Question 1

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?

Accepted Answer

Examining cash disbursements for several weeks after the balance sheet date helps in identifying any payments made for liabilities that were not recorded as of the balance sheet date, thus detecting unrecorded liabilities.

Question 2

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

Accepted Answer

When the client's physical inventory occurs before the last day of the year, an accounts payable cutoff should be performed. Additionally, the auditor must verify whether all acquisitions taking place between the count and the end of the year were added to both the physical inventory and accounts payable. Therefore, the best choice is D - the physical inventory and accounts payable.

Question 3

A company recorded an acquisition of merchandise and its related liability, but failed to include the merchandise in ending inventory. The effect on the financial statements was to

Accepted Answer

The failure to include merchandise in ending inventory results in an understatement of inventory, which leads to an overstatement of cost of goods sold and, consequently, an understatement of net income.

Question 4

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

Accepted Answer

Unpaid accounts payable are the most likely source of evidence for unrecorded liabilities. Debit memos and vendor memos are already recorded transactions, and sales invoices out of sequence may indicate errors but not necessarily unrecorded liabilities.

Question 5

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

Accepted Answer

Since the acquisition is not included in inventory, the ending inventory will be understated, thereby leading to an understatement of cost of goods sold and an overstatement of net earnings. This, in turn, leads to an overstatement of working capital and owner's equity.

Question 6

You are the in-charge auditor and are designing audit procedures for accounts payable. Which of the following management assertions would you normally be most concerned about?

Accepted Answer

Completeness is the management assertion that is the biggest concern in auditing accounts payable, as the auditor must ensure that all purchases, invoices, and payments are recorded and included in the financial statements. Failure to identify unrecorded liabilities can also result in an overstatement of income in subsequent periods.

Question 7

Cutoff procedures for inventory purchased should be designed by companies to assure that

Accepted Answer

Cutoff procedures for inventory purchased should be designed to assure that inventory received before the year-end was recorded before year-end. This ensures that the inventory is properly accounted for in the correct accounting period, which is a key aspect of financial reporting accuracy. The other choices (A, B, D) are important aspects of inventory management and accounting, but they are not specifically related to cutoff procedures.

Question 8

________ is a balance-related audit objective that is not applicable to liabilities.

Accepted Answer

Realizable value is a balance-related audit objective that is relevant for assets, but not for liabilities. The other three options (existence, accuracy, and detail tie-in) are relevant for both assets and liabilities.

Question 9

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

Accepted Answer

By examining the underlying documentation for subsequent cash disbursements, auditors can determine if there were any payments made in a subsequent accounting period for liabilities that existed at the balance sheet date, which would indicate unrecorded liabilities. This procedure helps the auditor to ensure that all liabilities are recorded in the correct period and not delayed to a subsequent period.

Question 10

At what point do most companies recognize liabilities in the acquisition and payment cycle when the goods are shipped FOB destination?

Accepted Answer

Liabilities are recognized when the goods or services are received because FOB destination means that the title of the goods passes to the buyer when they are received at the destination, indicating that the risks and rewards of ownership have also passed. Therefore, the buyer should recognize the liability when they have received the goods.

Question 11

The extent of a search for unrecorded liabilities largely depends on

Accepted Answer

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

Question 12

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?

Accepted Answer

Auditors' legal liability is the primary reason for focusing on overstatement of assets and understatement of liabilities, as these misstatements can lead to misleading financial statements and potential legal consequences for auditors.

Question 13

The main focus taken by the auditor in verifying liability balances is on the discovery of I. understated liabilities.
II) omitted liabilities.

Accepted Answer

The main focus taken by the auditor in verifying liability balances is on the discovery of both understated and omitted liabilities. This is because both types of errors can lead to material misstatements in the financial statements, and therefore need to be carefully checked by the auditor. Understated liabilities occur when an expense or obligation has been recognized at an amount that is lower than its actual value, while omitted liabilities occur when an expense or obligation has not been recognized at all. By verifying these balances, the auditor can ensure that the financial statements are fairly presented and comply with auditing standards.

Question 14

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

Accepted Answer

Tracing receiving reports issued after year-end to vendors' invoices helps identify liabilities that were recorded in the wrong period, potentially overstating liabilities at year-end.

Question 15

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

Accepted Answer

By tracing receiving reports to vendors' invoices and making sure they are included in accounts payable, the auditor is testing for unrecorded obligations. This ensures that all the goods received have been correctly recorded in the accounts payable, and no unrecorded liabilities exist at the year-end. Theft of merchandise by employees, lapping, and kiting are other fraudulent activities that require different audit procedures.

Question 16

Cutoff information for inventory acquisitions should be obtained during

Accepted Answer

Cutoff information for inventory acquisitions should be obtained during the physical observation of inventory to ensure that transactions are recorded in the correct accounting period.

Question 17

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

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 18

Which of the following is not a typical audit procedure performed as part of the out-of-period liability tests?

Accepted Answer

Out-of-period liability tests focus on determining whether liabilities exist at year-end that were not recorded until the following period. The typical audit procedures include examining bills not paid several weeks after year-end and tracing receiving reports issued before year-end to related vendors' invoices. However, examining underlying documentation for cash disbursements made during the last month of the year is not a typical audit procedure for out-of-period liability tests.

Question 19

The overall objective in the audit of accounts payable is to determine whether accounts payable

Accepted Answer

The overall objective in the audit of accounts payable is to determine whether accounts payable are fairly stated and properly disclosed, which means that they are accurately stated and not overstated or understated. Therefore, option A is the best choice.

Question 20

When determining sample sizes for accounts payable tests,

Accepted Answer

The answer of When determining sample sizes for accounts payable...

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