Deck 12: The Purchases, payables, and Payments Process

Question 1

Which of the following internal control procedures is most likely to be used in order to maintain accurate inventory records?

A)Perpetual inventory records are periodically compared with the current cost of individual inventory items.
B)A just-in-time inventory ordering system keeps inventory levels at a desired minimum.
C)Requisitions,receiving reports,and purchase orders are independently matched before payment is approved.
D)Periodic inventory counts are used to adjust the perpetual inventory records.

Answer 1

D

Question 2

ABC Co.has a calendar year-end.The final merchandise purchase recorded in the system was for PO #456,received January 3^rd.The ending inventory count excluded this shipment.Assuming shipping terms on PO #456 were FOB shipping point,what misstatement,if any,exists in ABC records?

A)Cost of goods sold has been understated,gross profit,net income,inventory,and owners' equity have been overstated.
B)Cost of goods sold has been overstated,gross profit,net income,inventory,and owners' equity have been understated.
C)There is no misstatement in ABC's accounts.
D)Cost of goods sold and accounts payable have been overstated,net income and owners' equity have been understated.

Answer 2

B

Question 3

Which of the following situations indicates a potential material weakness in internal control over acquisitions and expenditures?

A)Purchase orders are not prepared for services that are acquired directly under authorization of department heads.
B)The person who approves purchases also signs the cheques.
C)Unacceptable goods are not recorded on receiving reports.
D)The person who signs the cheques also stamps "paid" on the vouchers.

Answer 3

B

Question 4

Martinez CPA was auditing his client,Marvelous Retail Limited.He selected a sample of inventory items from the perpetual records and vouched all additions to receiving reports.This procedure was intended to satisfy which control objective?

A)Authorization.
B)Completeness.
C)Validity.
D)Accuracy.

Question 5

Quantities recorded during the physical count of inventories are greater than the quantities in the perpetual records.This could be the result of a failure to record ________.

A)sales
B)sales discounts
C)purchases
D)purchase discounts

Question 6

Mary Monitor CPA noted that ABC Co.Ltd.received goods prior to year-end and properly included them in the physical count of ending inventory.However,CPA did not record the purchase in the accounting records.In this case,which of the following adjustments should be made?

A)Debit Purchases,credit Cost of Goods Sold.
B)No adjustment is necessary.
C)Debit Inventory,credit Accounts Payable.
D)Debit Cost of Goods Sold,credit Accounts Payable.

Question 7

Purchase cutoff procedures should be designed to produce evidence about whether or not merchandise that is included in the inventory of the company ________.

A)has been paid for
B)is physically present in the warehouse
C)is owned by the company (legal title has been transferred)
D)relates to the shipping documents for the merchandise issued in the company's name

Question 8

In assessing control risk for purchases,an auditor vouches a sample of entries in the accounts payable trial balance to the supporting documents.Which account assertion would this test of controls most likely support?

A)Completeness.
B)Existence or occurrence.
C)Valuation or allocation.
D)Presentation

Question 9

A client maintains perpetual inventory records in both quantities and dollars.If the assessed level of control risk is high,an auditor would probably ________.

A)insist that the client perform physical counts of inventory items several times during the year
B)apply gross profit tests to ascertain the reasonableness of the physical counts
C)increase the extent of tests of controls of the inventory cycle
D)ask the client to schedule the physical inventory count at the end of the year and with a large number of test counts

Question 10

What documentary evidence is appropriate in attempting to determine if recorded purchase transactions are valid and prices on the vendors' invoices are correct?

A)Purchase requisitions and accounts payable entries.
B)Receiving reports and purchase orders.
C)Purchase requisitions and purchases orders.
D)Purchase orders and bid quotes.

Question 11

Brown CPA was auditing her client Red Manufacturing Company.She selected a sample of inventory item recorded as issues in the perpetual records and vouched them to production requisitions.Brown's audit procedure was intended to satisfy which control objective?

A)Validity.
B)Completeness.
C)Authorization.
D)Accuracy.

Question 12

To determine whether accounts payable is complete,an auditor performs a test to verify that all merchandise received is recorded.The population of documents for this test consists of all ________.

A)payment vouchers
B)receiving reports
C)purchase requisitions
D)vendor's invoices

Question 13

The control objective associated with selecting a sample of receiving reports and tracing them to the perpetual inventory records is ________.

A)accuracy
B)completeness
C)validity
D)classification

Question 14

Proper segregation of duties in the purchases,payables and payments cycle would be to have ________.

A)the accounting department independent of the sales department
B)the purchasing department independent of the receiving department
C)the information systems department independent of the accounting department
D)the sales department independent of the shipping department

Question 15

The statement "items on the accounts payable register must be supported by a completed voucher package containing a services purchase order and evidence the service was provided",is a specific example of which control objective?

A)Environment.
B)Validity.
C)Completeness.
D)Accuracy.

Question 16

An auditee uses a cut-off date other than the balance sheet date to ensure PPE purchases have been recorded in the proper period.What impact will this have on the audit?

A)No reliance on internal controls for PPE is possible in this audit and a substantial approach must be taken.
B)No additional audit testing is required beyond the cut-off date.
C)The audit opinion must be modified due to a material GAAP departure in the financial statements.
D)The auditor should verify both the cut-off and the transactions in the roll-forward period.

Question 17

Source documents involved in the purchases and payments cycle include all but which of the following?

A)Supplier Invoice
B)Receiving Reports
C)Cash prelists
D)Purchase orders

Question 18

What is the usual source of journal entries to record the purchase of inventory in the general ledger?

A)Sales invoices updated with cost data from the inventory records department.
B)Purchase invoices updated with cost data from the inventory records department.
C)Bid quotes updated with cost data from the inventory records department.
D)Receiving reports updated with cost data from the accounts payable department.

Question 19

The unmatched supplier invoices file,together with the unmatched receiving report file,can be used as audit evidence of ____.

A)Unrecorded cash payments
B)Potential unrecorded liabilities for purchases
C)Potential overstatement of the ending inventory count.
D)Improper expense classification

Question 20

When auditing merchandise inventory at year-end,the auditor performs a purchase cutoff test to obtain evidence that ________.

A)all goods purchased before year-end are received before the physical inventory count
B)goods held on consignment for customers are not included in the inventory balance
C)the stock of inventory on hand at year-end is neither pledged nor sold
D)all goods owned at year-end are included in the inventory balance

Question 21

When using confirmations to provide evidence about the completeness assertion for accounts payable,the appropriate population most likely would be ________.

A)vendors with whom the entity has previously done business
B)amounts recorded in the accounts payable subsidiary ledger
C)payees of cheques drawn in the month after the year-end
D)invoices filed in the company's open invoice file

Question 22

The procedure: "select a sample of 10 balances from the accounts payable trial balance and vouch to supplier statements" is a substantive test of which assertion(s)?

A)Completeness,valuation,and presentation
B)Valuation and ownership
C)Existence,completeness,and ownership
D)Completeness

Question 23

When the auditor selects a sample of inventory items from the perpetual inventory master file then searches out these items in the inventory warehouse,the auditor is collecting evidence to support which assertion?

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

Question 24

Determining useful life,salvage value and required provisions for future site restoration costs,all render valuation a high inherent risk assertion for the audit of PPE.What are the main reasons?

A)Annual depreciation expense is always a highly material amount.
B)There is a lack of independent evidence to support the assertion.
C)The high degree of subjectivity and potential for management bias.
D)Auditor reliance on an external expert is usually required.

Question 25

Which of the following procedures is an auditor most likely to perform in searching for unrecorded payables?

A)Reconcile receiving reports with related cash payments made just prior to year-end.
B)Compare the ratio of accounts payable to purchases with the prior year's ratio.
C)Vouch a sample of creditor balances to supporting invoices,receiving reports,and purchase orders.
D)Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.

Question 26

A company's internal control system requires that an approved payables voucher,supported by a purchase order and a receiving report,accompany every cheque requisition.To determine whether cheques are being issued for unauthorized expenditures,an auditor is most likely to select items for testing from the population of all ________.

A)purchase orders
B)cancelled cheques
C)receiving reports
D)approved vouchers

Question 27

Which of the following accounts would the auditor review in order to obtain reasonable assurance that additions to the equipment (fixed asset)account are not understated?

A)Amortization expense.
B)Gain on disposal of equipment.
C)Accounts payable.
D)Repairs and maintenance expense.

Question 28

Limiting access to blank documents,such as purchase orders,is part of the custody duty in the acquisition and expenditure cycle.

Question 29

Which of the following audit procedures is best for identifying unrecorded trade accounts payable?

A)Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.
B)Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether receiving reports support them.
C)Examining unusual relationships between monthly accounts payable balances and recorded cash payments.
D)Reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date.

Question 30

An auditee may count the inventory at a date other than the balance sheet date.Which of the following is necessary if the auditor plans to observe the count on a non-balance sheet date?

A)Complete recounts by independent teams must be performed.
B)Perform additional roll-forward or roll-back procedures for the period between the count date and balance sheet date.
C)Unit cost records must be integrated with production accounting records.
D)Inventory cannot be a material amount.

Question 31

Employees in the receiving department should inspect materials received as to quality and quantity and prepare a receiving report.

Question 32

The statement that "all purchase orders must be supported by properly approved purchase requisitions" is a specific example of which general control objective?

A)Valuation.
B)Completeness.
C)Authorization.
D)Classification.

Question 33

When confirming accounts payable,emphasis should be put on what kind of accounts?

A)Accounts with small or zero balances.
B)All accounts should be equally emphasized.
C)Accounts with large balances.
D)Accounts listed in the accounts payable subsidiary ledger.

Question 34

Which of the following is a common substantive test of the valuation assertion for PPE and intangible assets?

A)Observe physical inventory taking of the fixed assets and compare with detailed asset records.
B)For property valued at fair value,examine and verify supporting valuation evidence,such as independent appraisals.
C)Recalculate amortization expense and trace to general ledger account(s).
D)From a sample of items from the asset subsidiary records,inspect title or other ownership legal documents,

Question 35

The auditor decided to test the completeness of accounts payable by sending confirmations to selected vendors.The auditor's best approach in selecting the vendor accounts to confirm is to __________.

A)select vendor accounts with large balances
B)select vendor accounts at random in order to apply a statistical sampling procedure
C)select vendor accounts with small or zero balances
D)select vendor accounts that are past due

Question 36

The statement "account distributions for invoices are appropriate and reviewed independent of preparation" is a specific example of which general control objective?

A)Valuation
B)Completeness
C)Authorization
D)Classification

Question 37

An auditor wants to perform tests of controls on a client's cash disbursement procedures.If the control procedures leave no audit trail or documentary evidence,the auditor is most likely to test the procedures by ________.

A)confirmation and observation
B)observation and inquiry
C)analytical procedures and confirmation
D)inquiry and analytical procedures

Question 38

To uncover liabilities from actual or potential litigation,which of the following procedures is required by CAS 501?

A)Sending an inquiry letter to suppliers with which the auditee normally does business
B)Sending an inquiry letter prepared to the auditee's lawyers.
C)Sending confirmations to the insurance companies with which the auditee has coverage.
D)Sending bank confirmations to all financial institutions with which the auditee has done business.

Question 39

Which of the following statements concerning auditor observation of the auditee's physical inventory count is FALSE?

A)Tracing of items from the warehouse floor to the final inventory compilation,are performed test the completeness assertion.
B)Review of the count instructions is performed to assess client controls related to the inventory count.
C)If an auditor's expert is used during the count,it is the auditor who assumes responsibility for his/her work.
D)The auditor must be present for the full inventory count of all items,start to finish.

Question 40

A credit balance in a client's inventory records would suggest failure to record purchases.

Question 41

Explain what is meant by "purchase cut-off "and how it relates to the year-end inventory count.How does the risk of such cut-off errors impact on the auditor's planned procedures?

Question 42

The requirement that supplier invoices in the accounts payable register be matched with purchase orders and receiving reports is an example that satisfies the completeness internal control objective for purchases.

Question 43

If the auditor selects a sample of open accounts payable and vouches the details to supporting purchase documents,the auditor is testing the objective of validity.

Question 44

If the auditor traces a sample of receiving reports to the perpetual inventory records,the auditor is testing the control of validity.

Question 45

Explain why auditors must put greater emphasis on the completeness assertion when auditing accounts payable.Contrast this with the audit of assets.

Question 46

Briefly explain why the auditor's inventory tests counts are conducted in two directions.

Question 47

The requirement that "perpetual inventory records must be updated as of the date goods are received" is an example of a control that satisfies the "proper period" internal control objective.

Question 48

Comparing the results of a physical inventory count to the perpetual inventory records is considered a part of the recording function.

Question 49

An auditor should not be concerned if a cross-reference of vendor addresses with employee addresses reveals that there are matches.

Question 50

Auditors can perform tests of control audit procedures to determine whether the client throughout the period of intended reliance is actually performing controls that are said to be in place and operating.What two characteristics must a detail test of controls audit procedure have in order to be successful?

Question 51

Information gathering about the control structure often begins with an internal control questionnaire.

Question 52

Use of the revaluation model to present PPE at fair value increased the inherent risk of material misstatement.

Question 53

If an auditee never takes a complete inventory count on a single date,auditor observation of the inventory count is not required.

Question 54

The accounts payable trial balance is a list of payable amounts by vendor.This total should equal the control account total in the general ledger.

Question 55

Jack CPA is the auditor of Jill Corporation.Jack followed last year's working papers in selecting accounts payable to confirm.Jack mailed confirmations to 50 of Jill's 200 suppliers.The sample was designed to select accounts with the largest balances.Jack and Jill spent a lot of time reconciling minor differences between the confirmation amounts and the accounts payable trial balance.
Required:
Do you believe that Jack should have used the same sample design for accounts payable confirmations this year? If not,what suggestions can you give to improve the design?

Question 56

When auditors trace the test counts they took at the physical inventory count to the final inventory summary,they are gathering evidence on the completeness assertion.

Question 57

Why are payables vouchers marked "paid" after cheques have been issued in payment of vendor invoices?

Question 58

Auditors must place more emphasis on the existence and rights assertions when obtaining evidence about accounts payable.

Question 59

The accounts payable trial balance should not include vendors with nonzero balances.

Question 60

Risk assessments and the results of any control testing are taken into account in selecting the nature,timing,and extent of further substantive procedures.

Question 61

Identify situations when the auditor should use accounts payable confirmations and discuss whether they are required to use them.