Question 1

Matching the supplier's invoice, the purchase order, and the receiving report prior to preparing the voucher would normally be the responsibility of the:
A) warehouse receiving function.
B) purchasing function.
C) general accounting function.
D) treasury function.

Accepted Answer

Matching the supplier's invoice, purchase order, and receiving report is part of the accounts payable process, which falls under the general accounting function. The warehouse receiving function is responsible for physically receiving and inspecting goods, the purchasing function is responsible for initiating and approving purchase orders, and the treasury function is responsible for managing the organization's cash and financial assets.

Question 2

Which of the following tests of controls is least useful in assessing the transaction-related audit objective related to occurrence?
A) Examine documents in voucher package for occurrence.
B) Examine supporting documents for indication of approval.
C) Account for sequence of vouchers.
D) Attempt to input transactions with valid and invalid vendors.

Accepted Answer

Accounting for the sequence of vouchers primarily tests for completeness, ensuring all transactions are recorded. It is less useful for assessing occurrence, which focuses on whether transactions that have been recorded actually took place.

Question 3

An auditor is using audit sampling to test transactions in the acquisition and payment cycle. She would normally set the tolerable exception rate at what level?
A) low
B) medium
C) high
D) indeterminate

Accepted Answer

Setting a low tolerable exception rate means that the auditor expects a low level of errors in the transactions being tested. This is typically the preferred level for important areas such as the acquisition and payment cycle.

Question 4

An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all:
A) merchandise received.
B) vendors' invoices.
C) canceled checks.
D) receiving reports.

Accepted Answer

The population for this test consists of all vendors' invoices, as the auditor is checking to ensure that all billed merchandise was actually received. This involves matching the vendors' invoices (which detail what the client was billed for) to receiving documentation to confirm receipt of the billed items.

Question 5

In an examination of vendor statements or vendor confirmations when doing substantive tests of balances the auditor needs to perform the following:
A) reconciliation with the accounts payable master file.
B) reconciliation with vendor invoices.
C) reconciliation with purchase orders.
D) reconciliation with receiving reports.

Accepted Answer

The auditor should reconcile vendor statements or confirmations with the accounts payable master file to ensure that recorded liabilities are complete and accurate.

Question 6

Discuss the key internal controls that should be present in the processing purchase orders function in the acquisitions and payment cycle.

Accepted Answer

The answer of Discuss the key internal controls that should...

Question 7

Which of the following should sign checks under conditions of effective internal control?
A) Treasurer
B) Purchasing agent
C) Accounts payable clerk
D) Person preparing the checks

Accepted Answer

The treasurer is typically the authorized person to sign checks under conditions of effective internal control as they have the responsibility to manage the company's finances and ensure that all transactions are properly recorded and reported. The purchasing agent is responsible for making purchases, not signing checks. The accounts payable clerk is responsible for processing invoices and payments, not signing checks. The person preparing the checks may have access to company funds, but it is not recommended that they also sign the checks as it could lead to a conflict of interest or fraud.

Question 8

A CPA 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 disbursement report.
B) prenumbering of disbursement vouchers.
C) use of a limit or reasonableness test.
D) prenumbering of receiving reports.

Accepted Answer

Attachment of the receiving report to the disbursement report would ensure that the payment is only made once for the received goods. This is because the receiving report acts as proof of receipt and is necessary to process the disbursement. Prenumbering of disbursement vouchers or receiving reports would not prevent duplicate payments, while a limit or reasonableness test is not applicable in this situation.

Question 9

You are performing the audit of Jenkins and Company. Your tests of controls and tests of transactions for accounts payable demonstrate that the controls are operating effectively. This would normally allow you to:
A) eliminate the need for substantive testing of balances for accounts payable.
B) reduce the need for substantive testing of balances for accounts payable.
C) reduce control tests in other transactions cycles.
D) increase the need for substantive testing of balances for accounts payable.

Accepted Answer

Effective controls in accounts payable reduce the risk of material misstatement in the balances, but does not completely eliminate it. Therefore, some substantive testing of balances for accounts payable is still necessary, but the extent may be reduced.

Question 10

Because of the importance of tests of controls and substantive tests of transactions for acquisitions and cash disbursements, it is common in this audit area to use:
A) block sampling.
B) variables sampling.
C) attributes sampling.
D) probability proportional to size sampling.

Accepted Answer

Attributes sampling is the best choice for tests of controls and substantive tests of transactions. This type of sampling is used to assess the rate of occurrence of specific characteristics or attributes in a population. For example, an auditor might test a sample of cash disbursements to determine whether they were appropriately authorized by management. The auditor would select a sample of disbursements and determine whether each one was properly approved. The results of the sample would be projected to the entire population of disbursements. Attributes sampling is appropriate when the population is homogeneous and has a low rate of occurrence of the attribute of interest.

Question 11

A company failed to record an acquisition of merchandise and its related liability, but the merchandise was included in ending inventory. The effect on the financial statements was to:
A) understate both assets and liabilities.
B) understate net income and owners' equity.
C) understate assets and owners' equity.
D) understate liabilities, and overstate both net income and owners' equity.

Accepted Answer

The failure to record the liability understates liabilities. Since the merchandise is included in ending inventory, assets are not understated. However, because the expense related to the acquisition is not recorded, net income and owners' equity are overstated.

Question 12

Authorization for accepting goods in the receiving department should be based on:
A) Vendor Invoice.
B) Requisition Request.
C) Purchase order from the purchasing department.
D) Vendor Statement.

Accepted Answer

Authorization for accepting goods in the receiving department should be based on the purchase order from the purchasing department. This ensures that the goods received match the items ordered and helps prevent unauthorized purchases. The vendor invoice and statement would be used for payment processing after the goods have been accepted. The requisition request is used to initiate the purchase order but is not sufficient for authorization in the receiving department.

Question 13

Discuss the key internal controls that should be present in the receiving goods and services function in the acquisitions and payment cycle.

Accepted Answer

The answer of Discuss the key internal controls that should...

Question 14

Which of the following is the most effective control procedure to detect vouchers that were prepared for the payment of goods that were not received?
A) Count goods upon receipt in storeroom.
B) Match purchase order, receiving report, and vendor's invoice for each voucher in accounts payable department.
C) Compare goods received with goods requisitioned in receiving department.
D) Verify vouchers for accuracy and approval in internal audit department.

Accepted Answer

Matching the purchase order, receiving report, and vendor's invoice for each voucher in the accounts payable department would ensure that goods were actually received before payment was made. This procedure allows for a three-way match and helps prevent the payment of goods that were not received. Counting goods upon receipt in the storeroom would not catch discrepancies between goods received and goods requisitioned or invoices received. Comparing goods received with goods requisitioned in the receiving department would not ensure that payment was made for only the goods that were received. Verifying vouchers for accuracy and approval in the internal audit department would not necessarily catch discrepancies between goods received and goods paid for.

Question 15

The test of transactions which requires one to "reconcile recorded cash disbursements with the cash disbursements on the bank statement" satisfies the objective of:
A) occurrence.
B) completeness.
C) accuracy.
D) posting and summarization.

Accepted Answer

Reconciling recorded cash disbursements with the cash disbursements on the bank statement ensures that all cash disbursements have been recorded and no transactions were omitted, thereby satisfying the completeness objective of transactions.

Question 16

With respect to a small company's system of purchasing supplies, an auditor's primary concern should be to obtain satisfaction that supplies ordered and paid for have been:
A) requested by and approved by authorized individuals who have no incompatible duties.
B) used in the course of business and solely for business purposes during the year under audit.
C) received, counted, and checked to quantities and amounts on purchase orders and invoices.
D) properly recorded as assets and systematically amortized over the estimated useful life of the supplies.

Accepted Answer

The auditor's primary concern is to ensure that supplies ordered and paid for have been received, counted, and checked against purchase orders and invoices to verify that the company actually received what it paid for.

Question 17

For effective internal control purposes, the vouchers payable department generally should:
A) obliterate the quantity ordered on the receiving department copy of the purchase order.
B) stamp, perforate, or otherwise cancel supporting documentation after payment is mailed.
C) establish the agreement of the vendor's invoice with the receiving report and purchase order.
D) ascertain that each requisition is approved as to price, quantity, and quality by an authorized employee.

Accepted Answer

Establishing the agreement of the vendor's invoice with the receiving report and purchase order ensures that the payment is authorized and correct. Obliterating the quantity ordered on the receiving department copy of the purchase order (option A) could lead to discrepancies and fraud, while stamping or canceling the documentation after payment (option B) may not prevent duplicate payments or incorrect payments. Ensuring that each requisition is approved (option D) is important, but it is not specific to the vouchers payable department's internal controls.

Question 18

What are the three important controls over cash disbursements?

Accepted Answer

The answer of What are the three important controls over...

Question 19

How do auditors determine the extent of testing of internal controls in the acquisition and payment cycle?

Accepted Answer

The answer of How do auditors determine the extent of...

Question 20

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

Accepted Answer

The control objective of preventing the inclusion of expenses that benefit management or employees rather than the entity being audited is related to ensuring that recorded acquisitions are for goods and services received. This control helps to prevent fraudulent or inappropriate expenses from being recorded as legitimate business expenses. Therefore, the answer is D.

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

Matching the supplier's invoice, the purchase order, and the receiving report prior to preparing the voucher would normally be the responsibility of the:

Which of the following tests of controls is least useful in assessing the transaction-related audit objective related to occurrence?

An auditor is using audit sampling to test transactions in the acquisition and payment cycle. She would normally set the tolerable exception rate at what level?

An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all:

In an examination of vendor statements or vendor confirmations when doing substantive tests of balances the auditor needs to perform the following:

Discuss the key internal controls that should be present in the processing purchase orders function in the acquisitions and payment cycle.

Which of the following should sign checks under conditions of effective internal control?

A CPA 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:

You are performing the audit of Jenkins and Company. Your tests of controls and tests of transactions for accounts payable demonstrate that the controls are operating effectively. This would normally allow you to:

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

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

Authorization for accepting goods in the receiving department should be based on:

Discuss the key internal controls that should be present in the receiving goods and services function in the acquisitions and payment cycle.

Which of the following is the most effective control procedure to detect vouchers that were prepared for the payment of goods that were not received?

The test of transactions which requires one to "reconcile recorded cash disbursements with the cash disbursements on the bank statement" satisfies the objective of:

With respect to a small company's system of purchasing supplies, an auditor's primary concern should be to obtain satisfaction that supplies ordered and paid for have been:

For effective internal control purposes, the vouchers payable department generally should:

What are the three important controls over cash disbursements?

How do auditors determine the extent of testing of internal controls in the acquisition and payment cycle?

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: