Question 1

Auditors examine supporting documentation for cash disbursements subsequent to the balance sheet date in order to determine whether the cash disbursement was for a current period liability.
Describe at least two audit procedures the auditor would perform to provide evidence that the cash disbursement was made for a current period liability.

Accepted Answer

The answer of Auditors examine supporting documentation for cash disbursements...

Question 2

An inventory acquisition is received late in the afternoon of December 31 after the physical inventory is completed. If the acquisition is included in accounts payable and purchases, but excluded from inventory, the result:
A) is an understatement of net earnings.
B) is an overstatement of net earnings.
C) is an overstatement of working capital.
D) is an overstatement of owner's equity.

Accepted Answer

Since the acquisition is not included in the inventory, it means that the cost of the inventory is understated. This results in a higher net income because the cost of goods sold is less than it should be. Therefore, it is an understatement of net earnings.

Question 3

A document review of which of the following is most likely to yield evidence of any unrecorded liabilities?
A) Receiving reports
B) Vendor Memorandums
C) Unpaid accounts payable
D) Sales invoices out of sequence

Accepted Answer

Unpaid accounts payable are liabilities that have not been recorded in the accounting system, therefore reviewing them can result in identifying any unrecorded liabilities. Receiving reports, vendor memorandums, and sales invoices out of sequence may not directly relate to unrecorded liabilities.

Question 4

When auditing Accounts payable, the auditor is more concerned about the possibility of understatements than overstatements.

Accepted Answer

The auditor is more concerned about the possibility of understatements because these can result in an understated liability, which could create a financial misstatement in the financial statements. Overstatements, on the other hand, may result in an overstatement of liabilities or expenses, which could still be corrected and result in a lower net income, but would not create as significant of a financial misstatement.

Question 5

Cutoff information for inventory acquisitions should be obtained during:
A) the interim period prior to year-end.
B) the interim period immediately following year-end.
C) the physical observation of inventory.
D) either the interim period prior to or immediately following year-end.

Accepted Answer

The answer of Cutoff information for inventory acquisitions should be...

Question 6

The balance-related audit objective realizable value is not applicable when auditing Accounts payable.

Accepted Answer

Realizable value is a concept that refers to the expected amount of cash that a business can generate from the sale of its assets. This concept is typically applicable to auditing the value of inventory, fixed assets, and accounts receivable, but not to accounts payable. Accounts payable reflects the outstanding amount of money that a business owes to its suppliers or vendors for goods or services received but not yet paid for. Therefore, the balance-related audit objective realizable value is not relevant to the audit of accounts payable.

Question 7

The main focus taken by the auditor in verifying liability balances is on the discovery of:
A) understated liabilities.
B) overstated liabilities.
C) unrecorded liabilities.
D) overstated or extraneous liabilities.

Accepted Answer

The auditor's main focus in verifying liability balances is on the discovery of unrecorded liabilities. This is because unrecorded liabilities can have a material impact on the financial statements, and they can be difficult to detect.

Question 8

By tracing receiving reports issued at and before year-end to vendors' invoices and making sure they are included in accounts payable, the auditor is testing for:
A) theft of merchandise by employees.
B) unrecorded obligations.
C) lapping.
D) kiting.

Accepted Answer

By tracing receiving reports to vendors' invoices and ensuring they are properly recorded in accounts payable, the auditor is testing for unrecorded obligations, which are transactions that have been incurred by the company but not yet recorded in its financial statements. This test helps the auditor ensure that all liabilities are recorded and the financial statements are fairly presented. The other answer choices are not related to this specific audit procedure.

Question 9

When performing tests of controls or substantive tests of transactions for acquisitions, vendors' invoices are more useful than vendors' statements.

Accepted Answer

Vendors' invoices provide detailed information on specific transactions, including dates, amounts, and descriptions of goods or services provided. In contrast, vendors' statements typically summarize account activity over a period of time and do not provide as much detail. Therefore, invoices are more useful for testing the completeness, accuracy, and validity of transactions related to acquisitions.

Question 10

In determining that the accounts payable cutoff is correct, it is essential that the cutoff tests be coordinated with the:
A) confirmation of payables.
B) tests on long-term liabilities.
C) observation of inventory.
D) cash count.

Accepted Answer

The observation of inventory is crucial for ensuring that the accounts payable cutoff is correct, as it helps verify that purchases and related liabilities are recorded in the correct accounting period.

Question 11

When the client's physical inventory occurs before the last day of the year, it is still necessary to perform an accounts payable cutoff at the time of the count. In addition, the auditor must verify whether all acquisitions taking place between the count and the end of the year were added to:
A) the physical inventory.
B) Accounts Payable.
C) Accounts Payable and Cost of Goods Sold.
D) the physical inventory and Accounts Payable.

Accepted Answer

When the physical inventory occurs before the last day of the year, it is necessary to perform an accounts payable cutoff at the time of the count. This is to ensure that all unpaid invoices relating to inventory included in the count are properly recorded in the accounts payable balance. 
In addition, the auditor must verify whether all acquisitions taking place between the count and the end of the year were added to the physical inventory and accounts payable. Therefore, the best option is D, which includes both the physical inventory and accounts payable.

Question 12

To test for overstatement cutoff amounts when auditing Accounts payable, the auditor should trace receiving reports issued before year-end to related vendors' invoices to make sure they are not recorded as Accounts payable.

Accepted Answer

To test for overstatement cutoff amounts when auditing Accounts payable, the auditor should trace vendors' invoices received before year-end to related receiving reports to ensure they are recorded as Accounts payable. The opposite would be tracing receiving reports to vendors' invoices, which would not be effective in testing for overstatement.

Question 13

When assets are being verified, auditors focus much of their attention on making sure that the accounts are not overstated. Alternatively, auditors focus their efforts on understatement when auditing liabilities. What is the primary reason for this difference in focus?
A) Auditors' legal liability
B) GAAP
C) GAAS requirements
D) All of the above

Accepted Answer

The answer of When assets are being verified, auditors focus...

Question 14

Peprah Company pays its accounts payable 45 days after receipt of the goods or services. In this case which audit procedure should be used to detect any unrecorded liabilities?
A) examine cash disbursements for several weeks after the balance sheet date
B) reconcile purchase orders to requisition orders
C) reconcile purchase orders to receiving reports
D) reconcile purchase orders to vendor invoices

Accepted Answer

Examining cash disbursements for several weeks after the balance sheet date will help to detect any unrecorded liabilities since Peprah Company pays its accounts payable 45 days after receipt of the goods or services. This allows for some lag time between when the goods or services are received and when they are paid for, so examining cash disbursements after the balance sheet date will help to identify any liabilities that were not recorded on the balance sheet. Reconciling purchase orders and vendor invoices to detecting unrecorded liabilities would not be as useful as examining cash disbursements.

Question 15

The extent of a search for unrecorded liabilities largely depends on:
A) materiality and inherent risk.
B) materiality and control risk.
C) materiality only.
D) inherent risk only.

Accepted Answer

The answer of The extent of a search for unrecorded...

Question 16

When an acquisition is on an FOB origin basis, the inventory and related accounts payable must be recorded in the current period if the goods were:
A) received prior to the balance sheet date.
B) shipped prior to the balance sheet date.
C) both shipped and received prior to the balance sheet date.
D) paid for in advance.

Accepted Answer

Under FOB origin, title and responsibility transfer to the buyer as soon as the goods are shipped. Therefore, if the goods were shipped prior to the balance sheet date, the inventory and related accounts payable should be recorded in the current period.

Question 17

Describe the audit procedures typically used to test for out-of-period liabilities (also referred to as the search for unrecorded accounts payable).

Accepted Answer

The answer of Describe the audit procedures typically used to...

Question 18

The auditor has decided to use accounts payables confirmations when testing substantive testing for balances. Which two management assertions is she testing?
A) Existence and Completeness
B) Existence and Occurrence
C) Existence Only
D) Completeness Only

Accepted Answer

When using accounts payable confirmations, the auditor is testing both the existence (that the balance exists and is accurate) and completeness (that all applicable payables are recorded).

Question 19

To test for cutoff errors which overstate liabilities, the auditor should trace, to vendors' invoices, the receiving reports issued:
A) after year-end.
B) before year-end.
C) the last day of the fiscal year.
D) both before and after year-end.

Accepted Answer

If the auditor traces receiving reports issued before year-end, it is possible that they will not be recorded in the accounts payable at year-end, resulting in understated liabilities. However, if the auditor traces receiving reports issued after year-end, any cutoff errors that overstate liabilities will likely be caught. Therefore, option A is the best choice.

Question 20

In searching for unrecorded liabilities the purpose of the audit procedure to "examine underlying documentation for subsequent cash disbursements" is to:
A) uncover liabilities on the balance sheet which should not have been recorded until a subsequent period.
B) find the documentation relating to a cash disbursement.
C) uncover payments made in a subsequent accounting period for liabilities that existed at the balance sheet date.
D) uncover cash disbursements recorded in a subsequent accounting period which should be recorded in this period.

Accepted Answer

The purpose of the audit procedure to "examine underlying documentation for subsequent cash disbursements" is to uncover payments made in a subsequent accounting period for liabilities that existed at the balance sheet date, which is consistent with option C. The audit procedure is used to search for unrecorded liabilities, not liabilities that should not have been recorded until a subsequent period (option A). While the procedure may lead to finding the documentation relating to a cash disbursement (option B), this is not the primary purpose. Lastly, the procedure specifically looks for payments made in a subsequent accounting period, not cash disbursements recorded in a subsequent accounting period which should be recorded in this period (option D).

Quiz 18: Audit of the Acquisition and Payment Cycle: Tests of Controls and Substantive Tests of Transactions, and Accounts Payable

An inventory acquisition is received late in the afternoon of December 31 after the physical inventory is completed. If the acquisition is included in accounts payable and purchases, but excluded from inventory, the result:

A document review of which of the following is most likely to yield evidence of any unrecorded liabilities?

When auditing Accounts payable, the auditor is more concerned about the possibility of understatements than overstatements.

Cutoff information for inventory acquisitions should be obtained during:

The balance-related audit objective realizable value is not applicable when auditing Accounts payable.

The main focus taken by the auditor in verifying liability balances is on the discovery of:

By tracing receiving reports issued at and before year-end to vendors' invoices and making sure they are included in accounts payable, the auditor is testing for:

When performing tests of controls or substantive tests of transactions for acquisitions, vendors' invoices are more useful than vendors' statements.

In determining that the accounts payable cutoff is correct, it is essential that the cutoff tests be coordinated with the:

When the client's physical inventory occurs before the last day of the year, it is still necessary to perform an accounts payable cutoff at the time of the count. In addition, the auditor must verify whether all acquisitions taking place between the count and the end of the year were added to:

To test for overstatement cutoff amounts when auditing Accounts payable, the auditor should trace receiving reports issued before year-end to related vendors' invoices to make sure they are not recorded as Accounts payable.

When assets are being verified, auditors focus much of their attention on making sure that the accounts are not overstated. Alternatively, auditors focus their efforts on understatement when auditing liabilities. What is the primary reason for this difference in focus?

Peprah Company pays its accounts payable 45 days after receipt of the goods or services. In this case which audit procedure should be used to detect any unrecorded liabilities?

The extent of a search for unrecorded liabilities largely depends on:

When an acquisition is on an FOB origin basis, the inventory and related accounts payable must be recorded in the current period if the goods were:

Describe the audit procedures typically used to test for out-of-period liabilities (also referred to as the search for unrecorded accounts payable).

The auditor has decided to use accounts payables confirmations when testing substantive testing for balances. Which two management assertions is she testing?

To test for cutoff errors which overstate liabilities, the auditor should trace, to vendors' invoices, the receiving reports issued:

In searching for unrecorded liabilities the purpose of the audit procedure to "examine underlying documentation for subsequent cash disbursements" is to: