purchasing department can focus on negotiating the best deals with suppliers, while the receiving department can focus on verifying the quality and quantity of the goods received.

Question 2

The statement that "all purchase orders must be supported by properly approved purchase requisitions" is a specific example of which general objective?
A) Valuation.
B) Completeness.
C) Authorization.
D) Classification.

Accepted Answer

The requirement for purchase orders to be supported by approved purchase requisitions ensures that all transactions are authorized before they are executed.

Question 3

Which of the following internal control procedures is most likely to be used in order to maintain accurate inventory records?
A) Perpetual inventory records are periodically compared with the current cost of individual inventory items.
B) A just-in-time inventory ordering system keeps inventory levels at a desired minimum.
C) Requisitions, receiving reports, and purchase orders are independently matched before payment is approved.
D) Periodic inventory counts are used to adjust the perpetual inventory records.

Accepted Answer

Periodic inventory counts are used to adjust the perpetual inventory records. This is because periodic inventory counts allow for a physical verification of the inventory on hand, which can then be compared to the perpetual inventory records. Any discrepancies can then be adjusted in the records to improve their accuracy. Options A, B, and C may be helpful internal control procedures in other areas, but they do not directly address maintaining accurate inventory records.

Question 4

Martinez CPA was auditing his client, Marvelous Retail Limited. He selected a sample of inventory items from the perpetual records and vouched all additions to receiving reports. This procedure was intended to satisfy which control objective?
A) Authorization.
B) Completeness.
C) Validity.
D) Accuracy.

Accepted Answer

Vouching additions to receiving reports ensures that recorded inventory additions are valid, meaning they actually occurred and are supported by documentation (receiving reports). This addresses the control objective of validity, ensuring that all recorded transactions or inventory additions are real and substantiated.

Question 5

To determine whether accounts payable is complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all ________.
A) payment vouchers
B) receiving reports
C) purchase requisitions
D) vendor's invoices

Accepted Answer

Receiving reports provide evidence that merchandise has been received and should be recorded in the accounts payable system. Payment vouchers, purchase requisitions, and vendor's invoices do not necessarily provide this evidence.

Question 6

Which control objective is associated with observing the inventory record-keeping personnel as they perform their work?
A) Authorization.
B) Completeness.
C) Environment.
D) Accuracy.

Accepted Answer

The answer of Which control objective is associated with observing...

Question 7

Purchase cutoff procedures should be designed to produce evidence about whether or not merchandise that is included in the inventory of the company ________.
A) has been paid for
B) is physically present in the warehouse
C) is owned by the company (legal title has been transferred)
D) relates to the shipping documents for the merchandise issued in the company's name

Accepted Answer

Purchase cutoff procedures should produce evidence of legal title transfer to the company, ensuring that the inventory belongs to the company. Payment status, physical presence, and relating to shipping documents are also important factors, but they do not provide evidence about legal ownership.

Question 8

Brown CPA was auditing her client Red Manufacturing Company. She selected a sample of inventory item recorded as issues in the perpetual records and vouched them to production requisitions. Brown's audit procedure was intended to satisfy which control objective?
A) Validity.
B) Completeness.
C) Authorization.
D) Accuracy.

Accepted Answer

Vouching inventory issues to production requisitions helps ensure that the inventory transactions recorded actually occurred and were valid, addressing the control objective of validity.

Question 9

The statement that items on the accounts payable register must be supported by a completed voucher package containing a services purchase order and evidence the service was provided is a specific example of which control objective?
A) Environment.
B) Validity.
C) Completeness.
D) Accuracy.

Accepted Answer

The control objective of "Validity" ensures that transactions are legitimate and authorized, which is supported by having a completed voucher package with a purchase order and evidence of service.

Question 10

A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably ________.
A) insist that the client perform physical counts of inventory items several times during the year
B) apply gross profit tests to ascertain the reasonableness of the physical counts
C) increase the extent of tests of controls of the inventory cycle
D) ask the client to schedule the physical inventory count at the end of the year and with a large number of test counts

Accepted Answer

If the assessed level of control risk is high, the auditor should perform more substantive procedures such as physical inventory count with a larger number of test counts to gather sufficient and appropriate audit evidence to reduce the risk of material misstatement in the inventory account. Insisting on the client to perform physical counts of inventory items several times during the year is not practical and may increase client expenses. Applying gross profit tests and increasing the extent of tests of controls of the inventory cycle are not substantial enough to detect material misstatements in inventory, especially when control risk is high.

Question 11

When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that ________.
A) all goods purchased before year-end are received before the physical inventory count
B) goods held on consignment for customers are not included in the inventory balance
C) the stock of inventory on hand at year-end is neither pledged nor sold
D) all goods owned at year-end are included in the inventory balance

Accepted Answer

A purchase cutoff test ensures that all goods owned at year-end are correctly included in the inventory balance, verifying that transactions are recorded in the correct accounting period.

Question 12

What documentary evidence is appropriate in attempting to determine if recorded purchase transactions are valid and prices on the vendors' invoices are correct?
A) Purchase requisitions and accounts payable entries.
B) Receiving reports and purchase orders.
C) Purchase requisitions and purchases orders.
D) Purchase orders and bid quotes.

Accepted Answer

Receiving reports and purchase orders provide appropriate documentary evidence to determine if recorded purchase transactions are valid and prices on the vendors' invoices are correct. Receiving reports show that the goods were received and purchase orders show the agreed-upon terms and prices for the purchase. Purchase requisitions and accounts payable entries are not as directly related to the validity of purchase transactions or the correctness of prices. Purchase orders and bid quotes may be useful in determining pricing, but they do not provide evidence of the actual transactions occurring.

Question 13

In "Retread Tires", J. Lock stole money by selling the company's new tires and replacing them with retread tires. The key weakness in the control system that failed to prevent or detect this scheme to continue was that ________.
A) Lock often prepared purchase orders
B) Lock was the chief accountant
C) the president of the company signed cheques without reviewing any supporting documentation
D) no one noticed the invoices for the retread tires

Accepted Answer

The key weakness in the control system that failed to prevent or detect this scheme was that the president of the company signed cheques without reviewing any supporting documentation. As the president was not reviewing any supporting documentation, Lock was easily able to get away with selling new tires and replacing them with retread tires, without anyone noticing or raising an alarm. Therefore, option C is the best choice.

Question 14

Mary Monitor CPA noted that ABC Co. Ltd. received goods prior to year-end and included them in the physical inventory but did not record them in the accounting records. In this case, which of the following adjustments should be made?
A) Debit Purchases, credit Cost of Goods Sold.
B) No adjustment is necessary.
C) Debit Inventory, credit Accounts Payable.
D) Debit Cost of Goods Sold, credit Accounts Payable.

Accepted Answer

Since the goods were received prior to year-end and included in the physical inventory, they should be added to inventory by debiting inventory and crediting accounts payable. This adjustment ensures that the ending inventory balance is accurately reflected on the balance sheet, and accounts payable is reduced by the amount owed for the goods.

Question 15

"Observe if personnel in the purchasing department are following company policies" is an audit procedure intended to test which control objective?
A) Environment.
B) Accuracy.
C) Validity.
D) Proper period cutoff.

Accepted Answer

The audit procedure is intended to test the control objective of environment, which is the control environment over the purchasing department.

Question 16

Quantities recorded during the physical count of inventories are greater than the quantities in the perpetual records. This could be the result of a failure to record ________.
A) sales
B) sales discounts
C) purchases
D) purchase discounts

Accepted Answer

If quantities recorded during the physical count of inventories are greater than the quantities in the perpetual records, it could be because purchases were not recorded in the perpetual records.

Question 17

In assessing control risk for purchases, an auditor vouches a sample of entries in the accounts payable trial balance to the supporting documents. Which account assertion would this test of controls most likely support?
A) Completeness.
B) Existence or occurrence.
C) Valuation or allocation.
D) Presentation

Accepted Answer

Vouching the entries in the accounts payable trial balance to supporting documents verifies the existence or occurrence of the recorded transactions. It ensures that the transactions actually took place and are accurately reflected in the financial statements.

Question 18

What is the usual source of journal entries to record the purchase of inventory in the general ledger?
A) Sales invoices updated with cost data from the inventory records department.
B) Purchase invoices updated with cost data from the inventory records department.
C) Bid quotes updated with cost data from the inventory records department.
D) Receiving reports updated with cost data from the accounts payable department.

Accepted Answer

The answer of What is the usual source of journal...

Question 19

The control objective associated with selecting a sample of receiving reports and tracing them to the perpetual inventory records is ________.
A) accuracy
B) completeness
C) validity
D) classification

Accepted Answer

Tracing receiving reports to perpetual inventory records ensures that all received items are recorded, addressing the control objective of completeness. This process verifies that inventory records are complete and include all items that should be recorded.

Question 20

Which of the following situations indicates a potential material weakness in internal control over acquisitions and expenditures?
A) Purchase orders are not prepared for services that are acquired directly under authorization of department heads.
B) The person who approves purchases also signs the cheques.
C) Unacceptable goods are not recorded on receiving reports.
D) The person who signs the cheques also stamps "paid" on the vouchers.

Accepted Answer

The answer of Which of the following situations indicates a...

Quiz 12: The Purchases, Payables, and Payments Process

A good environmental control over purchases and payables would be to have ________.

The statement that "all purchase orders must be supported by properly approved purchase requisitions" is a specific example of which general objective?

Which of the following internal control procedures is most likely to be used in order to maintain accurate inventory records?

Martinez CPA was auditing his client, Marvelous Retail Limited. He selected a sample of inventory items from the perpetual records and vouched all additions to receiving reports. This procedure was intended to satisfy which control objective?

To determine whether accounts payable is complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all ________.

Which control objective is associated with observing the inventory record-keeping personnel as they perform their work?

Purchase cutoff procedures should be designed to produce evidence about whether or not merchandise that is included in the inventory of the company ________.

Brown CPA was auditing her client Red Manufacturing Company. She selected a sample of inventory item recorded as issues in the perpetual records and vouched them to production requisitions. Brown's audit procedure was intended to satisfy which control objective?

The statement that items on the accounts payable register must be supported by a completed voucher package containing a services purchase order and evidence the service was provided is a specific example of which control objective?

A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably ________.

When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that ________.

What documentary evidence is appropriate in attempting to determine if recorded purchase transactions are valid and prices on the vendors' invoices are correct?

In "Retread Tires", J. Lock stole money by selling the company's new tires and replacing them with retread tires. The key weakness in the control system that failed to prevent or detect this scheme to continue was that ________.

Mary Monitor CPA noted that ABC Co. Ltd. received goods prior to year-end and included them in the physical inventory but did not record them in the accounting records. In this case, which of the following adjustments should be made?

"Observe if personnel in the purchasing department are following company policies" is an audit procedure intended to test which control objective?

Quantities recorded during the physical count of inventories are greater than the quantities in the perpetual records. This could be the result of a failure to record ________.

In assessing control risk for purchases, an auditor vouches a sample of entries in the accounts payable trial balance to the supporting documents. Which account assertion would this test of controls most likely support?

What is the usual source of journal entries to record the purchase of inventory in the general ledger?

The control objective associated with selecting a sample of receiving reports and tracing them to the perpetual inventory records is ________.

Which of the following situations indicates a potential material weakness in internal control over acquisitions and expenditures?