Deck 8: Acquisition and Expenditure Cycle

Question 1

In order to ensure appropriate segregation of duties,the supervisor in each department handles the custody of the payroll checks.

Answer 1

False

Question 2

Auditors should inspect the "unmatched receiving report" file to determine whether the liability for the receipt of goods has been recorded.

Answer 2

True

Question 3

Acquisition and expenditure activities include (1)purchasing goods and services,(2)receiving the goods or services,(3)recording the asset or expense and related liability,and (4)depreciating assets purchased.

Answer 3

False

Question 4

The emphasis is on the completeness assertion because financial statement users tend to be more concerned about understated expenses and liabilities than overstated.

Question 5

Unrecorded liabilities can be prevented if there is an appropriate segregation of duties in accounts payable.

Question 6

If the risk of material misstatement is assessed as high,it is likely that additional substantive procedures will be required.

Question 7

Tracing the payables to the cash disbursements journal can provide the evidence regarding the valuation of accounts payable.

Question 8

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.

Question 9

Changes to the payroll master file should be approved by human resources department.

Question 10

Purchases are requisitioned by a purchasing department that seeks the best prices and quality.

Question 11

Proper separation of duties involves the purchasing department as the recordkeeping function.

Question 12

If a person is absent from the company due to illness or vacation,their paycheck should be returned to the payroll department.

Question 13

The receiving department receives a "blind" copy of the purchase order which does not include the vendor's name and address.

Question 14

The principal goal of the physical inspection of property,plant,and equipment is to determine actual valuation of property.

Question 15

If internal controls over the expenditure cycle are weak,auditors will need to design substantive procedures to try to detect whether control failures have produced misleading financial statement account balances.

Question 16

The auditors' "search for unrecorded liabilities" should emphasize payments made shortly after the end of the year.

Question 17

The payroll department approves payroll hours prior to processing the payroll.

Question 18

Paychecks should be written to a payroll bank account that is used only for payroll.

Question 19

Bill of ladings for goods shipped from a vendor to the purchasing company should always include the company's purchase order number.

Question 20

The accounts payable department reconciles the vendor invoice,purchase order,and receiving report prior to approving the payment to the vendor.

Question 21

Which of the following accounts would most likely be reviewed by the auditor to gain reasonable assurance that additions to the equipment account are not understated?

A) Depreciation expense.
B) Gain on disposal of equipment.
C) Accounts payable.
D) Repairs and maintenance expense.

Question 22

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 checks drawn in the month after the year-end.
D) invoices filed in the entity's open invoice file.

Question 23

Auditors may conclude that depreciation charges are too small by noting

A) insured values much larger than book values.
B) large numbers of fully depreciated assets.
C) frequent trade-ins of relatively new assets.
D) large and frequent losses on assets retired.

Question 24

Vouchers should be stamped PAID to

A) prevent duplicate payment.
B) generate a new purchase order.
C) indicate posting in the voucher register.
D) facilitate preparation of the bank reconciliation.

Question 25

Which of the following would detect the understatement of a purchase discount?

A) Verify the arithmetic accuracy of the purchases journal.
B) Compare purchase disbursement records and checks with invoice terms.
C) Compare approved purchase orders to receiving reports.
D) Verify the receipt of items ordered and invoiced.

Question 26

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) no goods held on consignment for customers are included in the inventory balance.
C) no goods observed during the physical count are pledged or sold.
D) all goods owned at year-end are included in the inventory balance.

Question 27

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

A) Purchase orders are not prepared for services acquired directly under authorization of department heads.
B) The same person authorizes voucher packages and signs checks.
C) Unacceptable goods are not scheduled on receiving reports.
D) The same person signs checks and stamps vouchers PAID.

Question 28

Purchase cutoff procedures should be designed to produce evidence of whether merchandise is included in the inventory of the client company if the company

A) has paid for the merchandise.
B) has physical possession of the merchandise.
C) holds legal title to the merchandise.
D) holds the shipping documents for the merchandise issued in the company's name.

Question 29

Which of the following would not be included in the supporting documents for a voucher?

A) Purchase order.
B) Vendor invoice.
C) Receiving report.
D) Blank check.

Question 30

The auditor decided to test accounts payable by sending open-ended (blank)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 based on the number of purchases from vendors during the year.
D) select vendor accounts that are past due.

Question 31

A voucher would typically contain

A) a purchase requisition, purchase order, vendor invoice, receiving report, and check copy.
B) a purchase requisition, purchase order, sales invoice, receiving report, and check copy.
C) a purchase requisition, sales order, sales invoice, receiving report, and check copy.
D) a purchase requisition, sales order, vendor invoice, receiving report, and check copy.

Question 32

For the copy of the purchase order that goes to the receiving department,it is best to

A) leave off the description of the goods ordered.
B) leave off the quantity of the goods ordered.
C) leave off the name of the vendor.
D) have the receiving department forward all copies of the purchase order to accounts payable.

Question 33

"Recorded vouchers (accounts payable entries)in the voucher register (e.g.,purchases journal)supported by completed voucher documentation" is a specific example of which management assertion?

A) Classification.
B) Occurrence.
C) Completeness.
D) Cutoff.

Question 34

The usual source for journal entries posted to the general ledger to record the purchase of inventory is

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) receiving reports updated with cost data from the accounts payable department.
D) vouchers payable journal from the accounts payable department.

Question 35

Cash disbursements are authorized by

A) purchase orders.
B) invoices.
C) receiving reports.
D) a complete voucher package.

Question 36

Which of the following client control activities is not usually performed in the vouchers payable (accounts payable)department?

A) Determining the mathematical accuracy of the vendors' invoices.
B) Writing checks for the treasurer's signature to take advantage of purchase discounts.
C) Controlling the mailing of the check and remittance advice.
D) Checking the prices on the vendor's invoice.

Question 37

A voucher package is used to

A) document receipt of inventory.
B) document completion of services.
C) document a purchase contract.
D) provide a source document for recording the purchase of a good or service.

Question 38

An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal.The purpose of this substantive audit procedure most likely was to

A) identify usually large purchases that should be investigated further.
B) verify that cash disbursements were for goods actually received.
C) determine that purchases were properly recorded.
D) test whether payments were for goods actually ordered.

Question 39

"All purchase orders are supported by requisitions from proper persons" is a specific example of which management assertion?

A) Occurrence.
B) Completeness.
C) Cutoff.
D) Classification.

Question 40

What evidence is appropriate to determine whether recorded purchase transactions are valid and the vendors charged the correct prices?

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.

Question 41

The permanent reference files (master files)in a personnel and payroll database ordinarily do not include which of the following?

A) Deduction table.
B) Payroll master.
C) Compensation table.
D) Employee earning record.

Question 42

When auditing PP&E,the auditor's approach is generally to

A) examine evidence supporting the amounts in the ending balance.
B) examine evidence supporting additions during the year.
C) follow a reliance strategy, testing internal controls and analytical procedures.
D) concentrate on finding unrecorded assets.

Question 43

Failure to record a liability generally results in

A) an understatement of profit.
B) an understatement of current ratio.
C) an overstatement of profit.
D) an overstatement of assets.

Question 44

A weakness in internal control over recording retirements of equipment may cause an auditor to

A) inspect certain items of equipment in the plant and trace those items to the accounting records.
B) review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year.
C) trace additions to the "other assets" account to search for equipment that is still on hand but no longer being used.
D) select certain items of equipment from the accounting records and locate them in the plant.

Question 45

Which of the following audit procedures is best for identifying unrecorded 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 they are supported by receiving reports.
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.

Question 46

Improperly capitalizing an expense item results in

A) understatement of profit in the current year and overstatement in future years.
B) understatement of profit in the current year and in future years.
C) overstatement of profit in the current year and understatement in future years.
D) overstatement of profit in the current year and in future years.

Question 47

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

A) Reconcile receiving reports with related cash payments made just prior to year-end.
B) Contrast 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.

Question 48

Which of the following would be an indicator of potential fraud?

A) Photocopies of invoices in the voucher file.
B) Vendor invoices in numerical order.
C) Vendors with only post office box addresses.
D) All of the above indicate potential fraud.

Question 49

Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?

A) Trace a sample of accounts payable entries recorded just before year-end to the unmatched receiving report file.
B) Compare a sample of purchase orders issued just after year-end with the year-end accounts payable trial balance.
C) Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices.
D) Scan the cash disbursements entries recorded just before year-end for indications of unusual transactions.

Question 50

Cutoff tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year most likely would provide assurance about management's assertion of

A) valuation or allocation.
B) existence or occurrence.
C) completeness.
D) rights and obligations.

Question 51

An auditor wishes to perform tests of controls on a client's purchasing procedures.If the control activities leave no audit trail of documentary evidence,the auditor most likely will test the procedures by

A) confirmation and observation.
B) observation and inquiry.
C) analytical procedures and confirmation.
D) inquiry and analytical procedures.

Question 52

Which of the following fraud detection steps could not be performed by CAATs?

A) Look for photocopies in invoice files.
B) Look for vendor invoices in numerical order.
C) Look for vendor invoices slightly below the approval threshold.
D) Look for duplicate vendor numbers.

Question 53

Which of the following expense accounts would not normally be tested by listing all debits and examining any significant items?

A) Legal expense.
B) Miscellaneous expense.
C) Repairs and Maintenance.
D) Payroll expense.

Question 54

Which of the following situations represents an internal control weakness in the payroll department?

A) Payroll department personnel are rotated in their duties.
B) Paychecks are distributed by the employees' immediate supervisor.
C) Payroll records are reconciled with quarterly tax reports.
D) The timekeeping function is independent of the payroll department.

Question 55

Which of the following personnel department procedures reduces the risk of payroll fraud and represents an appropriate responsibility for the department?

A) Distributing paychecks.
B) Authorizing overtime hours.
C) Authorizing the addition or deletion of employees from the payroll.
D) Collecting and retaining unclaimed paychecks.

Question 56

A liability for a long-term purchase contract should generally be recognized when

A) the contract is signed.
B) the goods are shipped.
C) the goods are received.
D) the goods are sold to match the cost.

Question 57

Tracing a sample of time clock cards to payroll registers (journals)is a procedure designed to obtain evidence about the transaction assertion(s)of

A) occurrence only.
B) occurrence and accuracy only.
C) completeness only.
D) accuracy only.

Question 58

In performing a search for unrecorded retirements of fixed assets,an auditor most likely would

A) inspect the property ledger and the insurance and tax records, and then tour the client's facilities.
B) tour the client's facilities, and then inspect the property ledger, and the insurance and tax records.
C) analyze the repair and maintenance account, and then tour the client's facilities.
D) tour the client's facilities, and then analyze the repair and maintenance account.

Question 59

An entity's internal control structure requires for every check request that there be an approved voucher,supported by a prenumbered purchase order and a prenumbered receiving report.To determine whether checks are being issued for unauthorized expenditures,an auditor most likely would select items for testing from the population of all

A) purchase orders.
B) canceled checks.
C) receiving reports.
D) approved vouchers.

Question 60

To provide assurance that each voucher is submitted and paid only once,an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is

A) supported by a vendor's invoice.
B) stamped "paid" by the check signer.
C) prenumbered and accounted for.
D) approved for authorized purchases.

Question 61

Small Corporation uses a Wages Clearing Account for its payroll disbursements.At the end of February,a reasonably large debit balance remained in this account.The most likely reason for this is that

A) more labor cost had been assigned to the expense accounts than had been paid.
B) some labor cost had not been properly classified in the expense accounts.
C) some employees had not yet cashed their checks.
D) not enough cash had been transferred to the bank account.

Question 62

Which of the following procedures is least likely to be performed before the balance-sheet date?

A) Observation of inventory.
B) Review of internal control over cash disbursements.
C) Search for unrecorded liabilities.
D) Confirmation of receivables.

Question 63

To test the transaction assertion of occurrence in the area of payroll,the auditor most likely would

A) select a sample of personnel files and trace the pay rate to union contracts or other rate rights and obligations.
B) select a sample of personnel files and trace the pay rate to payroll department files used in payroll preparation.
C) select a sample of payroll register entries and recalculate gross pay, deductions, and net pay.
D) select a sample of payroll register entries and vouch hours worked to clock time cards.

Question 64

The sampling unit in a test of controls pertaining to the existence or occurrence of payroll transactions ordinarily is a(an)

A) clock card or time ticket.
B) employee Form W-2.
C) employee personnel record.
D) payroll register (journal) entry.

Question 65

Which of the following is an internal control activity that could prevent a paid disbursement voucher from being presented for payment a second time?

A) Vouchers should be prepared by individuals who are responsible for signing disbursement checks.
B) Disbursement vouchers should be approved by at least two responsible management officials.
C) The date on a disbursement voucher should be within a few days of the date the voucher is presented for payment.
D) The official who signs the check should compare the check with the voucher and should stamp PAID on the voucher documents.

Question 66

Substantive tests of account balances in the payroll cycle are likely to include the following procedures except

A) analytical review procedures.
B) recalculation of accruals.
C) comparison of accruals to subsequent payments.
D) detail vouching of payroll expense entries.

Question 67

Which of the following is not a major control risk in the payroll cycle?

A) Paying fictitious "employees."
B) Overpaying for time or production.
C) Losing employees to competitors.
D) Incorrect accounting for costs or expenses.

Question 68

To determine whether accounts payable are complete,auditors perform a test to verify that all merchandise received has been recorded.The population for this test consists of all

A) vendors' invoices.
B) purchase orders.
C) receiving reports.
D) canceled checks.

Question 69

Which of the following would not overstate current-period net income?

A) Capitalizing an expenditure that should be expensed.
B) Failing to record a liability for an expenditure.
C) Failing to record a check paying an item in vouchers payable.
D) All of the above would overstate net income.

Question 70

An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that

A) payments to employees are computed at authorized rates.
B) employees work the number of hours for which they are paid.
C) separation of duties exists between the preparation and distribution of the payroll.
D) internal controls relating to unclaimed payroll checks are operating effectively.

Question 71

For which of the following accounts would the matching concept be the most appropriate?

A) Cost of goods sold.
B) Research and development.
C) Depreciation expense.
D) Sales.

Question 72

Which of the following is the best audit procedure for determining the existence of unrecorded liabilities?

A) Examine confirmation requests returned by creditors whose accounts are on a subsidiary trial balance of accounts payable.
B) Examine a sample of cash disbursements in the period subsequent to year-end.
C) Examine a sample of invoices a few days prior to and subsequent to year-end to ascertain whether they have been properly recorded.
D) Examine unusual relationships between monthly accounts payable and recorded purchases.

Question 73

R.Budd,the purchasing agent of Lake Hardware Wholesalers,has a relative who owns a retail hardware store.Budd arranged for hardware to be delivered by manufacturers to the retail store on a cash-on-delivery (COD)basis,thereby enabling his relative to buy at Lake's wholesale prices.Budd was probably able to accomplish this because of Lake's poor internal control over

A) purchase requisitions.
B) cash receipts.
C) perpetual inventory records.
D) purchase orders.

Question 74

A client's purchasing system ends with the recording of a liability and its eventual payment.Which of the following best describes auditors' primary concern with respect to liabilities resulting from the purchasing system?

A) Accounts payable are not materially understated.
B) Authority to incur liabilities is restricted to one designated person.
C) Acquisition of materials is not made from one vendor or one group of vendors.
D) Commitments for all purchases are made only after established competitive bidding procedures are followed.

Question 75

An auditor most likely would extend substantive tests of payroll when

A) payroll is extensively audited by the state government.
B) payroll expense is substantially higher than in the prior year.
C) overpayments are discovered in performing tests of controls.
D) employees complain to management about too much overtime.

Question 76

The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the

A) human resources function from the controllership function.
B) administrative controls from the internal accounting controls.
C) authorization of transactions from the custody of related assets.
D) operational responsibility from the record keeping responsibility.

Question 77

When verifying debits to the perpetual inventory records of a nonmanufacturing company,auditors would be most interested in examining a sample of purchase

A) approvals.
B) requisitions.
C) invoices.
D) orders.

Question 78

Which of the following accounts does not appear in the acquisition and expenditure cycle?

A) Cash.
B) Purchases Returns.
C) Sales Returns.
D) Prepaid Insurance.

Question 79

An auditor most likely would assess control risk at the maximum if the payroll department supervisor is responsible for

A) examining authorization forms for new employees.
B) comparing payroll registers with original batch transmittal data.
C) distribute payroll checks to all employees.
D) hiring all subordinate payroll department employees.

Question 80

An auditor most likely would perform substantive procedures on payroll transactions and balances when

A) cutoff tests indicate a substantial amount of accrued payroll expense.
B) the assessed level of control risk relative to payroll transactions is low.
C) analytical procedures indicate unusual fluctuations in recurring payroll entries.
D) accrued payroll expense consists primarily of unpaid commissions.