Deck 13: Audit of the Acquisition and Payment Cycle

Question 1

One of the ways to prevent the use of fictitious vendors to steal company funds is to

A)have adequate network access controls to prevent unauthorized access to transaction files.
B)ensure that accounts payable programs are available only in source code.
C)establish controls to establish only approved vendors.
D)reconcile the accounts payable trial balance to the general ledger.

Answer 1

C

Question 2

A)Describe each of the four business functions that comprise the acquisition and payment cycle.B)Describe the key documents used in processing purchase orders for the acquisitions and payment cycle.C)Discuss the key documents and records used in recognizing the liability function in the acquisitions and payment cycle.

Answer 2

A)The four business functions that comprise the acquisition and payment cycle are:
•Processing purchase orders.This function involves the preparation of a purchase requisition and a purchase order to acquire goods and services.
•Receiving goods and services.When goods are received,a receiving report is prepared that indicates the description of goods,the quantity received,the date received,and other relevant data.
•Recognizing the liability.In most companies,the liability for acquisitions is recognized when the goods and services are received;in other companies,it is deferred until the vendor's invoice is received.
•Processing and recording cash disbursements.This function involves the signing and mailing of the cheque for payment of the acquisition and recording of the cash disbursement in the cash disbursements journal.
B)The key documents and files used in processing purchase orders in the acquisitions and payment cycle are:
•Purchase requisition.This is a request by an authorized employee to the purchasing department to place an order for inventory and other items used by an entity.
•Purchase order.This is prepared by the purchasing department indicating the description,quantity,and related information for goods and services that the company intends to purchase.
C)The key documents and records used in the recognizing the liability function in the acquisitions and payment cycle are:
•Vendor's invoice.This document,sent by the vendor,indicates the description and quantity of goods and services received,price including freight,cash discount terms,and date of the billing.
Debit Memo.This document is used to indicate a reduction in the amount owed to a vendor because of returned goods or an allowance granted.
Voucher.Is commonly used by organizations to establish a formal means of recording and controlling acquisitions,primarily by enabling each acquisition transaction to be sequentially numbered.
Acquisitions Transaction File.This is a computer-generated file that includes all
acquisition transactions processed by the accounting system for a period,such as a
day,week,or month.It includes information for each transaction,such as vendor name,date,amount,account classification or classifications,and description and quantity of goods and services purchased.
Acquisitions Journal or Listing.The acquisitions journal or listing,often referred to as
the purchases journal,is generated from the acquisitions transaction file and typically
includes the vendor name,date,amount,and account classification or classifications
for each transaction,such as repair and maintenance,inventory,or utilities.
Accounts Payable Master File.An accounts payable master file records acquisitions,
cash disbursements,and acquisition returns and allowances transactions for each vendor.
The master file is updated from the acquisition,returns and allowances,and cash
disbursement computer transaction files.
Accounts Payable Trial Balance.An accounts payable trial balance listing includes
the amount owed to each vendor or for each invoice or voucher at a point in time.It
is prepared directly from the accounts payable master file.
Vendor's Statement.A vendor's statement is a document prepared monthly by the
vendor and indicates the beginning balance,acquisitions,returns and allowances,
payments to the vendor,and ending balance.

Question 3

One of the ways to prevent the use of fictitious vendors to steal company funds is by

A)having adequate network access controls to prevent unauthorized access to transaction files.
B)ensuring that accounts payable programs are available only in source code.
C)having software automatically check for duplicate invoice numbers before payment.
D)having authorized personnel carefully scrutinize documentation supporting payments.

Answer 3

D

Question 4

The purchase order,usually in writing,is a legal document that is

A)a non-binding agreement between client and vendor.
B)an offer to buy.
C)not enforceable if it is not in writing.
D)an acceptance of a vendor's catalogue offer to sell.

Question 5

One form of accounts payable fraud occurs when the accounts payable clerk or another employee steals a cheque made payable to a legitimate vendor.The purchaser's information is then resubmitted for payment and the second cheque sent to the vendor.How could such a theft be prevented?

A)Cancel supporting documents to prevent their being re-used.
B)Make sure that all payments are supported by valid documents.
C)Reconcile the transaction files to the accounts payable master file.
D)Have receiving reports authorized independently.

Question 6

The point at which most companies first recognize the acquisition and related liability on their records is when the

A)purchase requisition is completed.
B)purchase order is completed.
C)receiving report is completed.
D)vendor's invoice is paid.

Question 7

What are the risks of error or fraud in the acquisition and payment cycle?

Question 8

The most common fraud in the acquisitions area is for the perpetrator to

A)alter the cheque payment file before it is printed so that the payee name is changed.
B)issue payments to fictitious vendors and deposit the cheques to a fictitious account.
C)change the optical characters at the bottom of a cheque to alter the account to be credited.
D)issue duplicate payments for invoices and then pocket the second cheque.

Question 9

Which of the following areas are tested as part of the audit of the acquisition and payment cycle?

A)payment for raw materials,receipt of raw materials,shipment of goods to customers
B)processing of sales orders,production of goods for clients,and subsequent invoicing
C)processing vendor invoices,vendor master file changes,shipment of goods to customers
D)processing purchase orders,processing cash disbursements,receiving goods and services

Question 10

The major balance sheet account in the acquisition and payment cycle is

A)accounts payable.
B)purchases.
C)merchandise inventory.
D)common stock.

Question 11

To determine whether accounts payable are complete,an auditor performs a test to verify that all merchandise received is recorded.Which of the following is the population for this test?

A)supplier invoices
B)purchase orders
C)receiving reports
D)customer invoices

Question 12

The proper recognition of accounts payable liabilities are crucial to ensure fair statement of the ending accounts payable balance.What documents are required to adequately support accounts payable?

A)receiving reports and bill of lading documents that indicate dates shipped
B)bill of lading documents matched to the internal purchase requisition
C)purchase requisition (authorized)matched with the purchase order to the vendor
D)vendor invoices matched to receiving reports and authorized purchase documents

Question 13

What are the significant risks relating to accounts payable and accrued liabilities?

Question 14

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)purchase requisitions and purchases orders
C)receiving report and purchase orders
D)purchase orders and bid quotes

Question 15

When accounts payable and purchasing systems are highly automated,more detail is included in the transaction files.This deeper level of detail is illustrated by including

A)economic order quantities for each item that is held in inventory,including delivery times.
B)quantities,prices,and item descriptions from each line of the vendor invoice.
C)sequentially numbered purchase requisitions and purchase orders (with matching numbers).
D)receiving report numbers that match the numbers on the vendor invoices for improved tracking.

Question 16

Which of the following situations would indicate increased inherent risk in the accounts payable and acquisition cycle?

A)good quality internal controls for cash handling
B)the use of packaged software for accounting (including accounts payable)
C)the use of clear,standard terms when negotiating vendor discounts
D)significant related party transactions

Question 17

Which business functions are part of the acquisition and payment cycle?

Question 18

A document identifying the description,vendor,quantity,and related information for goods and services the company intends to purchase is the

A)purchases catalogue.
B)purchase requisition.
C)receiving report.
D)purchase order.

Question 19

Many companies have inventory that is easy to steal and is readily marketable.Which of the following controls helps to prevent theft and misuse of inventory?

A)physical control of inventory from time of receipt until use
B)proper access controls over the inventory master and transaction files
C)dual signatures required on all purchase orders over $10 000
D)purchase requisitions are to be approved by the production manager

Question 20

To protect against theft of physical assets (such as computer equipment),the company should

A)assign computers to specific individuals at the company
B)assign computers to specific areas within the company
C)use strong access controls (such as login passwords)to prevent access
D)have equipment engraved or otherwise permanently labelled and a subsidiary ledger maintained

Question 21

What are the two factors that the audit strategy depends on for the acquisition and payment cycle?

Question 22

Internal controls that are likely to prevent the client from including as a business expense those transactions that primarily benefit management or other employees rather than the entity being audited satisfy the control objective that

A)recorded acquisitions are for goods and services received.
B)existing acquisitions are recorded.
C)acquisitions are correctly valued.
D)acquisitions are correctly classified.

Question 23

The internal control that requires "new vendors and changes to vendor file be approved" satisfies the objective of

A)occurrence.
B)completeness.
C)accuracy.
D)posting and summarization.

Question 24

ZyCo has recently converted to a new online accounts payable system.To test that all vendor balances have been converted to the vendor master file (completeness),the auditor would

A)conduct cutoff tests for receiving reports and vendor invoices.
B)on a test basis,agree vendor file details for each vendor from the new (online)system to the old (batch)system.
C)on a test basis,agree vendor file details for each vendor from the old (batch)system to the new (online)system.
D)conduct tests of programs to verify that programs in the new systems are functioning as designed.

Question 25

After the vendor master file data has been entered,to best improve internal controls the

A)vendor master file data should be matched to the accounts payable files.
B)transaction file detail should be matched to the vendor master file.
C)data entry should be independently verified.
D)accounting department should file the new vendor authorization form sequentially.

Question 26

ZyCo has recently converted to a new online accounts payable system.To test that only authorized vendors have been converted to the vendor master file (occurrence),the auditor would

A)conduct cutoff tests for receiving reports and vendor invoices.
B)on a test basis,agree vendor file details for each vendor from the new (online)system to the old (batch)system.
C)on a test basis,agree vendor file details for each vendor from the old (batch)system to the new (online)system.
D)conduct tests of programs to verify that programs in the new systems are functioning as designed.

Question 27

Before a new vendor is added into the vendor master file (or the purchasing master file),the company should

A)conduct a credit check on the new vendor.
B)have the vendor detail matched against the invoice detail.
C)ask the purchasing manager to verify the authenticity of the vendor.
D)have the accounting department enter the necessary detail about the vendor.

Question 28

What are the important controls relating to cash disbursements?

Question 29

Segregation of duties has an important role in providing for good quality internal controls.Which of the following segregation of duties improve controls over the inventory and distribution cycle?

A)The purchasing department should not be responsible for updating the economic order quantity.
B)The accounting staff should not be responsible for the data entry of vendor invoice detail.
C)The inventory transaction processing systems should not be accessible to the receiving department.
D)The purchasing department should not be responsible for authorizing the acquisition of or receiving the goods.

Question 30

What are the factors that increase inherent risks for the accounts within the acquisition and payment cycle?

Question 31

To ensure that goods and services acquired are for authorized company purposes,and to help acquire only needed items

A)receiving reports should be independently signed and reconciled to the purchase order.
B)proper authorization for acquisitions and changes to the master file should take place.
C)purchase requisitions should be approved and matched to purchase orders.
D)account allocations of vendor invoices should be carefully checked.

Question 32

The internal control that requires "approval of acquisitions at the proper level" satisfies the objective of

A)occurrence.
B)completeness.
C)accuracy.
D)posting and summarization.

Question 33

Because of the importance of tests of controls for acquisitions and cash disbursements,it is common in this audit area to use

A)attributes sampling.
B)variables sampling.
C)probability-proportional-to-size sampling.
D)block sampling.

Question 34

Since the audit of accounts payable generally takes a considerable amount of audit time,effective and properly tested internal controls can significantly reduce audit costs by reducing

A)tests of controls.
B)confirmations.
C)tests of details of balances.
D)analytical procedures.

Question 35

When processing and recording cash disbursements,it is important to have a method of cancelling the supporting documents to prevent their reuse as support for another cheque at a later time.A common method is to

A)shred the documents so they can't be reused.
B)transfer possession of the documents to a bank vault such as a safety deposit box.
C)move the documents to a permanent off-site facility such as a warehouse.
D)write the cheque number and payment date on the supporting documents.

Question 36

An auditor learns that his client has paid a vendor twice for the same shipment,once based upon the original invoice and once based upon the monthly statement.A control procedure that should have prevented this duplicate payment is

A)attachment of the receiving report to the invoice only.
B)prenumbering of disbursement vouchers.
C)use of a limit or reasonableness test.
D)prenumbering of receiving reports.

Question 37

An important control in the accounts payable and information systems departments is to require that those personnel who record acquisitions do not have access to

A)lists of vendors' names and addresses.
B)cash,marketable securities,and other assets.
C)vendors' price lists.
D)the accounts payable master file.

Question 38

The internal control objective to determine that "existing acquisition transactions are recorded" describes the objective of

A)occurrence.
B)classification.
C)completeness.
D)accuracy.

Question 39

When automatic purchase orders are generated,to help make sure that goods are ordered for products that the company still needs,the company should

A)have all purchase orders approved by the purchasing manager.
B)have vendors automatically replenish the shelves.
C)ensure that re-order points are monitored.
D)have receiving reports matched to the purchase order amounts.

Question 40

Because many of the types of errors and irregularities that may be found in the acquisition and payment cycle represent a misstatement of earnings and are of significant concern to the auditor,the tolerable exception rate selected by the auditor for attribute testing of this cycle will be

A)low.
B)high.
C)average.
D)15% or less.

Question 41

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

A)confirmation of accounts payable.
B)tests on long-term liabilities.
C)observation of inventory.
D)cash count.

Question 42

The test of details of balances procedure to "inspect the accounts payable trial balance and master file for related parties,notes,or other interest-bearing liabilities" satisfies the objective of

A)existence.
B)completeness.
C)classification.
D)detail tie-in.

Question 43

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

A)liabilities posted to the wrong account.
B)overstated liabilities.
C)understated or omitted liabilities.
D)overstated or extraneous liabilities.

Question 44

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

A)accuracy.
B)validity.
C)completeness.
D)classification.

Question 45

Comparing expenses to prior years is an effective analytical procedure for accounts payable because expenses from year to year are

A)relatively stable.
B)erratic.
C)variable.
D)dynamic.

Question 46

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)does not affect earnings.
D)is indeterminable from the information given.

Question 47

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)valuation and allocation
C)existence and occurrence
D)presentation and disclosure

Question 48

What are the common key controls relating to acquisitions?

Question 49

Which of the following controls help to ensure that the receipt of raw materials for inventory is recorded in the correct period?

A)Vendor details are automatically retrieved from the vendor master file.
B)Receiving staff write down the date goods are received on the bill of lading.
C)Accounting staff record the date that goods are received in the accounting systems.
D)The transaction date entered must be the same as the system date.

Question 50

The test of transactions that requires the recomputing of cash discounts satisfies the objective of

A)occurrence.
B)completeness.
C)accuracy.
D)posting and summarization.

Question 51

The purpose of the audit procedure to "trace receiving reports issued before year-end to related vendors' invoices" is to determine that all

A)merchandise received is included in accounts payable.
B)merchandise received is included in inventory.
C)merchandise was received.
D)invoices have been paid.

Question 52

The control test that requires "the auditor to compare recorded transactions in the acquisitions journal with the vendor's invoice,receiving report,and other supporting documentation" satisfies the objective of

A)occurrence.
B)classification.
C)completeness.
D)accuracy.

Question 53

The internal control that requires receiving reports to be prenumbered and accounted for satisfies the objective of

A)occurrence.
B)classification.
C)completeness.
D)accuracy.

Question 54

State each of the five specific transaction-related audit objectives for acquisitions and,for each objective,describe one common test of transactions.

Question 55

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

A)completeness
B)valuation
C)authorization
D)classification

Question 56

The purpose of the audit procedure to "examine underlying documentation for subsequent cash disbursements" is to

A)uncover liabilities on the balance sheet that 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 that represent liabilities at the balance sheet date.
D)uncover cash disbursements recorded in a subsequent accounting period that should be recorded in that period.

Question 57

The internal control that requires an "independent verification of calculations and amounts" satisfies the objective of

A)occurrence.
B)completeness.
C)accuracy.
D)posting and summarization.

Question 58

The analytical procedure that requires the auditor to "inspect the list of accounts payable for unusual or non-vendor payables" would have the best chance of discovering which possible error?

A)misstatement of accounts payable and expenses
B)classification error for non-trade liabilities
C)unrecorded accounts or misstatements
D)invalid accounts or misstatements

Question 59

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

Question 60

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)accuracy
B)completeness
C)validity
D)presentation and disclosure

Question 61

Describe the two objectives that are most important in auditing accumulated amortization.Explain why these objectives are important.

Question 62

When verifying current-year additions to manufacturing equipment,the two major objectives for this part of the audit are

A)accuracy and classification.
B)detail tie-in and cutoff.
C)disclosure and completeness.
D)rights and existence.

Question 63

State six specific balance-related audit objectives for accounts payable and for each objective describe one common test of details of balances.

Question 64

A set of records for each piece of equipment that includes descriptive information,date of acquisition,original cost,current year amortization,and accumulated amortization is the

A)capital asset master file.
B)file of purchase requisitions.
C)amortization schedule.
D)acquisitions journal.

Question 65

Ordinarily,it is unnecessary to test the valuation of capital assets recorded in prior periods because

A)it will not affect the current valuations.
B)they were verified in previous audits.
C)the related amortization calculations for the current period are more important.
D)the emphasis of the audit is on the income statement items,not the balance sheet items.

Question 66

State each of the six specific balance-related audit objectives for manufacturing equipment additions and describe one common test of details of balances for each objective.

Question 67

A normal audit procedure is to analyze the current year's repairs and maintenance accounts to provide evidence in support of the audit proposition that

A)expenditures for capital assets have been recorded in the proper period.
B)capital expenditures have been properly authorized.
C)non-capitalizable expenditures have been properly expensed.
D)expenditures for capital assets have been capitalized.

Question 68

The most important objectives for amortization expense are valuation and

A)accuracy.
B)classification.
C)cutoff.
D)understandability.

Question 69

The tests of details of balances procedure for manufacturing equipment that requires the auditor to examine vendors' invoices of closely related accounts (such as repairs and maintenance)to uncover items that should be manufacturing equipment would satisfy the audit objective of

A)detail tie-in.
B)existence.
C)classification.
D)accuracy.

Question 70

Discuss the key internal controls related to the disposal of manufacturing equipment.

Question 71

Estimated unpaid obligations for services or benefits that have been received prior to the balance sheet date are classified as

A)accounts payable.
B)accrued liabilities.
C)miscellaneous assets.
D)unearned revenues.

Question 72

When an acquisition is on an FOB (freight on board)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.

Question 73

The starting point for the verification of current-year acquisitions of manufacturing equipment is normally

A)the manufacturing equipment account in the general ledger.
B)the acquisitions journal.
C)the purchase requisitions file.
D)a client schedule of all acquisitions recorded during the year.

Question 74

Of these two documents - vendor invoice or vendor statements - which document is better to:
a)verify the correct balance in accounts payable?
b)test the acquisitions in tests of control?

Question 75

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

Question 76

Discuss the audit tests the auditor would use to audit capital assets acquired in prior years.

Question 77

It is normal for the auditor to verify large and unusual transactions for the entire year as well as a representative sample of typical additions.The size of the sample for substantive testing depends on the auditor's

A)sampling selection methodology used.
B)assessed control risk and assessed inherent risks.
C)understanding of the nature of internal controls.
D)availability of client resources to pull supporting documentation.

Question 78

Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because

A)this is a duplication of cutoff tests.
B)accounts payable balances at the balance sheet date may not be paid before the audit is completed.
C)correspondence with the audit client's lawyer will reveal all legal action by vendors for nonpayment.
D)there is likely to be other reliable external evidence available to support the balances.