Deck 15: Audit of Transaction Cycles and Financial Statement Balances I

Question 1

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

A) is overstated.
B) is fairly stated and properly disclosed.
C) is understated.
D) is accurately stated.

Answer 1

B

Question 2

A request by an authorised employee for goods or services is made on the:

A) debit note.
B) acquisition transaction file.
C) purchase requisition.
D) purchase order.

Answer 2

C

Question 3

Perpetual inventory master files maintained by persons who do not have custody of or access to assets are a useful cost accounting control, because:

A) they provide a record of the use of raw materials and sale of finished goods, which can be reviewed for obsolete or slow- moving items.
B) they are a record that can be used to pinpoint responsibility for custody when there are differences between physical counts and amounts shown on records.
C) they provide a record of items on hand, which is used to initiate production or acquisition of additional materials or goods.
D) all of the above.

Answer 3

D

Question 4

A document frequently used by organisations to establish a formal means of recording the controlling acquisitions, and which usually contains a package of documents relevant to the acquisition, is the:

A) purchase requisition.
B) purchase order.
C) voucher.
D) receiving report.

Question 5

A company failed to record an acquisition of merchandise and its attendant liability, but it was included in the physical count of ending inventory. The effect on the financial statements would be to:

A) overstate net income and owners' equity.
B) understate both assets and liabilities.
C) understate liabilities and overstate both net income and owners' equity.
D) understate assets and owners' equity.

Question 6

To BEST ascertain that a company has properly included merchandise that it owns in its ending inventory, the auditor should review and test the:

A) contractual commitments made by the purchasing department.
B) terms of the open purchase orders.
C) purchase invoices received on or around year- end.
D) purchase cutoff procedures.

Question 7

Inherent risk is often assessed as relatively high for inventory, because of the characteristic/s:

A) potential for obsolescence.
B) multiple storage locations.
C) complex pricing.
D) all of the above

Question 8

From which one of the following evidence- gathering audit procedures would an auditor obtain most assurance concerning the existence of inventories?

A) Confirmation of inventories in a public warehouse
B) Written inventory representations from management
C) Auditor's recomputation of inventory extensions
D) Observation of physical inventory counts

Question 9

The analytical procedure that requires the auditor to 'review 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) Invalid accounts or misstatements
C) Classification error for non- trade liabilities
D) Unrecorded accounts or misstatements

Question 10

Necessary controls in the accounts payable and information technology departments include:

A) adequate documents and records, and proper procedures for record keeping.
B) independent checks on performance.
C) that personnel who record transactions do not have access to cash, marketable securities or other assets.
D) all of the above

Question 11

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

Question 12

Cost accounting controls are divided into which broad categories?

A) Physical controls over raw materials, work in progress, finished goods and controls over related costs
B) Physical controls over finished goods and related costs
C) Physical controls over raw materials and work in progress
D) Physical controls over raw materials, work in progress and finished goods

Question 13

Which one of the following analytical procedures would be most helpful in alerting the auditor to the possibility of obsolete inventory?

A) Compare current year manufacturing costs with previous years' costs.
B) Compare gross margin percentage with previous years' percentages.
C) Compare inventory turnover ratio with previous years' ratios.
D) Compare unit costs of inventory with previous years' costs.

Question 14

When goods are received, adequate control requires examination for:

A) condition.
B) description.
C) quantity.
D) all of the above

Question 15

After the payroll total has been agreed upon, often a separate bank account is set up to pay the amount. This account is referred to as:

A) a cashiered account.
B) a completed transaction account.
C) a voided cheque account.
D) an imprest payroll account.

Question 16

It usually takes more time to audit the acquisition and payment cycle than any other cycle because:

A) there is a greater possibility of fraud in these transactions.
B) internal controls in this area are usually weaker.
C) of the large number of time- consuming accounts affected.
D) there is a greater likelihood of lawsuits against the auditor relating to these accounts.

Question 17

No individual with authority to sign payroll cheques or approve direct bank transfers should be permitted access to:

A) timekeeping.
B) the computer.
C) the preparation of payroll.
D) both A and B.

Question 18

Sample size in physical observation of inventory is:

A) impossible to specify in units because the emphasis is on observing the client's procedures.
B) determined using attributes sampling.
C) determined using dollar- unit sampling.
D) determined using variables sampling.

Question 19

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 overstatement of net earnings.
B) does not affect earnings.
C) is indeterminable from the information given.
D) is an understatement of net earnings.

Question 20

The document that indicates such things as the description and quantity of goods and services received, price including freight, cash discount terms and date of the billing is the:

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

Question 21

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

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

Question 22

When labour is a material factor in inventory valuation, the auditor should place special emphasis on testing the internal controls concerning:

A) proper classification of transactions.
B) authorisation of wage rates.
C) fictitious employees.
D) completeness of recorded transactions.

Question 23

A document indicating a reduction in the amount owed to a vendor because of returned goods is:

A) a debit note.
B) a shipping room report.
C) a receiving room report.
D) a credit note.

Question 24

Cost accounting controls are those related to the physical inventory and the consequent costs from the point at which:

A) the customer's order is received until the finished product is shipped.
B) raw materials are requisitioned until the finished product is completely manufactured.
C) raw materials are requisitioned until the finished product is sent to storage.
D) materials are ordered for purchase until the finished product is sold.

Question 25

The test of details of balance procedure which requires the auditor to inquire of management for the possibility of the inclusion of consigned or other non- owned inventory is associated with the audit objective of:

A) realisable value.
B) existence.
C) rights.
D) completeness.

Question 26

The most important part of the observation of inventory is determining whether:

A) obsolete inventory has been identified.
B) the counts are accurate.
C) the inventory- takers are qualified.
D) the physical count is being taken in accordance with the client's instructions.

Question 27

Test results of which other cycle/s, in addition to the test results of inventory and warehousing, will affect the tests of details of balances for inventory?

A) The acquisitions and payments cycle
B) The sales and collection cycle
C) The payroll and personnel cycle
D) All three of the above

Question 28

The file for recording each payroll transaction for each employee and maintaining total employee wages paid for the year to date is the:

A) payroll journal.
B) job time ticket.
C) payroll master file.
D) summary payroll report.

Question 29

Which of the following is NOT a factor affecting the complexity of the audit of inventory?

A) Different acceptable valuation methods
B) Inventory being stored at more than one location
C) Counting inventory at different locations
D) Inventory is often the largest item on the balance sheet.

Question 30

Which one of the following is NOT an element of the audit of the inventory and warehousing cycle?

A) Review timekeeping procedures for manufacturing employees
B) Physically observe inventory
C) Price and compile inventory
D) Check how goods are shipped and revenue and costs are recorded

Question 31

The main difference between the payroll and personnel cycle and other cycles is:

A) transactions are more significant than related balance sheet accounts.
B) there is only one class of transactions.
C) internal controls for payroll are effective for most companies.
D) all of the above

Question 32

Controls which provide a means of ensuring that the physical counts are properly summarised, priced at the same amount as the unit records, correctly extended and totalled and included in the general ledger at the proper amount are known as:

A) count quantity internal controls.
B) inventory compilation controls.
C) pricing internal controls.
D) standard cost controls.

Question 33

'Recorded payroll transactions are for the amount of time actually worked and at the proper pay rate; withholdings are properly calculated' relates to which transaction- related audit objective for payroll?

A) Accuracy
B) Existence
C) Authorisation
D) Completeness

Question 34

Which one of the following is a test of controls?

A) Review the payroll journal, general ledger and payroll earnings records for large or unusual amounts.
B) Examine time cards for indication of supervisor approval.
C) Prove the bank reconciliation.
D) Reconcile payments in the payroll journal with payments on the bank statement.

Question 35

Which one of the following statements is NOT correct?

A) Internal controls vary from company to company; therefore, the auditor must identify the controls and deficiencies for each organisation.
B) The auditor must perform tests of controls on all of the client's internal controls.
C) The tests of controls and substantive tests of transactions are combined where appropriate.
D) The substantive tests of transactions will vary depending on the assessed control risk.

Question 36

The test of transactions, which requires 'compare paid cheques with the related acquisitions journal and cash payments journal', satisfies the transaction- related audit objective for cash payments of:

A) accuracy.
B) completeness.
C) posting and summarisation.
D) existence.

Question 37

The overall objective of the audit of the inventory and warehousing cycle is:

A) to determine that errors in the acquisitions and payroll cycles have not impacted on inventory pricing.
B) to determine that inventory is not obsolete.
C) to determine that raw materials, work- in- process, finished goods inventory and cost of goods sold are fairly stated in the financial statements.
D) to determine that raw materials, work- in- process, finished goods inventory and cost of goods sold are accurate.

Question 38

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

A) purchases.
B) ordinary shares.
C) merchandise inventory.
D) accounts payable.

Question 39

'Recorded payroll payments are for work actually performed by non- fictitious employees' is the transaction- related audit objective for payroll of:

A) accuracy.
B) completeness.
C) existence.
D) authorisation.

Question 40

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:

A) theft of merchandise by employees.
B) lapping.
C) kiting.
D) unrecorded obligations.

Question 41

When examining payroll transactions, an auditor is primarily concerned with the possibility of:

A) posting of gross payroll amounts to incorrect salary expense accounts.
B) misfootings of employee time records.
C) excess withholding of amounts required to be withheld.
D) overpayments and unauthorised payments.

Question 42

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

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

Question 43

The classes of transactions in the acquisition and payment cycle include:

A) acquisition of goods.
B) acquisition of goods and services.
C) acquisition of goods and services, cash payments, and purchase returns and discounts.
D) acquisition of goods and services, and cash payments.

Question 44

From an audit point of view, which one of the following would NOT be an important internal control in the personnel cycle?

A) Reconciliation of total payroll expense in the general ledger with the payroll tax returns and the group certificates
B) Adequate separation of duties
C) Proper authorisation of changes in pay rates
D) Physical control over assets and records

Question 45

The accounts payable department usually has responsibility for verifying the propriety of acquisitions by comparing the details on the:

A) purchase requisition, purchase order and receiving report.
B) vendor's invoice and the purchase requisition.
C) purchase order, receiving report and vendor's invoice.
D) vendor's invoice and the receiving report.

Question 46

When an acquisition is on an FOB origin basis, the inventory and related accounts payable must be recorded in the current period if the goods were:

A) paid for in advance.
B) both shipped and received prior to the balance sheet date.
C) received prior to the balance sheet date.
D) shipped prior to the balance sheet date.

Question 47

Which one of the following circumstances would NOT cause an auditor to extend payroll procedures considerably?

A) There is a possibility of material fraudulent payroll transactions.
B) There is a lack of independent third- party evidence, such as confirmations.
C) Payroll significantly affects inventory valuation.
D) There is a deficient internal control structure.

Question 48

In connection with the client's physical count of inventory, adequate controls include:

A) proper instructions for the physical count and supervision by responsible personnel
B) adequate control over count sheets or tags.
C) independent internal verification including reconciliation of physical counts with perpetual inventory master files.
D) all of the above

Question 49

The most important consideration in evaluating the fairness of the amounts accrued for holiday pay, sick pay and other benefits is:

A) the profitability of the client which will enable these liabilities to be met.
B) the amount expended to date in the current period.
C) the consistent accrual of these liabilities in accordance with relevant agreements or legislation.
D) the actual expense incurred for the prior period.

Question 50

Examining inventory descriptions on tags and comparing to actual inventory relates to which audit objective?

A) Inventory is counted accurately (accuracy)
B) Inventory as recorded on tags exists (existence)
C) Inventory is classified correctly (classification)
D) Existing inventory is counted and tagged (completeness)

Question 51

A file recording payroll transactions for each employee and maintaining total wages paid for year to date is:

A) summary payroll report.
B) rate authorisation form.
C) payroll master file.
D) deduction authorisation form.

Question 52

When the client's physical inventory takes place before the last day of the year, it is still necessary to perform an accounts payable cutoff at the time of the physical count. In addition, the auditor must verify whether all acquisitions taking place between the physical count and the end of the year were added to:

A) accounts payable and cost of goods sold.
B) accounts payable.
C) the physical inventory.
D) the physical inventory and accounts payable.

Question 53

The auditor's transaction- related audit objective for acquisitions, to determine that 'recorded acquisitions are for goods and services received', relates to:

A) completeness.
B) authorisation.
C) accuracy.
D) existence.

Question 54

For good internal control, the purchasing department should NOT be responsible for:

A) designing the purchase order form.
B) finding the lowest cost vendor.
C) reviewing vendors' catalogue descriptions and prices for standardised items.
D) authorising the acquisition of goods.

Question 55

The auditor must verify whether the physical counts were correctly summarised, the inventory quantities and prices were correctly extended and the extended inventory was correctly footed. These tests are called:

A) compilation tests.
B) price tests.
C) cost tests.
D) mechanical tests.

Question 56

Which one of the following is the BEST audit procedure for the discovery of damaged merchandise in a client's ending inventory?

A) Compare the physical quantities of slow- moving items with corresponding quantities of the prior year.
B) Review the management's inventory representation letter for accuracy.
C) Test overall fairness of inventory values by comparing the company's turnover ratio with the industry average.
D) Be alert for items that are located in inappropriate places while observing the client's physical inventory count.

Question 57

A zero balance confirmation:

A) involves sending confirmations to all vendors.
B) involves sending confirmations to active vendors whose balance has not been included in accounts payable.
C) is similar to a positive confirmation.
D) involves sending confirmations to all vendors who have not been included in accounts payable.

Question 58

Which one of the following internal accounting control procedures is effective in preventing duplicate payment of vendors' invoices?

A) Cancelled cheques should be sent to persons other than the cashier or accounting department personnel.
B) The invoices should be stamped, perforated or otherwise effectively cancelled before submission for approval of the voucher.
C) Properly authorised and approved vouchers with appropriate documentation should be the basis for cheque preparation.
D) Unused voucher forms should be prenumbered and accounted for.

Question 59

When labour is a significant part of inventory, verifying the proper accounting of these costs should be tested in the:

A) cash cycle.
B) acquisitions and payments cycle.
C) inventory and warehousing cycle.
D) payroll and personnel cycle.

Question 60

When testing inventory items for pricing, the auditor should select items that:

A) have high prices.
B) have stable prices.
C) are representative.
D) both A and C

Question 61

A formal review and reporting of obsolete, slow- moving, damaged and overstated inventory items:

A) involves reviewing perpetual inventory master files for inventory turnover and holding discussions with engineering or production personnel.
B) is an internal control designed to prevent the overstatement of inventory through the inclusion of obsolete inventory.
C) should be done by a competent employee.
D) All of the above are correct.

Question 62

Receipt of ordered materials by the receiving department will generate the completion of a form called the:

A) inventory acquisition summary.
B) receiving report.
C) materials requisition.
D) bill of lading.

Question 63

Which one of the following would NOT justify an auditor's decision to spend very little time performing tests of transactions in the payroll and personnel cycle?

A) Employees will detect any underpayments.
B) The new payroll bookkeeper has a much better educational background than the former one.
C) Payroll transactions are extensively audited by government agencies.
D) Payroll transactions are uniform and uncomplicated.

Question 64

The document that indicates the time an employee stopped working each day and the number of hours worked is the:

A) job time card.
B) payroll master file.
C) rate authorisation form.
D) time card.

Question 65

The purpose of the audit procedure to 'examine underlying documentation for subsequent cash payments' is to:

A) uncover payments made in a subsequent accounting period that represent liabilities at the balance sheet date.
B) uncover liabilities on the balance sheet which should not have been recorded until a subsequent period.
C) uncover cash payments recorded in a subsequent accounting period which should be recorded in this period.
D) find the documentation relating to a cash payment.

Question 66

Statistical sampling is less commonly used for the audit of accounts payable than for accounts receivable because it is more difficult to:

A) define the population.
B) determine the tolerable exception rate.
C) decide on attributes or variables sampling.
D) mathematically calculate and interpret the results.

Question 67

The costs used to value the physical inventory must be tested to determine whether the client has correctly followed an inventory method that is in accordance with accounting standards and is consistent with previous years. The audit procedures used to verify these costs are referred to as:

A) price tests.
B) consistency tests.
C) cost tests.
D) compilation tests.

Question 68

Once the auditor has determined the company's policy for accruing wages and knows it is consistent with that of previous years, the appropriate audit procedure to test for cutoff and accuracy is to:

A) compare the recorded accrued wages with the amount approved in the minutes of the board.
B) confirm the amount with employees.
C) recalculate the client's accruals.
D) compare the ledger balance with the journal and the tax form.

Question 69

In audits of companies in which payroll is a significant portion of inventory, the improper account classification of payroll can:

A) increase asset valuations.
B) decrease asset valuations.
C) either A or B
D) not affect asset valuations.

Question 70

The primary concern in testing payroll- related liabilities is to make sure that:

A) transactions are recorded in the proper period.
B) there are no understated or omitted accruals.
C) accruals are properly valued.
D) the accruals are not overstated.

Question 71

Once the auditor has decided on procedures, the acquisitions and cash payments tests are typically performed:

A) concurrently, to achieve efficiency without reducing the effectiveness of the tests.
B) by different audit staff, to maintain independence.
C) consecutively, to achieve efficiency without reducing the effectiveness of the tests.
D) separately, to maximise the effectiveness of the tests.

Question 72

Internal control over accounts payable is strengthened when a monthly reconciliation of the vendors' statements with recorded liabilities and the accounts payable master file with the general ledger is performed by:

A) the auditor.
B) the purchasing agent.
C) an independent person.
D) any of the above.

Question 73

Matching the vendor's invoice, the purchase order and the receiving report normally should be the responsibility of the:

A) accounts payable department.
B) warehouse receiving function.
C) purchasing function.
D) treasury function.

Question 74

The internal control which requires that 'cheques are prenumbered and accounted for' satisfies the transaction- related audit objective for cash payments of:

A) posting and summarisation.
B) completeness.
C) accuracy.
D) existence.

Question 75

The auditor should be satisfied that acquisitions of raw materials are correctly stated at the completion of the:

A) payroll and personnel cycle.
B) acquisitions and payments cycle.
C) cash cycle.
D) inventory and warehousing cycle.

Question 76

When auditing accounts payable, auditors are usually especially concerned about the:

A) existence and accuracy objectives.
B) existence and cutoff objectives.
C) existence and completion objectives.
D) completeness and cutoff objectives.

Question 77

When a physical count of inventory is performed at an interim date, the auditor observes it at that time and tests the perpetuals for transactions:

A) which are a representative sample of the period under audit.
B) from the date of the count to the end of the audit field work.
C) from the date of the count to year- end.
D) throughout the year.

Question 78

The auditor recounts the client's inventory count to:

A) ensure that none is lost or intentionally omitted (completeness).
B) ensure that inventory is counted accurately (accuracy)
C) obtain proper cutoff information for sales and acquisitions (cutoff).
D) confirm that inventory as recorded on tags exists (existence).

Question 79

The total of the individual employee earnings in the payroll master file equals the:

A) total of the cheques drawn to employees for payroll.
B) total gross pay for the current week's payroll.
C) total gross payroll plus the total contributed by the employer for superannuation.
D) total balance of gross payroll in general ledger accounts.

Question 80

Which one of the following would NOT be a test used when auditing accrued sales commissions?

A) Test the detail tie- in in the commissions expense account at interim dates.
B) Confirm the commissions directly with the employees.
C) Compare the method of accruing commissions with the previous years.
D) Test the calculation (recalculate) based on the agreement between client and employees.