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

Question 1

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

Answer 1

True

Question 2

A new vendor should be added to an authorized vendor database by an individual in the purchasing department.

Answer 2

False

Question 3

A networked software system linking a company's information system to vendors whose offerings and prices have been preapproved by appropriate management is called an automated purchasing system.

Answer 3

True

Question 4

Most organizations use a perpetual inventory system to manage inventory.

Question 5

The major accounts in the acquisition and payment cycle are inventory, cost of goods sold, accounts payable, and other expense accounts.

Question 6

In an audit where there is a heightened risk of fraud related to inventory, the auditor may want to observe all inventory locations simultaneously.

Question 7

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

Question 8

Approval of items for payment usually involves a three-way match among the vendor invoice, the purchase order, and the receiving report.

Question 9

Inventory turnover is often calculated by the auditor for proper disclosure in client financial statements.

Question 10

For proper control, the receiving department should receive a copy of the purchase order that has the quantities blanked out.

Question 11

The acquisition and payment cycle includes processes for identifying products or services to be acquired, purchasing goods and services, receiving the goods, approving payments, and paying for goods and services received.

Question 12

An indication of potential inventory fraud is that inventory levels are growing faster than sales.

Question 13

The purchasing department should make sure that only authorized goods are received, the goods meet order specifications, an accurate count of the goods received is taken, and that accountability is established to assure that all receipts are recorded.

Question 14

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

Question 15

Supply chain management has helped many companies improve the efficiency of operations.

Question 16

A major control benefit of a centralized purchasing department is the segregation of the authorization function from the custody and recording functions.

Question 17

The acquisition process begins with a purchase of goods or services.

Question 18

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

Question 19

A purchase order identifies the quantity and description of products that have been received.

Question 20

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

Question 21

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

Question 22

Sources of information regarding a client's inventory obsolescence can be partially noted during the inventory observation.

Question 23

One reason the inventory observation is performed is for the purpose of determining the accuracy of client counting procedures.

Question 24

During the counting process of inventory, 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."

Question 25

The lower of cost or market assumption is not important to valuation of inventory.

Question 26

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

Question 27

The acquisition cycle begins with the receipt of goods and services and ends with their payment as reflected in cash disbursements.

Question 28

Many frauds are committed by overstating inventory accounts.

Question 29

Proper internal control over the inventory account would require that inventory items should be reviewed for obsolescence and proper accounting treatment.

Question 30

Generally accepted auditing standards (GAAS) require the auditor to observe the taking of the physical inventory at year-end.

Question 31

When auditing accounts payable, the auditor would most likely review a sample of cash disbursements throughout the year end to determine whether disbursements for goods and services are applicable to the subsequent year.

Question 32

Legal expenses are reviewed by auditors for possible litigation and related FAS 5 treatment.

Question 33

The auditor tests significant repairs and maintenance expenses to ensure that an item that should be capitalized has not been expensed.

Question 34

Test counts are performed by the auditor to give the impression of control and they are not used for substantive testing.

Question 35

Valuation is the most complex assertion related to inventory.

Question 36

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

Question 37

Inventory may become obsolete because of technological advances even though there are no signs of physical wear.

Question 38

The auditor may test a manufacturing client's cost system to substantiate the valuation of inventory.

Question 39

The cash account is not part of the acquisitions and payment cycle.

Question 40

The auditor is required by generally accepted accounting principles (GAAP) to observe the taking of physical inventory.

Question 41

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

A) Reserves for contingencies are reducing rapidly.
B) Inventory amounts are growing faster than sales.
C) Repairs and maintenance accounts have significant credit entries.
D) The purchase of manufacturing equipment is occurring at a rapid rate.

Question 42

In computerized purchase operations the computer matches three documents, the purchase order, the receiving report, and the monthly statement, and if the three match within a prespecified tolerable limit, the invoice is approved for payment.

Question 43

The internal control that requires that "checks are pre-numbered and accounted for" satisfies which assertion?

A) Accuracy.
B) Existence.
C) Completeness.
D) Posting and summarization.

Question 44

In observing the client's inventory at year-end the auditor makes test counts that are later traced into the client's inventory compilation.

Question 45

Which of the following is an example of the type of analytics that an auditor would use for inventory?

A) Number of day's sales in receivables compared to industry averages.
B) Inventory turnover for the previous five years.
C) Days outstanding in accounts payable.
D) Salaries of marketing personnel as a percent of total inventory.

Question 46

Which relationship might suggest a heightened risk of fraud in the acquisition and payment cycle?

A) Unexpected increases in the number of suppliers.
B) A reduction in raw material costs.
C) Maturing capital assets with no plan for replacement.
D) Sales expenses growing in proportion to sales revenue.

Question 47

The tracing of a sample of receiving reports through the recording process tests the completeness assertion.

Question 48

Reduction of the risk of understated payables can be accomplished by focusing on which assertion?

A) Existence.
B) Rights.
C) Presentation and disclosure.
D) Completeness.

Question 49

Which of the following is not a management assertion relevant to inventory?

A) Existence or occurrence.
B) Completeness.
C) Rights and obligations.
D) Reporting.

Question 50

Substantive tests of accounts payable and related expense accounts for valuation usually involve simply verifying the mathematical accuracy of the accounts, and agreeing them to general ledger and supporting documentation.

Question 51

The acquisition and payment process consists of each of the following phases except which of the following?

A) Receipts of goods and services.
B) Approval of items for payment.
C) Application of cash receipts.
D) Authorized request for goods and services.

Question 52

Accounting for inventories is a major consideration for many companies because of its significance to which of the following financial statements?

A) Balance sheet.
B) Income statement.
C) Statement of Cash Flow
D) Both A and B.

Question 53

When a purchasing agent benefits personally by accepting payment from a vendor, the purchasing agent is guilty of which of the following?

A) Performing kiting.
B) Committing embezzlement.
C) Receiving kickbacks.
D) Stealing company assets.

Question 54

Which of the following is NOT an example of fraud in the acquisition and payment cycle?

A) Theft of inventory by employees.
B) Inventory shrinkage.
C) Large manual adjustments to inventory accounts.
D) Excess inventory because of a production slowdown.

Question 55

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

Question 56

Which of the following would meet the need for additional control procedures when using computer-generated purchase orders?

A) Establishment of a maximum quantity limits that can be ordered within a given time period.
B) Automated acceptance for high dollar levels.
C) Purchase order copies sent by purchasing to receiving.
D) Accounts payable department entering new vendors into the system.

Question 57

Prenumbered receiving documents establish the completeness of the population and are useful in determining that all goods are recorded in the correct period.

Question 58

Which of the following accounts is NOT a major account in the acquisition and payment cycle?

A) Inventory.
B) Cost of goods sold.
C) Accounts payable.
D) All of the above are major accounts.

Question 59

What is the primary reason for management's ability to easily overvalue inventory without rapid detection by auditors?

A) The limited volume of transactions in the inventory accounts.
B) The auditor's assessment of inventory as a low-risk area.
C) Complexity in the valuation of inventory.
D) Consideration by the auditor of non-financial indicators of inventory fraud.

Question 60

Which of the following is not a rationale for purchasing to be a separate function?

A) Purchasing promotes efficiency and effectiveness.
B) Purchasing eliminates potential favoritism.
C) Purchasing reduces the opportunity for fraud.
D) Purchasing decentralizes control.

Question 61

Which of the following is not an inherent risk associated with inventory?

A) Inventory accounts typically have a high volume of activity.
B) Inventory is easily transportable
C) Inventory may become obsolete.
D) Inventory costing methods frequently change from one year to the next.

Question 62

Which of the following would the auditor most likely do when testing the valuation assertion for inventory?

A) Confirm inventory on consignment.
B) Examine receiving reports for inventory, tracing the recorded amounts.
C) Observe the taking of physical inventory.
D) Vouch inventory purchases to vendor invoices.

Question 63

Please indicate the proper sequence of the acquisition cycle:
1. Approval of items for payment.
2. Authorized requisition for goods or services.
3. Cash disbursements.
4. Receipt of goods and services.
5. Authorized purchase of goods or services.

A) 2, 5, 4, 1, 3
B) 2, 4, 5, 1, 3
C) 2, 1, 4, 5, 3
D) 2, 5, 1, 4, 3

Question 64

Which of the following procedures will usually be performed by the auditor to determine if obsolete inventory exists?

A) Confirmation of inventory with customers.
B) Footing the inventory subsidiary ledger.
C) Tracing inventory ordered by the client to receiving reports.
D) Analysis of inventory turnover and sales reports.

Question 65

The auditor may discover that the recorded cost of inventory exceeds the designated market price when testing which assertion?

A) Existence.
B) Cutoff.
C) Valuation.
D) Rights.

Question 66

An auditor may best test commissions expense for salespeople when control risk is low by performing which of the following procedures?

A) Analytical procedures.
B) Tagging and tracing.
C) Alternative procedures.
D) Subsequent proof of cash.

Question 67

A perpetual inventory system is preferable to a periodic system if adequately controlled and maintained because of which of the following?

A) It requires that a full inventory count be taken at year-end by all warehouse employees.
B) It allows management to calculate cost of goods sold at year end.
C) It provides information to management where book inventory is continuously in agreement with inventory on hand within specified time periods.
D) It better controls the receipt of goods.

Question 68

An internal control benefit of centralized purchasing in an organization includes which of the following?

A) Separation of authorization from the custody and recording function.
B) An increase in the number of vendors used.
C) Increased compensation of agents through side agreements.
D) Mathematically accurate vendor invoices.

Question 69

Which of the following is a reason why an automated purchasing system is beneficial?

A) It applies preloaded specifications and materials lists to the system.
B) It automatically flags invoices that do not reconcile with purchase orders.
C) It creates change orders and analyzes variances from purchase orders.
D) All of the above.

Question 70

When auditing expense accounts, which of the following would the auditor be least likely to subject to a detailed test of transactions?

A) Legal expense.
B) Utilities expense.
C) Repairs and maintenance expense.
D) Travel expense.

Question 71

Why should the client's legal expenses be examined?

A) To compare with previously released attorney's letters.
B) To determine the types of fraud occurring in the organization.
C) To ensure proper recording of vendor payables.
D) To determine if there is any litigation pending or threatened.

Question 72

Which of the following is NOT a reason why inventory is a complex accounting and auditing area?

A) Diversity of items in inventory.
B) Low volume of activity.
C) Easily transportable.
D) Difficulty in applying the lower of cost or market principle.

Question 73

Which assertion has the greatest emphasis when auditing accounts payable?

A) Existence.
B) Completeness.
C) Presentation.
D) Disclosure.

Question 74

A primary feature of automated control in the acquisition cycle includes which of the following?

A) That authorization is no longer required.
B) Limits as to the number of items that can be received by the warehouse.
C) Calculated order quantities based on set criteria.
D) Funds transfer at the request of the controller.

Question 75

Which of the following is NOT a element of internal controls for inventory?

A) Authorization for all purchases.
B) Proper accounting for receipt of inventory.
C) Perpetual inventory system.
D) Rapid introduction of new products without market studies.

Question 76

Which one of the following accounts would an auditor most likely test by performing analytical procedures?

A) Sales commissions expense.
B) Legal expenses.
C) Repairs and maintenance expense.
D) Travel expense.

Question 77

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

A) Occurrence.
B) Presentation and Disclosure.
C) Completeness.
D) Valuation or allocation.

Question 78

Bar code scanning may best be utilized in the receiving process to accomplish which of the following?

A) Identify goods arriving automatically in conjunction with a count.
B) Notify the shipper that product has arrived.
C) Order new items on behalf of the purchasing department.
D) Record inventory that has been written off the books.

Question 79

Which of the following would the auditor most likely do when testing the existence assertion for inventory?

A) Observe the client's count of the annual physical inventory and perform test counts.
B) Review vendor invoices for the amounts recorded.
C) Review open purchase orders at year end.
D) Trace raw material purchases to invoices and to the general ledger.

Question 80

Which of the following procedures would the auditor perform in testing the completeness assertion for accounts payable?

A) Examine a sample of cash disbursements made after year end to determine whether the disbursements were for goods applicable to the previous year.
B) Reconcile vendor's statements with the accounts receivable trial balance.
C) Examine production equipment for useful lives.
D) Gather purchase orders immediately previous to and subsequent to year-end.