Deck 12: The Purchases, Payables, and Payments Process

Question 1

A good environmental control over purchases and payables 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

Answer 1

B

Question 2

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

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

Answer 2

C

Question 3

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 3

D

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

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 6

Which control objective is associated with observing the inventory record-keeping personnel as they perform their work?

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

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

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 9

The statement that 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 10

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 11

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 12

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 13

In "Retread Tires", J. Lock stole money by selling the company's new tires and replacing them with retread tires. The key weakness in the control system that failed to prevent or detect this scheme to continue was that ________.

A) Lock often prepared purchase orders
B) Lock was the chief accountant
C) the president of the company signed cheques without reviewing any supporting documentation
D) no one noticed the invoices for the retread tires

Question 14

Mary Monitor CPA noted that ABC Co. Ltd. received goods prior to year-end and included them in the physical inventory but did not record them 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 15

"Observe if personnel in the purchasing department are following company policies" is an audit procedure intended to test which control objective?

A) Environment.
B) Accuracy.
C) Validity.
D) Proper period cutoff.

Question 16

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 17

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 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 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 20

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.

Question 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

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 26

In "Amortize the 'Drum' Slowly", Candid Production overvalued net assets by taking too little amortization. Which of the following was the lesson for the auditors in this case?

A) Check the client's calculations regardless of how simple they appear.
B) Understand special industry accounting before accepting an engagement.
C) Maintain professional skepticism when evaluating a client's accounting estimates.
D) Always investigate a client's background before accepting an engagement.

Question 27

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

Question 28

Rather than counting the entire inventory at year-end, a company may make periodic, or cycle counts, of selected inventory items at various times during the year. Which of the following is necessary if the auditor plans to observe inventories at interim dates?

A) Complete recounts by independent teams are performed.
B) Perpetual inventory records are maintained.
C) Unit cost records are integrated with production accounting records.
D) Inventory balances are rarely at low levels.

Question 29

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 30

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 31

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 32

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 33

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 34

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 35

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 36

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 37

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

Question 38

The auditor decided to test 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 39

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

Question 40

Audit procedures used in the observation of a client's physical inventory count are designed primarily to ________.

A) test and observe the client's physical count of inventory
B) independently verify the physical counts recorded by the client
C) assist the client in taking test counts of year-end inventory
D) determine whether inventory contains obsolete goods

Question 41

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

Question 42

If a client uses the cycle method of counting inventory and never takes "wall to wall" inventory on a single date, what must the auditor do in order to avoid requesting the client to take a full inventory count?

Question 43

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

Question 44

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 45

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 46

This question requires knowledge about specific account balance assertions, general audit procedures, and trade accounts payable.
You are assigned to audit trade accounts payable at Green Corporation, whose business is wholesale and retail trade. Green purchases products from 1,000-2,000 manufacturers and sells the products to its retail and wholesale customers. The general ledger shows a trade accounts payable balance as of the balance sheet date in the amount of $42 million (the balance comprises 70% of current liabilities, 50% of total liabilities, and 35% of total liabilities and shareholders' equity). Green's accountants post summary entries from the purchases journal and from the cash disbursements journal to the accounts payable control account each month. The accounts payable manager gave you a detailed trial balance that lists all the recorded, unpaid invoices (recording date, vendor name, vendor invoice number, invoice date, and amount) subtotalled by vendor.
Other members of the audit team have already decided to assess control risk at maximum for accounts payable. The engagement manager gave you last year's audit working papers and told you not to use the audit program from last year because it was no longer appropriate. The first part of your assignment is to write the audit program for the audit of Green's trade accounts payable.
Required:
For each of the general assertions EXISTENCE, COMPLETENESS, and VALUATION, write two or more specific audit procedures designed to produce appropriate evidence about Green's trade accounts payable balance.

Question 47

Identify the accounts payable audit objectives that the auditors must consider in determining the audit procedures to be performed.

Question 48

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

Question 49

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

Question 50

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 51

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

Question 52

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

Question 53

When performing procedures to search for unrecorded liabilities, the auditor can obtain several sources of audit evidence, for example, documents, files, and enquiries of management and clerical personnel.
Required:
List at least five, but no more than eight, sources of audit evidence that could be accumulated in the search for unrecorded liabilities. (Do not write procedures or reasons for using the sources.)

Question 54

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 55

Auditors can perform detail 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 56

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 57

Audit procedures to test controls over inventory records could include the procedures listed below. Match each of the procedures numbered 1 through 5 to the appropriate control objective (A through F) and place the identifying letter in the space provided.
A: Validity
B: Completeness
C: Authorization
D: Accuracy
E: Classification
F: Proper period
____ 1. Account for the integrity of the numerical sequence of shipping documents used to relieve stock from the inventory records.
____ 2. Examine material requisitions for evidence of approval by the production supervisor.
____ 3. Review the reconciliation of the daily summary of goods shipped per shipping bills to the daily summary of stock removed from inventory per the perpetual inventory records.
____ 4. Trace quantities shipped per shipping bills to the perpetual inventory records.
____ 5. Review material requisitions for evidence of internal verification of general ledger account numbers.

Question 58

An internal control questionnaire for purchases and accounts payable could include the following questions. Match the question to the appropriate control objective and place the identifying letter in the space provided.
A: Environment
B: Validity
C: Completeness
D: Authorization
E. Accuracy
F. Classification
G: Proper period
____ 1. Are receiving reports pre-numbered and accounted for?
____ 2. Are all purchases orders supported by properly approved purchase requisitions?
____ 3. Are vendors' invoices listed immediately upon receipt?
____ 4. Are vendors' invoices matched against purchase orders and receiving reports before a liability is recorded?
____ 5. Is the purchasing department independent of the accounting, receiving, and shipping departments?
____ 6. Are vendors' invoices checked against purchase orders and receiving reports for quantities, prices, and terms?
____ 7. Does the accounting procedures manual require that transactions be recorded on the date that goods and services are received?
____ 8. Are all goods returned to vendors supported by properly approved shipping documents?
____ 9. Is the chart of accounts adequate?
____ 10. Are vouchers and attached documents cancelled after being recorded?

Question 59

What issues must the auditor consider if the client has inventory located away from the client's place of business?

Question 60

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