Question 1

Centralized purchasing.
List the advantages for implementing a centralized purchasing function. What are the disadvantages (if any)?

Accepted Answer

The answer of Centralized purchasing.
List the advantages for implementing a...

Question 2

Which of the following is a condition which would not create a conducive situation for a client to take a physical inventory at an interim date before year end?
A) The control risk over inventory is high.
B) The auditor will be able to review material transactions in the roll-forward period.
C) The auditor can effectively test the year-end balance through a combination of analytical procedures and selective testing of transactions between the physical count and the year-end.
D) The auditor reviews the intervening transactions for evidence of any manipulation or unusual activity.

Accepted Answer

A high control risk over inventory means that there is a higher likelihood of material misstatements in the inventory balance. This would make it difficult for the auditor to rely on an interim physical count and more comprehensive testing would be needed closer to year-end.

Question 3

When testing a standard cost system, the auditor does not normally make which of the following inquiries?
A) The method for developing standard costs.
B) The method for identifying components of overhead and of allocating overhead to products.
C) The method for identifying sales cutoff.
D) The method used for allocating variances to inventory and cost of goods sold.

Accepted Answer

Inquiries about the method for identifying sales cutoff are not relevant to testing a standard cost system as sales cutoff is more relevant to the sales and revenue cycle. The other inquiries listed - developing standard costs, identifying components of overhead and allocating overhead to products, and allocating variances to inventory and cost of goods sold - are all important aspects of testing a standard cost system.

Question 4

The principle of lower of cost or market and the potential obsolescence of inventory are a concern for the audit team because of which of the following?
A) They are uncommon and may not exist.
B) They are a burden to the auditor in the undue amount of work caused.
C) They are likely to occur in the last month of the year and cause cutoff problems.
D) They are an inherent component of complexity related to valuation.

Accepted Answer

The principle of lower of cost or market requires the auditor to assess whether the inventory is stated at the lower of its cost or market value, which can be a complex valuation issue. Additionally, the potential obsolescence of inventory is a risk of inventory valuation and requires the auditor to assess the appropriateness of the inventory reserve. Therefore, the potential obsolescence of inventory and the application of lower of cost or market are inherent components of complexity related to inventory valuation.

Question 5

Physical inventory procedures.
Discuss the procedures that the audit team will most likely perform upon arrival at each site right before physical inventory is taken.

Accepted Answer

The answer of Physical inventory procedures.
Discuss the procedures that the...

Question 6

The acquisition cycle begins with which of the following?
A) A payment.
B) A purchase order.
C) A requisition.
D) A receiving report.

Accepted Answer

The acquisition cycle begins with a requisition, a request for goods or services to be purchased. This request is then processed through a series of steps, such as a purchase order, receiving report and payment, to ultimately acquire the goods or services.

Question 7

Auditing the valuation assertion for inventory of a client utilizing the FIFO cost flow assumption will require the auditor to examine which of the following?
A) Invoices representing the more recent purchases of inventory.
B) Invoices representing the purchase of base year inventory in the year of inception.
C) Shipping documents for a sample of cost of goods sold transactions during the year.
D) Shipping documents for a sample of units on hand in the interim period.

Accepted Answer

The FIFO (First-In, First-Out) method assumes that the oldest inventory items are sold first. Therefore, to audit the valuation assertion, the auditor should examine invoices representing the more recent purchases of inventory to ensure that the inventory is valued at the most recent costs.

Question 8

Which of the following is not a potential fraud indicator in the acquisition cycle?
A) Expenses that are significantly above or below industry norms.
B) Expense accounts that have significant debit entries.
C) Unexpected increases in gross margin.
D) Capital assets that seem to be growing faster than the business.

Accepted Answer

Expense accounts with significant debit entries are normal as expenses are typically recorded as debits. The other options can indicate potential fraud in the acquisition cycle.

Question 9

Which of the following is a procedure used in an audit where there is a heightened risk of fraud related to accounts payable and other related expense accounts?
A) Send blank confirmations to vendors that ask them to furnish information about all outstanding invoices, payment terms, and payment histories.
B) Scan journals for unusual or large year-end transactions and adjustments.
C) Obtain and examine documentation for payments of invoices that are for amounts just under the limit that typically requires some level of approval.
D) All the above.

Accepted Answer

All of these procedures are commonly used in auditing when there is a heightened risk of fraud related to accounts payable and other related expense accounts. Sending blank confirmations to vendors can help identify fictitious vendors or overstatement of balances, scanning journals for unusual transactions can help identify journal entries made to manipulate account balances, and examining payments just under the approval threshold can help identify unauthorized payments or kickbacks. Therefore, the best choice is D.

Question 10

Acquisition and payment processes.
What are the five major phases of the acquisition and payment process?

Accepted Answer

The answer of Acquisition and payment processes.
What are the five...

Question 11

Which of the following might an auditor do in testing for the existence of accounts payable?
A) Review client's financial statement disclosure.
B) Review long-term purchase commitments.
C) Perform a cutoff test of purchases and cash disbursements.
D) Perform analytical review of related expense accounts.

Accepted Answer

Performing a cutoff test of purchases and cash disbursements is the most appropriate way of testing for the existence of accounts payable. This involves reviewing transactions near the end of the client's accounting period to ensure that they have been properly recorded and included in the accounts payable balance. Reviewing financial statement disclosure, purchase commitments, or related expense accounts may also provide some evidence of accounts payable, but they are not as direct or reliable as testing transactions themselves.

Question 12

Auditing accounts payable.
What are the procedures available to auditors in auditing accounts payable and what level of assurance is obtained by each? Describe at least three. Which primary assertion is tested through these approaches?

Accepted Answer

The answer of Auditing accounts payable.
What are the procedures available...

Question 13

Which of the following is not an item reviewed by the auditor to test the client's assertion related to the presentation and disclosure of inventory?
A) The inventory valuation methods used.
B) The amount of obsolete inventory on hand.
C) The existence of contingent losses associated with long-term purchase commitments.
D) The classification of inventory as raw material, work in process or finished goods.

Accepted Answer

The answer of Which of the following is not an...

Question 14

Inventory obsolescence procedures.
Identify and describe at least four procedures the audit team may perform in order to determine potential obsolescence of items in the inventory balances.

Accepted Answer

The answer of Inventory obsolescence procedures.
Identify and describe at least...

Question 15

Cost accounting systems.
When auditing a manufacturing concern, what major inquiries might be made by the auditor about the cost accounting system?

Accepted Answer

The answer of Cost accounting systems.
When auditing a manufacturing concern,...

Question 16

Which of the following is not a standard procedure that the auditor normally should follow in the observation of inventory at year-end?
A) Observe the client taking inventory.
B) Make selected test counts and trace into client's inventory compilation.
C) Look for slow-moving, obsolete or damaged inventory.
D) Review disclosure of inventory valuation.

Accepted Answer

Reviewing disclosure of inventory valuation is not a standard procedure while observing inventory at year-end. The other options, such as observing the client taking inventory, making selected test counts and tracing them into the client's inventory compilation, and looking for slow-moving, obsolete or damaged inventory, are all part of standard procedures for inventory observation.

Question 17

An auditor reviews purchase contracts to assess the conditions for the return of merchandise as a test related to which management assertion?
A) Existence
B) Completeness
C) Rights and Obligations
D) Valuation

Accepted Answer

The management assertion being tested in this case relates to the rights and obligations of the company regarding return of merchandise. The auditor is reviewing the purchase contracts to ensure that the company has contractual rights to return merchandise in certain situations and that the terms and conditions of such returns are properly recorded in the accounts.

Question 18

Preparing for an inventory observation.
In the audit of inventory the auditor must perform important procedures prior to the actual observation. Identify the steps the auditor must take prior to the day the inventory is actually counted.

Accepted Answer

The answer of Preparing for an inventory observation.
In the audit...

Question 19

Physical inventory procedures.
Discuss the procedures the audit team will most likely perform during the physical observation of inventory.

Accepted Answer

The answer of Physical inventory procedures.
Discuss the procedures the audit...

Question 20

Which of the following is NOT a procedure that the auditor should perform related to the physical inventory count?
A) Document the first and last tag numbers used.
B) Take notations of all items that appear to be obsolete or are in questionable condition.
C) Make counts of all items and record the counts for subsequent tracing into the client's inventory compilation.
D) Observe whether there is any physical movement of goods during the counting of the inventory.

Accepted Answer

Auditors do not make counts of all items themselves; instead, they observe the client's counting process and perform test counts on a sample basis to verify the accuracy of the client's inventory records.

Quiz 11: Auditing Inventory, Goods and Services, and Accounts Payable: the Acquisition and Payment Cycle

Centralized purchasing. List the advantages for implementing a centralized purchasing function. What are the disadvantages (if any)?

Which of the following is a condition which would not create a conducive situation for a client to take a physical inventory at an interim date before year end?

When testing a standard cost system, the auditor does not normally make which of the following inquiries?

The principle of lower of cost or market and the potential obsolescence of inventory are a concern for the audit team because of which of the following?

Physical inventory procedures. Discuss the procedures that the audit team will most likely perform upon arrival at each site right before physical inventory is taken.

The acquisition cycle begins with which of the following?

Auditing the valuation assertion for inventory of a client utilizing the FIFO cost flow assumption will require the auditor to examine which of the following?

Which of the following is not a potential fraud indicator in the acquisition cycle?

Which of the following is a procedure used in an audit where there is a heightened risk of fraud related to accounts payable and other related expense accounts?

Acquisition and payment processes. What are the five major phases of the acquisition and payment process?

Which of the following might an auditor do in testing for the existence of accounts payable?

Auditing accounts payable. What are the procedures available to auditors in auditing accounts payable and what level of assurance is obtained by each? Describe at least three. Which primary assertion is tested through these approaches?

Which of the following is not an item reviewed by the auditor to test the client's assertion related to the presentation and disclosure of inventory?

Inventory obsolescence procedures. Identify and describe at least four procedures the audit team may perform in order to determine potential obsolescence of items in the inventory balances.

Cost accounting systems. When auditing a manufacturing concern, what major inquiries might be made by the auditor about the cost accounting system?

Which of the following is not a standard procedure that the auditor normally should follow in the observation of inventory at year-end?

An auditor reviews purchase contracts to assess the conditions for the return of merchandise as a test related to which management assertion?

Preparing for an inventory observation. In the audit of inventory the auditor must perform important procedures prior to the actual observation. Identify the steps the auditor must take prior to the day the inventory is actually counted.

Physical inventory procedures. Discuss the procedures the audit team will most likely perform during the physical observation of inventory.

Which of the following is NOT a procedure that the auditor should perform related to the physical inventory count?