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

Question 1

A document generally received from the vendor which indicates a reduction in the amount owed due to the company granting an allowance is:

A) vendor invoice.
B) debit memo.
C) credit adjustment form.
D) credit memo.

Answer 1

B

Question 2

What typically initiates the acquisitions and payment cycle?

A) issuance of a purchase requisition or request for purchase of goods/services
B) issuance of payment to vendor
C) approval of a new vendor
D) purchase requisition

Answer 2

A

Question 3

Absent disputed amounts and minor timing differences, the vendor's statements should reconcile to the:

A) acquisition journal.
B) accounts payable master file.
C) cash disbursements amount for purchases.
D) vouchers payable amount for vendors.

Answer 3

B

Question 4

Discuss each of the four business functions that comprise the acquisition and payment cycle.

Question 5

A document used by organizations to establish a formal means of recording and controlling acquisitions which usually contains a package of documents about the acquisition is the:

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

Question 6

Match seven of the terms for documents and records (a-m) used in the acquisitions and cash disbursement cycle with the descriptions provided below (1-7):
a. Purchase requisition
b. Purchase order
c. Receiving report
d. Acquisitions journal
e. Summary acquisitions report
f. Vendor's invoice
g. Debit memo
h. Voucher
i. Accounts payable master file
j. Accounts payable trial balance
k. Vendor's statement
l. Check
m. Cash disbursements journal
________ 1. A document indicating a reduction in the amount owed to a vendor because of returned goods or an allowance granted.
________ 2. A document that specifies the details of an acquisition transaction and amount of money owed to the vendor for an acquisition.
________ 3. A document prepared by the purchasing department indicating the description, quantity, and related information for goods and services that the company intends to purchase.
________ 4. A listing of the amount owed to each vendor at a point in time.
________ 5. A document used to establish a formal means of recording and controlling acquisitions; it includes a cover sheet and a package of relevant documents.
________ 6. A document used to request goods and services by an authorized employee.
________ 7. The listing or report that includes all cash payments for a given period.

Question 7

Describe purchase requisitions and purchase orders. What is a key difference between the two documents?

Question 8

Describe for each function below their role in the acquisition and payment cycle:
Purchasing
Invoice Processing
Accounts Payable

Question 9

Which of the following business functions is not considered to be part of the acquisitions class of transactions?

A) Processing purchase orders
B) Recognizing liabilities
C) Receiving goods and services
D) Processing cash disbursements

Question 10

After a purchase requisition is approved, a ________ must be initiated to purchase the goods or services.

A) purchase order
B) vendor order
C) call order
D) vendor invoice

Question 11

Which of the following accounts is not included in the acquisitions class of transactions?

A) Inventory
B) Prepaid expenses
C) Purchase discounts
D) Accounts payable

Question 12

The computer-generated file which records acquisitions, disbursements and allowances for each vendor is the:

A) Accounts payable master file.
B) Cash disbursements file.
C) Acquisitions transaction file.
D) Purchase approval file.

Question 13

The acquisition and payment cycle is highly controlled and not well-structured in most companies.

Question 14

The overall objective in the audit of the acquisition and payment cycle is:

A) to ensure the reliability of the affected accounts.
B) to ensure the accuracy of the affected accounts.
C) to evaluate whether the affected accounts are fairly stated in accordance with accounting standards.
D) to evaluate whether fraudulent payments were made.

Question 15

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

A) a debit memo.
B) a credit memo.
C) a receiving report.
D) a contractual adjustment form.

Question 16

What typically ends the acquisitions and payment cycle?

A) issuance of a purchase requisition or request for purchase of goods/services
B) issuance of a payment to a vendor
C) approval of a new vendor
D) purchase requisition

Question 17

Smaller privately held companies may not maintain an accounts payable master file by vendor. These companies pay on the basis of:

A) vendors' monthly statements.
B) individual vendors' invoices.
C) the accounts payable account in the general ledger.
D) dunning letters.

Question 18

The acquisition and payment cycle consists of one class of transactions.

Question 19

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

Question 20

During your audit of Williams Company you are trying to determine whether all accounts payable were recorded in the proper period. Which assertion are you gathering evidence for?

A) Occurrence
B) Completeness
C) Cutoff
D) Rights and Obligations

Question 21

The auditor's internal control objective to determine that "recorded acquisitions are for goods and services received" satisfies the audit objective of:

A) accuracy.
B) occurrence.
C) authorization.
D) completeness.

Question 22

An auditor has been assigned to perform tests of controls for a client's cash disbursement system. Client files are kept electronically with no paper audit trail. In this case the auditor would need to rely on which of the following audit procedures?

A) Analytical procedures and Inquiry
B) Confirmations and Inquiry
C) Observation and Inquiry
D) Reperformance and Inquiry

Question 23

Which of the following is not a key control in the acquisition and payment cycle?

A) Authorization of purchases
B) Authorization of credit
C) Timely recording and independent review of transactions
D) Authorization of payments

Question 24

A company's internal control procedures over the acquisition cycle should prevent the preparation of a voucher for goods that have not yet been received. Which of the following is the best procedure to assure vouchers are not prepared for goods not received?

A) purchase order and vendor invoice are matched to the receiving report
B) compare goods received with goods ordered
C) perform sample test counts of items when received
D) compare the requisition for goods with the purchase order

Question 25

The acquisition and payment cycle typically begins with the initiation of purchase requisition for goods and services from an authorized individual.

Question 26

Proper authorization for acquisition is useful for management as an internal control procedure, because it:

A) ensures that goods/services are used efficiently by company employees.
B) ensures that goods/services were purchased from approved vendors.
C) ensures that goods/services were purchased according to company policy.
D) ensures that goods/services were purchased at the lowest possible price.

Question 27

When a client uses perpetual inventory records, the tests of details of balances for inventory can be significantly reduced if the auditor believes the records are accurate. The controls over the acquisitions included in the records are normally tested as a part of the:

A) tests of controls.
B) tests of controls and tests of transactions.
C) tests of details of balances.
D) analytical procedures and tests of controls.

Question 28

A substantive test for accounts payable that would be used to provide evidence regarding the occurrence assertion would be to:

A) agree a sample of vouchers to authorized purchase orders.
B) recalculate the accuracy of the vouchers and the authorized purchase orders.
C) trace vouchers to the client's purchases journal.
D) vouch a sample of vouchers from the cash disbursements register to accounts payable.

Question 29

The internal control that requires that "checks are prenumbered and accounted for" satisfies the objective of:

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

Question 30

Receiving reports are normally only used to document the receipt of goods and are not used to document the receipt of services.

Question 31

The accounts payable department usually has responsibility for approving acquisitions for payment by comparing the details on the:

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

Question 32

Failure to record the acquisition of goods is a violation of which audit objective?

A) Accuracy
B) Occurrence
C) Authorization
D) Completeness

Question 33

You have been assigned to the accounts payable transaction cycle as part of your auditing responsibilities. You have decided to vouch a sample of entries in the accounts payable master file to supporting documents. Which assertion is this test of controls most likely to support?

A) Accuracy
B) Classification
C) Completeness
D) Occurrence

Question 34

An auditor is gathering evidence on the completeness assertion. To do so she performs a test to verify that all goods received by the company have been recorded properly. The document population for this test would consist of all:

A) Vendor Invoices
B) Purchase Orders
C) Receiving Reports
D) Cash Disbursements for Accounts Payables

Question 35

An acquisitions transaction file is a computer generated file that includes all information entered into the system regarding acquisition transactions.

Question 36

Which one of the following duties should not be assigned the purchases department?

A) finding the lowest cost vendor
B) reviewing vendors' catalog descriptions and prices for standardized items
C) designing the purchase order form
D) authorizing the acquisition of goods

Question 37

A vendor invoice is normally prepared at the time tangible goods are received and indicates the description of goods, the quantity received, the date received, and other relevant data.

Question 38

A written purchase order is a contractual document that is:

A) an offer to buy.
B) not enforceable if it is not in writing.
C) a binding agreement between purchaser and vendor.
D) an acceptance of a vendor's catalog offer to sell.

Question 39

A document received from the vendor indicating such things as the description and quantity of goods and services received, price including freight, cash discount terms, and date of billing is called the voucher.

Question 40

The accounts payable accounting clerk erroneously recorded the same purchase twice. Which of the following internal control tests would most likely act as a detective control?

A) recalculating the purchases journal
B) tracing from the purchases journal to the general ledger
C) vouching from the general ledger to the purchases journal
D) reconciling the vendor's statements to the accounts payable subsidiary ledger

Question 41

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.

Question 42

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.

Question 43

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

Question 44

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.

Question 45

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.

Question 46

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

Question 47

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

Question 48

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.

Question 49

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.

Question 50

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.

Question 51

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.

Question 52

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.

Question 53

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

Question 54

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.

Question 55

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.

Question 56

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.

Question 57

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.

Question 58

What are the three important controls over cash disbursements?

Question 59

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

Question 60

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.

Question 61

Auditors need to distinguish between accounts payable and accrued liabilities in designing the appropriate control and substantive tests. A liability is properly accounted for as an account payable if:

A) the amount is known and owed as of the balance sheet date.
B) the amount can be estimated and is owed at the balance sheet date.
C) the amount is known at the balance sheet date and owed by the end of the next fiscal year.
D) the amount is estimated and owed within 90 days of the balance sheet date.

Question 62

The audit procedure "Test clerical accuracy by footing the journals and tracing postings to general ledger and to accounts payable and inventory master files" is used to test the posting and summarization objective for acquisitions.

Question 63

If tests of controls and substantive tests of transactions related to perpetual inventory records reveal controls over perpetuals are effective, the auditor is justified in reducing the extent of tests of details of inventory.

Question 64

The internal control "Vouchers are prenumbered and accounted for" relates most closely to the occurrence objective for acquisitions.

Question 65

One type of audit procedure the auditor uses to test accounts payable is a substantive analytical procedure. Describe why the auditor uses substantive analytical procedures for accounts payable and provide an example.

Question 66

A substantive test of transactions commonly used to test the completeness objective for acquisitions is "Trace from a file of receiving reports to the acquisitions journal."

Question 67

You are the in-charge auditor and are designing audit procedures for accounts payable. Which of the following management assertions would you normally be most concerned about?

A) Occurrence
B) Accurancy
C) Completeness
D) Existence

Question 68

Auditors are normally more concerned about violations of the completeness objective for acquisitions than about violations of the occurrence objective for acquisitions.

Question 69

Because of the importance of tests of controls and substantive tests of transactions for acquisitions and cash disbursements, attributes sampling is commonly used when testing the acquisitions and cash disbursements cycle.

Question 70

Companies would normally recognize an account payable when the goods are received by the company.

Question 71

At what point do most companies recognize liabilities in the acquisition and payment cycle when the goods are shipped FOB Destination?

A) the issuance of a purchase order
B) receipt of acknowledgement of order by vendor
C) receipt of goods or services
D) the receipt of a vendor invoice

Question 72

The use of statistical sampling is less common for the audit of accounts payable than for accounts receivable because it is more difficult to define the population and determine the population size in accounts payable.

Question 73

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

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

Question 74

Discuss the key internal controls that should be present in the "recognizing the liability" function in the acquisitions and payment cycle.

Question 75

When auditing the acquisitions and cash disbursements cycle, it is usually more efficient for the auditor to reduce the extent of tests of controls and rely primarily on substantive tests of transactions and on tests of details of balances, provided the auditor has determined control risk low.

Question 76

Failure to record the acquisition of goods directly affects the balance in Accounts payable and may result in an understatement of ending inventory.

Question 77

Cutoff procedures for inventory purchased should be designed by companies to assure the company that:

A) inventory owned by the company has been received.
B) inventory included in the year end inventory count has been paid.
C) inventory received before year end was recorded before year end.
D) inventory was correctly valued at year end.

Question 78

The audit procedure "Examine canceled check for authorized signature, proper endorsement, and cancellation by the bank" is used to test the occurrence objective for cash disbursements.

Question 79

Listed below are some management assertions made for the acquisition and payment cycle. For each one give an example of how the auditor by using the documents normally found in the process can apply an auditing procedure to test the assertion.
Completeness
Timing
Accuracy

Question 80

Describe the methodology for designing tests of details of balances for accounts payable.