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

Many frauds are committed by overstating inventory accounts.

It is likely in the acquisition and payment cycle that audit evidence from substantive analytical procedures alone will be sufficient for the auditor.

The auditor's primary concern with accounts payable is that of existence.

The use of substantive analytical procedures applied to related expense accounts would not be used to determine if accounts payable were understated.

Auditing standards require the auditor to observe the client taking physical inventory.

During the inventory counting process,the client arranges not to ship or receive goods or segregates all goods received during the process to be labeled and counted as "after inventory."

During your audit of Brown Company you are trying to determine whether all accounts payable were recorded. Which assertion are you gathering evidence for?

Legal expenses are reviewed by auditors for possible litigation that would require recording or disclosure.

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?

Reconciliation of vendor statements to recorded payables provides assurance related to the completeness assertion.

Stable relationships are expected between specific accounts (for example,cost of goods sold and sales)that can be investigated for unusual discrepancies.

A walkthrough is typically not a useful means of obtaining information about controls in the acquisition and payment cycle.

Standard cost systems When auditing a manufacturing concern,what inquiries would the auditor likely make about the standard cost system?

Testing cash disbursements subsequent to the year under audit allows the auditor to determine certain payables that may not have been recorded previously.

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

Analytical review of related expense accounts when auditing accounts payable would be used when control risk is assessed as low.

Which of the following signals a potential fraud that may cause the overstatement of inventory accounts?

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

Management may intentionally misstate inventory balances by overvaluing items that are obsolete.

Test counts are performed by the auditor only when it is not possible for the auditor to observe the client taking a physical inventory.