Question 1

When using confirmations to provide evidence about the completeness assertion for accounts payable,the appropriate population most likely would be ________.
A)vendors with whom the entity has previously done business
B)amounts recorded in the accounts payable subsidiary ledger
C)payees of cheques drawn in the month after the year-end
D)invoices filed in the company's open invoice file

Accepted Answer

The appropriate population for confirmations to provide evidence about the completeness assertion for accounts payable would be vendors with whom the entity has previously done business. These vendors would have provided goods or services to the entity and sent invoices to be recorded in accounts payable. By obtaining confirmation from these vendors, the auditor can ensure that all accounts payable balances have been recorded accurately and completely.

Question 2

The procedure: "select a sample of 10 balances from the accounts payable trial balance and vouch to supplier statements" is a substantive test of which assertion(s)?
A)Completeness,valuation,and presentation
B)Valuation and ownership
C)Existence,completeness,and ownership
D)Completeness

Accepted Answer

This procedure tests the existence of balances in the accounts payable trial balance, the completeness of recorded balances, and whether the balances are owned by the entity (i.e. not duplicate or fictitious).

Question 3

When the auditor selects a sample of inventory items from the perpetual inventory master file then searches out these items in the inventory warehouse,the auditor is collecting evidence to support which assertion?
A)Presentation.
B)Valuation.
C)Completeness.
D)Existence.

Accepted Answer

When the auditor selects a sample of inventory items from the perpetual inventory master file and searches out those items in the inventory warehouse, they are collecting evidence to support the existence assertion. This assertion is concerned with whether the inventory balance represents actual tangible goods that exist, and the process of physically counting inventory items helps to provide evidence that they do exist.

Question 4

Determining useful life,salvage value and required provisions for future site restoration costs,all render valuation a high inherent risk assertion for the audit of PPE.What are the main reasons?
A)Annual depreciation expense is always a highly material amount.
B)There is a lack of independent evidence to support the assertion.
C)The high degree of subjectivity and potential for management bias.
D)Auditor reliance on an external expert is usually required.

Accepted Answer

The determination of useful life, salvage value, and provisions for future site restoration costs is subjective and requires management's judgment. This makes it difficult for auditors to assess the reasonableness of the amounts reported and increases the risk of management bias. The lack of independent evidence to support the assertion and the requirement for auditor reliance on an external expert also contribute to the high inherent risk assertion. The annual depreciation expense may or may not be material depending on the size and composition of the PPE.

Question 5

Which of the following procedures is an auditor most likely to perform in searching for unrecorded payables?
A)Reconcile receiving reports with related cash payments made just prior to year-end.
B)Compare the ratio of accounts payable to purchases with the prior year's ratio.
C)Vouch a sample of creditor balances to supporting invoices,receiving reports,and purchase orders.
D)Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.

Accepted Answer

To search for unrecorded payables, an auditor is most likely to compare cash payments occurring after the balance sheet date with the accounts payable trial balance. This procedure helps identify any payments made after the year-end that should have been recorded as payables. Option A is incorrect because reconciling receiving reports with cash payments made just prior to year-end would help identify any payables recorded but not yet paid, rather than unrecorded payables. Option B is incorrect because comparing the ratio of accounts payable to purchases with the prior year's ratio may be helpful in identifying trends or anomalies, but it may not necessarily identify unrecorded payables. Option C is also incorrect because vouching a sample of creditor balances to supporting documents is more likely to identify unrecorded liabilities rather than unrecorded payables.

Question 6

A company's internal control system requires that an approved payables voucher,supported by a purchase order and a receiving report,accompany every cheque requisition.To determine whether cheques are being issued for unauthorized expenditures,an auditor is most likely to select items for testing from the population of all ________.
A)purchase orders
B)cancelled cheques
C)receiving reports
D)approved vouchers

Accepted Answer

To determine if cheques are being issued for unauthorized expenditures, an auditor would select from the population of cancelled cheques. This allows the auditor to trace the cheques back to the supporting documentation (approved payables voucher, purchase order, and receiving report) to verify authorization and completeness of the transaction.

Question 7

Which of the following accounts would the auditor review in order to obtain reasonable assurance that additions to the equipment (fixed asset)account are not understated?
A)Amortization expense.
B)Gain on disposal of equipment.
C)Accounts payable.
D)Repairs and maintenance expense.

Accepted Answer

The repairs and maintenance expense account would provide information on any work or upgrades done to the equipment during the year, which could represent additions to the equipment account. Reviewing this account would help the auditor obtain reasonable assurance that additions to the equipment account are not understated. Amortization expense and gain on disposal of equipment would not provide relevant information for this purpose, and accounts payable represents liabilities rather than asset additions.

Question 8

Limiting access to blank documents,such as purchase orders,is part of the custody duty in the acquisition and expenditure cycle.

Accepted Answer

Limiting access to blank documents helps to prevent unauthorized use or manipulation of the documents, which is part of the custody duty in the acquisition and expenditure cycle.

Question 9

Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
A)Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.
B)Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether receiving reports support them.
C)Examining unusual relationships between monthly accounts payable balances and recorded cash payments.
D)Reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date.

Accepted Answer

By reviewing cash disbursements recorded subsequent to the balance sheet date, the auditor can identify whether any of those payments relate to trade accounts payable incurred in the prior period but not recorded until after the balance sheet date. This procedure is effective because it focuses on payments made after the balance sheet date that might relate to liabilities recorded in the prior period. The other options may also be used as audit procedures but are not as effective for identifying unrecorded trade accounts payable.

Question 10

An auditee may count the inventory at a date other than the balance sheet date.Which of the following is necessary if the auditor plans to observe the count on a non-balance sheet date?
A)Complete recounts by independent teams must be performed.
B)Perform additional roll-forward or roll-back procedures for the period between the count date and balance sheet date.
C)Unit cost records must be integrated with production accounting records.
D)Inventory cannot be a material amount.

Accepted Answer

If the auditor plans to observe the inventory count on a non-balance sheet date, they must perform additional roll-forward or roll-back procedures to ensure that the inventory balance is accurately stated for the balance sheet date. This is necessary because there may be additional inventory transactions between the count date and the balance sheet date that could affect the accuracy of the balance sheet. A complete recount by independent teams may be necessary if the auditee has a history of unreliable inventory counts or if the inventory is material. Integrating unit cost records with production accounting records may be necessary for auditing the accuracy of the current cost of inventory, but it is not directly related to the observation of the inventory count on a non-balance sheet date. The materiality of the inventory balance does not determine whether or not additional procedures are necessary for observing the inventory count on a non-balance sheet date.

Question 11

Employees in the receiving department should inspect materials received as to quality and quantity and prepare a receiving report.

Accepted Answer

It is the responsibility of employees in the receiving department to inspect the materials received for quality and quantity, and to prepare a receiving report to document the same. This process helps ensure that the materials received are in good condition and that the correct amount of materials has been delivered.

Question 12

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

Accepted Answer

The statement refers to the control objective of authorization, which ensures that all transactions are approved by appropriate personnel before being processed. Purchase orders should only be made if they are properly approved through the purchase requisition process.

Question 13

When confirming accounts payable,emphasis should be put on what kind of accounts?
A)Accounts with small or zero balances.
B)All accounts should be equally emphasized.
C)Accounts with large balances.
D)Accounts listed in the accounts payable subsidiary ledger.

Accepted Answer

The answer of When confirming accounts payable,emphasis should be put...

Question 14

Which of the following is a common substantive test of the valuation assertion for PPE and intangible assets?
A)Observe physical inventory taking of the fixed assets and compare with detailed asset records.
B)For property valued at fair value,examine and verify supporting valuation evidence,such as independent appraisals.
C)Recalculate amortization expense and trace to general ledger account(s).
D)From a sample of items from the asset subsidiary records,inspect title or other ownership legal documents,

Accepted Answer

A common substantive test of the valuation assertion for PPE and intangible assets is to examine and verify supporting valuation evidence, such as independent appraisals, for property that is valued at fair value. This helps ensure that the assets are recorded on the balance sheet at their appropriate values. The other options listed are also common substantive tests for PPE and intangible assets, but they are not specifically related to the valuation assertion.

Question 15

The auditor decided to test the completeness of accounts payable by sending confirmations to selected vendors.The auditor's best approach in selecting the vendor accounts to confirm is to __________.
A)select vendor accounts with large balances
B)select vendor accounts at random in order to apply a statistical sampling procedure
C)select vendor accounts with small or zero balances
D)select vendor accounts that are past due

Accepted Answer

Selecting vendor accounts with small or zero balances ensures that all vendors are accounted for and there are no omitted vendors. Selecting only vendor accounts with large balances, past due accounts or applying a statistical sampling procedure may not ensure completeness of accounts payable.

Question 16

The statement "account distributions for invoices are appropriate and reviewed independent of preparation" is a specific example of which general control objective?
A)Valuation
B)Completeness
C)Authorization
D)Classification

Accepted Answer

The answer of The statement "account distributions for invoices are...

Question 17

An auditor wants to perform tests of controls on a client's cash disbursement procedures.If the control procedures leave no audit trail or documentary evidence,the auditor is most likely to test the procedures by ________.
A)confirmation and observation
B)observation and inquiry
C)analytical procedures and confirmation
D)inquiry and analytical procedures

Accepted Answer

Since there is no audit trail or documentary evidence available for testing, the auditor would need to rely on observation of the procedures being performed and inquiry of relevant personnel to gain an understanding of how the controls operate. Confirmation and analytical procedures require some form of reliable data or documentation to be effective, so they would not be suitable in this scenario.

Question 18

To uncover liabilities from actual or potential litigation,which of the following procedures is required by CAS 501?
A)Sending an inquiry letter to suppliers with which the auditee normally does business
B)Sending an inquiry letter prepared to the auditee's lawyers.
C)Sending confirmations to the insurance companies with which the auditee has coverage.
D)Sending bank confirmations to all financial institutions with which the auditee has done business.

Accepted Answer

According to CAS 501, the auditor is required to send an inquiry letter prepared to the auditee's lawyers to uncover liabilities from actual or potential litigation. This is because the lawyer is most likely to have information about any actual or potential litigation involving the auditee, and the inquiry can provide useful information about contingent liabilities that may not be reflected in the financial statements. Therefore, options A, C, and D are not relevant in uncovering liabilities from litigation.

Question 19

Which of the following statements concerning auditor observation of the auditee's physical inventory count is FALSE?
A)Tracing of items from the warehouse floor to the final inventory compilation,are performed test the completeness assertion.
B)Review of the count instructions is performed to assess client controls related to the inventory count.
C)If an auditor's expert is used during the count,it is the auditor who assumes responsibility for his/her work.
D)The auditor must be present for the full inventory count of all items,start to finish.

Accepted Answer

While it is ideal for the auditor to be present for the full inventory count, it is not always possible or practical. In some cases, the auditor may observe a representative sample of items and use that as a basis for testing the inventory balance as a whole. Therefore, statement D is false.

Question 20

A credit balance in a client's inventory records would suggest failure to record purchases.

Accepted Answer

A credit balance in inventory records means that more inventory has been credited (probably due to sales returns or overstocking) than the inventory that has been debited for purchases. This indicates a failure to record all the purchases, which would result in discrepancies in inventory values and incorrect financial statements.

Quiz 12: The Purchases, payables, and Payments Process

When using confirmations to provide evidence about the completeness assertion for accounts payable,the appropriate population most likely would be ________.

The procedure: "select a sample of 10 balances from the accounts payable trial balance and vouch to supplier statements" is a substantive test of which assertion(s) ?

When the auditor selects a sample of inventory items from the perpetual inventory master file then searches out these items in the inventory warehouse,the auditor is collecting evidence to support which assertion?

Determining useful life,salvage value and required provisions for future site restoration costs,all render valuation a high inherent risk assertion for the audit of PPE.What are the main reasons?

Which of the following procedures is an auditor most likely to perform in searching for unrecorded payables?

Which of the following accounts would the auditor review in order to obtain reasonable assurance that additions to the equipment (fixed asset) account are not understated?

Limiting access to blank documents,such as purchase orders,is part of the custody duty in the acquisition and expenditure cycle.

Which of the following audit procedures is best for identifying unrecorded trade accounts payable?

An auditee may count the inventory at a date other than the balance sheet date.Which of the following is necessary if the auditor plans to observe the count on a non-balance sheet date?

Employees in the receiving department should inspect materials received as to quality and quantity and prepare a receiving report.

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

When confirming accounts payable,emphasis should be put on what kind of accounts?

Which of the following is a common substantive test of the valuation assertion for PPE and intangible assets?

The auditor decided to test the completeness of accounts payable by sending confirmations to selected vendors.The auditor's best approach in selecting the vendor accounts to confirm is to __________.

The statement "account distributions for invoices are appropriate and reviewed independent of preparation" is a specific example of which general control objective?

An auditor wants to perform tests of controls on a client's cash disbursement procedures.If the control procedures leave no audit trail or documentary evidence,the auditor is most likely to test the procedures by ________.

To uncover liabilities from actual or potential litigation,which of the following procedures is required by CAS 501?

Which of the following statements concerning auditor observation of the auditee's physical inventory count is FALSE?

A credit balance in a client's inventory records would suggest failure to record purchases.