Deck 6: Auditing the Acquisition and Expenditure Business Process

Question 1

On the balance sheet,the acquisition and expenditure process includes which of the following accounts?

A)cost of goods sold
B)selling,general and administrative expenses
C)sale of inventory
D)accounts payable
E)cash payments
F)both A and B
G)both C and D
Both D and E

Answer 1

H

Question 2

The auditor gathers evidence about the land,building,equipment,and intangible asset accounts by reviewing changes in the accounts during the year and reviewing the valuation adjustments for certain intangible assets at the end of the year.

Answer 2

True

Question 3

Accrued liabilities are recorded for transactions where the company incurs an expense but may not have recorded the liability for the expense because the goods have been received but no invoice has been received.

Answer 3

False

Question 4

On the balance sheet,the acquisition and expenditure process includes which of the following accounts?

A)cost of goods sold
B)selling,general and administrative expenses
C)purchase returns and allowances
D)changes in land,building,equipment,and intangible assets
E)accounts receivable
F)both A and B
G)both C and D
H)both D and E

Question 5

On the income statement,the acquisition and expenditure process includes which of the following accounts?

A)cost of goods sold
B)selling,general and administrative expenses
C)purchases of inventory
D)accounts payable
E)both A and B
F)both C and D
G)both D and E

Question 6

The auditor is not responsible for

A)reviewing all transactions that were recorded in the income statement account during the year
B)reviewing all transactions that were recorded in the balance sheet account during the year
C)reviewing all journal entries that were recorded in the income statement account during the year
D)reviewing all journal entries that were recorded in the balance sheet account during the year

Question 7

According to FASB Concept Statement No.5,Recognition and Measurement in Financial Statements of Business Enterprises,an expense is recognized when the benefit of an asset has been reduced or when a liability has been incurred.

Question 8

The totals in the balance sheet accounts reflect

A)all the transactions recorded during the year
B)a beginning balance as of the last day of the current year
C)only the amounts in the accounts on the last day of the year
D)the total amount of the transactions recorded during the year

Question 9

The disclosures related to the financial statements are usually made in one of two places: the footnotes or in the "Management Discussion and Analysis" section.

Question 10

Normally there are no debit entries made to expense accounts or credit entries made to revenue accounts.

Question 11

On the balance sheet,the acquisition and expenditure process includes which of the following accounts?

A)cost of goods sold
B)selling,general and administrative expenses
C)purchases of inventory
D)accounts payable
E)cash receipts
F)both C and D
G)both D and E

Question 12

The auditor must determine whether the transactions recorded in the revenue and expense accounts during the year

A)have been properly recorded in accordance with GAAS
B)have been recorded in accordance with an applicable financial reporting framework
C)are capable of being transferred to the owners equity account
D)have comparable transactions on the balance sheet

Question 13

The decision to test internal controls for a financial statement audit is usually based on whether it is an efficient way to gather evidence for a business process.

Question 14

An auditor often uses analytical procedures as evidence for whether the financial statement accounts are accurate and complete.

Question 15

The totals at the end of the year in the revenue and expense accounts reflect

A)all the business conducted during the year
B)only the transactions completed during the year
C)all the transactions recorded during the year
D)only the transactions initiated during the year

Question 16

Purchase requisitions are prepared by the purchasing department to initiate the purchase requested on the purchase order.

Question 17

Misappropriation of company assets can occur when employees set up accounts for fictitious vendors and process payments to those vendors.

Question 18

The auditor is responsible for determining

A)only if the ending balance in the balance sheet account is stated in accordance with the applicable financial reporting framework
B)only if the ending balance in the income statement account is stated in accordance with the applicable financial reporting framework
C)only if the beginning balance in the balance sheet account is stated in accordance with the applicable financial reporting framework
D)only if the beginning balance in the income statement account is stated in accordance with the applicable financial reporting framework

Question 19

For the acquisition and expenditure process,management asserts that accounts payable exist at the income statement date and that the expense transactions recorded in the acquisition and expenditure cycle occurred at the balance sheet date.

Question 20

As with all income statement accounts,the expense accounts begin the year with

A)a total equal to the amount in accounts payable
B)a total equal to the budgeted estimated expenses for the year
C)the ending balance from prior year
D)a zero balance

Question 21

According to FASB Concept Statement No.5,Recognition and Measurement in Financial Statements of Business Enterprises,an expense is recognized when

A)the benefit of a liability has been reduced
B)an asset has been acquired
C)the benefit of an asset has been reduced
D)a liability has been incurred
E)the benefit of an asset has been acquired
F)both A and C
G)both C and D

Question 22

Misstatements in the acquisition and expenditures process may be

A)overstatement misstatements
B)understatement misstatements
C)both overstatement and understatement misstatements
D)neither overstatement nor understatement misstatements

Question 23

Which of the following are documents that the auditor may find useful for gathering evidence about the acquisition and expenditure business process?

A)purchase invoice
B)accounts payable subsidiary ledger
C)tangible asset subsidiary ledger
D)petty cash disbursements journal
E)adjusting journal entry report
F)both A and B
G)both C and D
Both B and E

Question 24

Which of the following are documents that the auditor may find useful for gathering evidence about the acquisition and expenditure business process?

A)purchase invoice
B)accounts receivable subsidiary ledger
C)cash disbursements journal
D)adjusting ledger entry report
E)cash receipts journal

Question 25

Which of the following are documents that the auditor may find useful for gathering evidence about the acquisition and expenditure business process?

A)purchase invoice
B)purchase order
C)receiving order
D)vendor invoice
E)voucher requisition
F)sales invoice
G)both A and C
Both B and D
I)both E and F

Question 26

For the income statement,

A)the auditor gathers evidence to support the transactions recorded in the accounts for 12 months
B)the auditor gathers evidence to determine whether the account balance on one day of the year,the end of the year,is correct
C)the tests that the auditor uses to gather evidence are called substantive tests of transactions
D)the tests that the auditor uses to gather evidence are called substantive tests of balances
E)the tests that the auditor uses to gather evidence are called substantive tests of controls
F)both A and C

Question 27

A company incurs most liabilities in transactions where

A)the company obtains the employees it needs to do business
B)the company obtains the materials it needs to do business
C)the company obtains the resources it needs to do business
D)the company obtains the financing it needs to do business

Question 28

Which of the following are documents that the auditor may find useful for gathering evidence about the acquisition and expenditure business process?

A)purchase invoice
B)accounts receivable subsidiary ledger
C)tangible asset subsidiary ledger
D)cash disbursements journal
E)adjusting journal entry report
F)both A and B
G)both D and E

Question 29

The Adjusting Journal Entry Report is

A)a record of all adjusting journal entries made during a specific time period,organized by month-end,quarter-end,and year-end
B)a detailed monthly report including a list of cash disbursements for the time period
C)a daily or monthly report including a list of purchase transactions for the time period
D)supported by documentation for the adjusting journal entries with the signature of the person initiating the entry
E)a detailed listing of intangible assets and decline in value adjustments as required according to the applicable financial reporting framework
F)both A and D
G)both B and C

Question 30

Which of the following are documents that the auditor may find useful for gathering evidence about the acquisition and expenditure business process?

A)purchase journal
B)accounts receivable subsidiary ledger
C)tangible asset subsidiary ledger
D)adjusting ledger entry report
E)cash receipts journal

Question 31

Agreements associated with acquiring resources it needs to do business obligate the company to pay cash or provide goods or services in exchange for the benefits received.The amount of the expense recognized should

A)be equal to the cash they expect to receive to reduce the liability to zero
B)be equal to the cash they expect to pay to reduce the asset to zero
C)be equal to the cash they expect to pay to reduce the liability to zero
D)be equal to the cash they expect to receive to reduce the asset to zero

Question 32

The client may use a variety of methods to understate expenses and payables.These include

A)failure to review accounts payable at the end of the year
B)failure to review payroll expense or fringe benefits at year end
C)failure to review accrued expenses at year end
D)capitalization of expenses
E)failure to record long term liabilities
F)both A and B
G)both D and E

Question 33

Which of the following are documents that the auditor may find useful for gathering evidence about the acquisition and expenditure business process?

A)accounts receivable subsidiary ledger
B)intangible asset subsidiary ledger
C)petty cash disbursements journal
D)adjusting ledger entry report
E)cash receipts journal

Question 34

Which of the following is an example of a liability a company would routinely incur to acquire the funds,goods,and services they need to operate?

A)borrowing money obligates the company to repay the loan
B)buying assets for cash obligates the company to pay for them
C)buying assets on credit obligates the company to produce goods
D)using the knowledge,time,and skill of employees obligates the company to pay for their use
E)both A and B
F)both D and E

Question 35

Which of the following are documents that the auditor may find useful for gathering evidence about the acquisition and expenditure business process?

A)purchase requisition
B)purchase invoice
C)receiving document
D)vendor order
E)voucher requisition
F)shipping document
G)both A and C
H)both D and E

Question 36

Agreements associated with acquiring the resources it needs to do business obligate the company to pay cash or provide goods or services in exchange for the benefits received.Applying these rules to the process to record expenses,companies should recognize an expense when

A)they have developed an economic benefit in the process of acquiring funds,goods or services needed to operate a business
B)they have consumed an economic benefit in the process of distributing funds,goods or services needed to operate a business
C)they have consumed an economic benefit in the process of acquiring funds,goods or services needed to operate a business
D)they have developed an economic benefit in the process of distributing funds,goods or services needed to operate a business

Question 37

The client may use a variety of methods to understate expenses and payables.These include

A)failure to review accounts payable at the end of the year
B)failure to record payroll expense or fringe benefits at year end
C)failure to record accrued expenses at year end
D)failure to accrue interest income at year-end
E)failure to review long term liabilities
F)both A and D
G)both B and C

Question 38

The client may use a variety of methods to understate expenses and payables.These include

A)failure to record accounts payable at the end of the year
B)failure to review payroll expense or fringe benefits at year end
C)failure to record accrued expenses at year end
D)failure to accrue interest income at year-end
E)failure to review long term liabilities
F)both A and C
G)both B and D

Question 39

For the balance sheet,

A)the auditor gathers evidence to support the transactions recorded in the accounts for 12 months
B)the auditor gathers evidence to determine whether the account balance on one day of the year,the end of the year,is correct
C)the tests that the auditor uses to gather evidence are called substantive tests of transactions
D)the tests that the auditor uses to gather evidence are called substantive tests of balances
E)the tests that the auditor uses to gather evidence are called substantive tests of controls
F)both A and B
G)both C and D
Both B and D

Question 40

Substantive tests provide the auditor with evidence about whether

A)the account balance is correct for income statement accounts
B)the account balance is correct for balance sheet accounts
C)the transactions recorded in the financial statements are correct for income statement accounts
D)the transactions recorded in the financial statements are correct for balance sheet accounts
E)the transactions recorded in the financial statements are correct for internal control accounts
F)both A and B
G)both B and C
H)both D and E

Question 41

Misappropriation of company assets can occur in the following ways

A)employees can set up accounts for fictitious vendors and process payments to these vendors
B)customers can create fictitious employees and misdirect payroll for these employees to their own accounts
C)employees can make purchases of inventory or supplies on the company account and use the items for their own personal use
D)customers can set up accounts receivable for fictitious customers and process payments to these customers
E)both A and C
F)both B and D

Question 42

Management assertions in the acquisition and expenditure business process are

A)existence or occurrence - for both classes of transactions and account balances
B)completeness - for account balances
C)valuation and allocation - for classes of transactions
D)rights and obligations - for classes of transactions
E)accuracy - for account balances

Question 43

Management assertions in the acquisition and expenditure business process are

A)existence or occurrence - for account balances
B)completeness - for both classes of transactions and account balances
C)valuation and allocation - for classes of transactions
D)rights and obligations - for classes of transactions
E)accuracy - for classes of transactions
F)both A and C
G)both B and E

Question 44

Management assertions in the acquisition and expenditure business process are

A)existence or occurrence - for and account balances
B)completeness - for both classes of transactions and account balances
C)valuation and allocation - for classes of transactions
D)rights and obligations - for account balances
E)accuracy - for account balances
F)both A and C
G)both B and D

Question 45

Which of the following are IT controls that we might expect to find in the business process?

A)goods are received only for items with a valid requisition order
B)the accounting system matches information on the purchase order and the receiving report with the vendor invoice before the invoice is paid
C)the asset or expense is recognized based on the date on the receiving report
D)IT system prepares reports listing purchase orders where the goods have been received,and receiving reports that have been invoiced
E)IT system restricts access to individuals authorized to read purchase orders,receiving reports,and vendor invoices
F)both A and D
G)both B and C

Question 46

Because the most likely misstatement in the acquisition and expenditure process is an understatement misstatement,

A)accuracy is often the relevant assertion for this process
B)completeness is often the relevant assertion for this process
C)cut-off is often the relevant assertion for this process
D)existence or occurrence is often the relevant assertion for this process

Question 47

Which of the following are IT controls that we might expect to find in the business process?

A)goods are received only for items with a valid purchase order
B)the accounting system matches information on the purchase order and the receiving report with the vendor invoice before the invoice is paid
C)the asset or expense is recognized based on the date on the purchase order
D)IT system prepares reports listing purchase orders where the goods have been received,and receiving reports that have been invoiced
E)IT system restricts access to individuals authorized to read purchase orders,receiving reports,and vendor invoices
F)both A and B
G)both C and D

Question 48

Which of the following are IT controls that we might expect to find in the acquisition and expenditure business process?

A)goods are received only for items with a valid requisition order
B)the accounting system matches information on the purchase order with the vendor invoice before the invoice is paid
C)the asset or expense is recognized based on the date on the purchase order
D)IT system prepares reports listing purchase orders where the goods have not been received,and receiving reports that have not been invoiced
E)IT system restricts access to individuals authorized to input purchase orders,receiving reports,and vendor invoices
F)both A and B
G)both D and E

Question 49

Management assertions in the acquisition and expenditure business process are

A)existence or occurrence - for classes of transactions
B)completeness - for account balances
C)valuation and allocation - for classes of transactions
D)rights and obligations - for classes of transactions
E)accuracy - for classes of transactions

Question 50

Which of the following are IT controls that we might expect to find in the business process?

A)goods are received only for items with a valid purchase order
B)the accounting system matches information on the purchase order with the vendor invoice before the invoice is paid
C)the asset or expense is recognized based on the date on the purchase order
D)IT system prepares reports listing purchase orders where the goods have been received,and receiving reports that have been invoiced
E)IT system restricts access to individuals authorized to input purchase orders,receiving reports,and vendor invoices
F)both A and E
G)both B and D

Question 51

The relevant assertions for any business process are

A)linked to the risk in the accounting process
B)valued according to management rules
C)that accounts payable occurred at the balance sheet date
D)that the expense transactions recorded in the business process were correct

Question 52

Misappropriation of company assets can occur in the following ways

A)customers can set up accounts for actual vendors and process payments to these vendors
B)employees can create fictitious employees and misdirect payroll for these employees to their own accounts
C)employees can make purchases of inventory or supplies on the company account and use the items as part of their job in the company
D)customers can set up accounts receivable for fictitious customers and process payments to these customers
E)employees can set up accounts for fictitious vendors and process payments to these vendors
F)both A and C
G)both B and E

Question 53

Which of the following are IT controls that we might expect to find in the business process?

A)goods are received only for items with a valid requisition order
B)the accounting system matches information on the purchase order with the vendor invoice before the invoice is paid
C)the asset or expense is recognized based on the date on the receiving report
D)IT system prepares reports listing purchase orders where the goods have not been received,and receiving reports that have not been invoiced
E)IT system restricts access to individuals authorized to read purchase orders,receiving reports,and vendor invoices
F)both A and D
G)both C and D

Question 54

The client may use a variety of methods to understate expenses and payables.These include

A)failure to record accounts payable at the end of the year
B)failure to review payroll expense or fringe benefits at year end
C)failure to review accrued expenses at year end
D)capitalization of expenses
E)failure to review long term liabilities
F)both A and D
G)both B and D

Question 55

The client may use a variety of methods to understate expenses and payables.These include

A)failure to review accounts payable at the end of the year
B)failure to record payroll expense or fringe benefits at year end
C)failure to review accrued expenses at year end
D)rationalization of expenses
E)failure to record long term liabilities
F)both A and D
G)both B and E

Question 56

If the auditor chooses not to test internal controls

A)it is because the client prefers substantive testing
B)the auditor is still required to obtain an understanding of internal control relevant to the audit
C)it is because management is not relying on internal controls
D)the auditor believes that management has a more efficient method of gathering evidence

Question 57

The definition of an asset is

A)an item that is classified in the asset section of the balance sheet
B)an item of value that will produce a benefit in the future
C)an item of value that resulted from a past consumption of a benefit
D)an item of value that resulted from a past consumption of an expense

Question 58

Management often uses internal controls in the acquisition and expenditure process because of

A)the requirements of the Sarbanes-Oxley Act
B)the large volume of transactions in the process
C)the requirements of the AICPA
D)the large balances in the process

Question 59

Management assertions in the acquisition and expenditure business process are

A)existence or occurrence - for both classes of transactions and account balances
B)completeness - for classes of transactions
C)valuation and allocation - for account balances
D)rights and obligations - for classes of transactions
E)accuracy - for account balances
F)both A and C
G)both B and D

Question 60

If the auditor decides to rely on internal control evidence

A)he will test all controls of significance to the financial statements
B)he will report any deficiencies in internal control
C)he will evaluate the impact of any control deficiencies on the accounting system
D)he will first document the internal control system using flowcharts and questionnaires

Question 61

The auditor determines whether an internal control is effective based on

A)the number of errors encountered
B)the number of instances of non-compliance
C)the number of deviations found
D)the number of deficiencies identified
E)the number of deviations not found

Question 62

Key controls for the acquisition and expenditures process that are often used by management to prevent or detect misstatements in the financial statements are

A)limitation of duties
B)authorization procedures
C)documented transaction entries
D)department reconciliations
E)physical controls that limit access to assets
F)both A and D
G)both B and E

Question 63

In the acquisition and expenditure process,the auditor might perform the following analytical procedures

A)Compare accounts payable,accrued liabilities,cost of goods sold,and the balance in all the balance sheet accounts for the current year to the prior year.Investigate changes from the auditor's expectations that appear to be unreasonable.
B)Calculate the gross margin percentage for the current and prior years.Investigate any changes from the auditor's expectations that appear to be unreasonable.
C)Consider the number of vendor accounts for the current year and the prior year and the new vendors added or lost in each year.
D)Compare accounts payable,accrued liabilities,cost of goods available for sale,and the balance in all the expense accounts for the current year to the prior year.Investigate changes from the auditor's expectations that appear to be unreasonable.
E)Calculate the merchandize inventory percentage for the current and prior years.Investigate any changes from the auditor's expectations that appear to be unreasonable.F.both A and D
G)both B and C

Question 64

Substantive audit tests for the acquisition and expenditure process are

A)analytical procedures
B)observation of the application of the control
C)inquiry
D)confirmation of control effectiveness
E)recalculation of the assessed risk
F)both A and C
G)both B and D

Question 65

The auditing standards

A)require that the auditor test controls for accounts payable
B)require that the auditor test controls for expenses
C)do not tell the auditor which controls must be tested
D)suggest that controls be tested for accounts payable and expenses

Question 66

Key controls for the acquisition and expenditures process that are often used by management to prevent or detect misstatements in the financial statements are

A)limitation of duties
B)separation procedures
C)documented transaction trails
D)department reconciliations
E)physical controls that limit access to assets
F)both A and B
G)both C and E

Question 67

For an auditor to know if a change is unreasonable,he needs knowledge of

A)the client's history
B)previous economic condition
C)the business under audit
D)personnel problems in the client's workforce
E)latest upgrade on the computer system

Question 68

Audit procedures to test internal controls are

A)inquiries of management
B)inspection of relevant documentation
C)observation of the application of the control
D)re-certification of the control
E)re-calculation of amounts
F)both A and D
G)both B and C

Question 69

Audit procedures to test internal controls are

A)inquiries of employees
B)inspection of accurate documentation
C)observation of the generalization of the control
D)re-certification of the control
E)re-calculation of amounts

Question 70

For an auditor to know if a change is unreasonable,he needs knowledge of

A)the client's industry
B)current economic expectation
C)management
D)personnel problems in the client's workforce
E)latest upgrade on the computer system

Question 71

The only controls that an auditor can test are controls that are

A)in place
B)operating effectively
C)authorized by management
D)documented

Question 72

Audit procedures to test internal controls are

A)inquiries of employees
B)inspection of accurate documentation
C)observation of the generalization of the control
D)re-performance of the control
E)re-calculation of amounts
F)both A and D
G)both B and D

Question 73

Audit procedures to test internal controls are

A)inquiries of management
B)inspection of relevant documentation
C)observation of the generalization of the control
D)re-certification of the control
E)re-calculation of amounts

Question 74

Key controls for the acquisition and expenditures process that are often used by management to prevent or detect misstatements in the financial statements are

A)limitation of duties
B)separation procedures
C)documented transaction trails
D)department reconciliations
E)logical controls that limit access to assets

Question 75

In the acquisition and expenditure process,the auditor might perform the following analytical procedures

A)Compare accounts payable,accrued liabilities,cost of goods sold,and the balance in all the expense accounts for the current year to the prior year.Investigate changes from the auditor's expectations that appear to be unreasonable.
B)Calculate the vendor margin percentage for the current and prior years.Investigate any changes from the auditor's expectations that appear to be unreasonable.
C)Consider the number of vendor accounts for the current year and the prior year and the new vendors added or lost in each year.
D)Compare accounts payable,accrued liabilities,cost of goods available for sale,and the balance in all the expense accounts for the current year to the prior year.Investigate changes from the auditor's expectations that appear to be unreasonable.
E)Calculate the merchandize inventory percentage for the current and prior years.Investigate any changes from the auditor's expectations that appear to be unreasonable.F.both A and C
G)both B and D

Question 76

Key controls for the acquisition and expenditures process that are often used by management to prevent or detect misstatements in the financial statements are

A)segregation of duties
B)separation procedures
C)documented transaction entries
D)independent reconciliations
E)logical controls that limit access to assets
F)both A and D
G)both B and D

Question 77

For an auditor to know if a change is unreasonable,he needs knowledge of

A)the client's industry
B)current economic condition
C)management
D)personnel problems in the client's workforce
E)latest upgrade on the computer system
F)both A and B
G)both C and D

Question 78

Key controls for the acquisition and expenditures process that are often used by management to prevent or detect misstatements in the financial statements are

A)segregation of duties
B)separation procedures
C)documented transaction entries
D)department reconciliations
E)logical controls that limit access to assets

Question 79

At the end of internal control testing,the auditor may conclude that

A)internal controls are effective in preventing or detecting misstatements for the assertion tested for the significant accounts in the business process at the assessed level of control risk specified by the auditor
B)internal controls are not effective
C)internal controls are effective
D)internal controls are effective in preventing or detecting misstatements for the assertion tested
E)internal controls are effective in preventing or detecting misstatements for the assertion tested for the significant accounts in the business process
F)both A and B
G)both C and D

Question 80

Substantive audit tests for the acquisition and expenditure process are

A)inspection of computer logs
B)observation
C)questioning
D)inquiry
E)recalculation of the assessed risk