Question 1

Explain why auditors must put greater emphasis on the completeness assertion when auditing accounts payable. Contrast this with the audit of assets.

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Question 2

If a client uses the cycle method of counting inventory and never takes "wall to wall" inventory on a single date, what must the auditor do in order to avoid requesting the client to take a full inventory count?

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Question 3

Briefly explain why the auditor's inventory tests counts are conducted in two directions.

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Question 4

The requirement that "perpetual inventory records must be updated as of the date goods are received" is an example of a control that satisfies the "proper period" internal control objective.

Accepted Answer

The "proper period" internal control objective is to ensure that transactions are recorded in the appropriate accounting period. Updating perpetual inventory records as of the date goods are received ensures that inventory is recorded in the correct period, satisfying this objective.

Question 5

When auditors trace the test counts they took at the physical inventory count to the final inventory summary, they are gathering evidence on the completeness assertion.

Accepted Answer

Tracing test counts to the final inventory summary helps auditors gather evidence that all items have been included in the inventory, supporting the completeness assertion.

Question 6

This question requires knowledge about specific account balance assertions, general audit procedures, and trade accounts payable.
You are assigned to audit trade accounts payable at Green Corporation, whose business is wholesale and retail trade. Green purchases products from 1,000-2,000 manufacturers and sells the products to its retail and wholesale customers. The general ledger shows a trade accounts payable balance as of the balance sheet date in the amount of $42 million (the balance comprises 70% of current liabilities, 50% of total liabilities, and 35% of total liabilities and shareholders' equity). Green's accountants post summary entries from the purchases journal and from the cash disbursements journal to the accounts payable control account each month. The accounts payable manager gave you a detailed trial balance that lists all the recorded, unpaid invoices (recording date, vendor name, vendor invoice number, invoice date, and amount) subtotalled by vendor.
Other members of the audit team have already decided to assess control risk at maximum for accounts payable. The engagement manager gave you last year's audit working papers and told you not to use the audit program from last year because it was no longer appropriate. The first part of your assignment is to write the audit program for the audit of Green's trade accounts payable.
Required:
For each of the general assertions EXISTENCE, COMPLETENESS, and VALUATION, write two or more specific audit procedures designed to produce appropriate evidence about Green's trade accounts payable balance.

Accepted Answer

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Question 7

Identify the accounts payable audit objectives that the auditors must consider in determining the audit procedures to be performed.

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Question 8

Why are payables vouchers marked "paid" after cheques have been issued in payment of vendor invoices?

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Question 9

Auditors must place more emphasis on the existence and rights assertions when obtaining evidence about accounts payable.

Accepted Answer

Auditors typically place more emphasis on the completeness assertion for accounts payable to ensure all liabilities are recorded. Existence and rights assertions are more relevant to assets.

Question 10

Risk assessments and the results of any control testing are taken into account in selecting the nature, timing, and extent of further substantive procedures.

Accepted Answer

Risk assessments and control testing results guide auditors in determining the appropriate level of further substantive procedures needed to provide sufficient audit evidence.

Question 11

If the auditor traces a sample of receiving reports to the perpetual inventory records, the auditor is testing the control of validity.

Accepted Answer

Tracing a sample of receiving reports to the perpetual inventory records primarily tests for completeness, ensuring that all received items are recorded in the inventory system, rather than testing for validity.

Question 12

Identify situations when the auditor should use accounts payable confirmations and discuss whether they are required to use them.

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Question 13

When performing procedures to search for unrecorded liabilities, the auditor can obtain several sources of audit evidence, for example, documents, files, and enquiries of management and clerical personnel.
Required:
List at least five, but no more than eight, sources of audit evidence that could be accumulated in the search for unrecorded liabilities. (Do not write procedures or reasons for using the sources.)

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Question 14

If the auditor selects a sample of open accounts payable and vouches the details to supporting purchase documents, the auditor is testing the objective of validity.

Accepted Answer

This statement is true. Vouching accounts payable to supporting purchase documents tests whether the accounts payable are valid and properly recorded in the financial statements.

Question 15

Auditors can perform detail tests of control audit procedures to determine whether the client throughout the period of intended reliance is actually performing controls that are said to be in place and operating. What two characteristics must a detail test of controls audit procedure have in order to be successful?

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Question 16

Jack CPA is the auditor of Jill Corporation. Jack followed last year's working papers in selecting accounts payable to confirm. Jack mailed confirmations to 50 of Jill's 200 suppliers. The sample was designed to select accounts with the largest balances. Jack and Jill spent a lot of time reconciling minor differences between the confirmation amounts and the accounts payable trial balance.
Required:
Do you believe that Jack should have used the same sample design for accounts payable confirmations this year? If not, what suggestions can you give to improve the design?

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Question 17

Audit procedures to test controls over inventory records could include the procedures listed below. Match each of the procedures numbered 1 through 5 to the appropriate control objective (A through F) and place the identifying letter in the space provided.
A: Validity
B: Completeness
C: Authorization
D: Accuracy
E: Classification
F: Proper period
____ 1. Account for the integrity of the numerical sequence of shipping documents used to relieve stock from the inventory records.
____ 2. Examine material requisitions for evidence of approval by the production supervisor.
____ 3. Review the reconciliation of the daily summary of goods shipped per shipping bills to the daily summary of stock removed from inventory per the perpetual inventory records.
____ 4. Trace quantities shipped per shipping bills to the perpetual inventory records.
____ 5. Review material requisitions for evidence of internal verification of general ledger account numbers.

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Question 18

An internal control questionnaire for purchases and accounts payable could include the following questions. Match the question to the appropriate control objective and place the identifying letter in the space provided.
A: Environment
B: Validity
C: Completeness
D: Authorization
E. Accuracy
F. Classification
G: Proper period
____ 1. Are receiving reports pre-numbered and accounted for?
____ 2. Are all purchases orders supported by properly approved purchase requisitions?
____ 3. Are vendors' invoices listed immediately upon receipt?
____ 4. Are vendors' invoices matched against purchase orders and receiving reports before a liability is recorded?
____ 5. Is the purchasing department independent of the accounting, receiving, and shipping departments?
____ 6. Are vendors' invoices checked against purchase orders and receiving reports for quantities, prices, and terms?
____ 7. Does the accounting procedures manual require that transactions be recorded on the date that goods and services are received?
____ 8. Are all goods returned to vendors supported by properly approved shipping documents?
____ 9. Is the chart of accounts adequate?
____ 10. Are vouchers and attached documents cancelled after being recorded?

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Question 19

What issues must the auditor consider if the client has inventory located away from the client's place of business?

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Question 20

An auditor should not be concerned if a cross-reference of vendor addresses with employee addresses reveals that there are matches.

Accepted Answer

An auditor should be concerned if there are matches between vendor addresses and employee addresses as this could indicate potential conflicts of interest or fraudulent activities, such as fictitious vendors or employees submitting personal expenses as vendor invoices.

Quiz 12: The Purchases, Payables, and Payments Process