[Binaluyo] Chapter 2 - Audit of Current Liabilities

A client erroneously recorded a large purchase twice. Which of the following control procedures would be most likely to detect this error in a timely and efficient manner?

a. Footing the purchases journal.

b. Reconciling vendors' monthly statements with subsidiary payable ledger accounts.

c. Tracing totals from the purchases journal to the ledger accounts.

d. Sending written quarterly confirmations to all vendors.

b. Reconciling vendors' monthly statements with subsidiary payable ledger accounts.

An internal control questionnaire indicates that an approved receiving report must accompany every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively?

a. Select and examine receiving reports and ascertain that the related canceled checks are dated no earlier than the receiving reports.

b. Select and examine receiving reports and ascertain that the related canceled checks are dated no later than the receiving reports.

c. Select and examine canceled checks and ascertain that the related receiving reports are dated no earlier than the checks.

d. Select and examine canceled checks and ascertain that the related receiving reports are dated no later than the checks.

d. Select and examine canceled checks and ascertain that the related receiving reports are dated no later than the checks.

The accounts payable department receives the purchase order form to accomplish all of the following except

a. Compare invoice price to purchase order pric.

b. Ensure that the purchase had been properly authorized.

c. Ensure that the party requesting the goods had received the goods.

d. Compare quantity ordered to quantity purchased.

c. Ensure that the party requesting the goods had received the goods.

For effective internal control purposes, which of the following individuals should be responsible for mailing signed checks?

a. Receptionist.

b. Treasurer.

c. Accounts payable clerk.

d. Payroll clerk.

b. Treasurer.

A client's expenditure/disbursement cycle begins with requisitions from user departments and ends with the receipt of materials and the of a liability. An auditor's primary objective in reviewing this cycle is to

a. Evaluate the reliability of information generated by the cycle.

b. Investigate the physical handling and recording of unusual acquisitions of materials.

c. Consider the need to be on hand for the annual physical inventory count if this system is not functioning properly.

d. Ascertain that materials said to be ordered, received, and paid for are on hand.

a. Evaluate the reliability of information generated by the cycle.

Which of the following is a primary function of the purchasing department?

a. Authorizing the acquisition of goods.

b. Ensuring the acquisition of goods of a specified quality.

c. Verifying the propriety of goods of a specified quality.

d. Reducing expenditures for goods acquired.

b. Ensuring the acquisition of goods of a specified quality.

Omitting quantities from copies of purchase orders sent to the receiving department is a control procedure intended mainly to

a. Ensure that goods received are physically counted by receiving department personnel.

b. Identify and return damaged goods as soon as they are received.

c. Provide a crosscheck for verifying the accuracy of perpetual inventory records.

d. Prevent theft of goods by receiving department personnel.

a. Ensure that goods received are physically counted by receiving department personnel.

Which of the following is not an appropriate activity for the treasurer's department?

a. Prepare checks.

b. Forward checks to vendors.

c. Cancel vouchers.

d. Prepare vouchers.

d. Prepare vouchers.

An effective internal control procedure that protects against the preparation of improper or inaccurate disbursements is to require that all checks be

a. Signed by an official after necessary supporting evidence has been examined.

b. Reviewed by the treasurer before mailing.

c. Sequentially numbered and accounted for by internal auditors.

d. Perforated or otherwise effectively canceled when they are retumed with the bank statement.

a. Signed by an official after necessary supporting evidence has been examined.

Matching the supplier's invoice, the purchase, and the receiving report normally should be the responsibility of the

a. Receiving department.

b. Purchasing department.

c. Accounting function.

d. Treasury function.

c. Accounting function.

To avoid potential errors and irregularities, well-designed controls in the accounts payable area should include a separation of which of the following functions?

a. Cash disbursements and vendor invoice verification.

b. Vendor invoice verification and merchandise ordering.

c. Physical handling of merchandise received and preparation of receiving reports.

d. Check signing and cancellation of payment documentation.

b. Vendor invoice verification and merchandise ordering.

Which of the following functions is not appropriate for the accounts payable department?

a. Compare purchase requisitions, purchase orders, receiving reports, and vendors' invoices.

b. Prepare purchase orders.

c. Prepare voucher and daily summary.

d. File voucher package by due date.

b. Prepare purchase orders.

The accounts payable department generally should

a. Cancel supporting documentation after a cash payment is mailed.

b. Approve the price and quantity of each purchase requisition.

c. Assure that the quantity ordered is omitted from the receiving department's copy of the purchase order.

d. Agree the vendor's invoice with the receiving report and purchase order.

d. Agree the vendor's invoice with the receiving report and purchase order.

Based on observations made during an audit, an independent auditor should discuss with management the effectiveness of procedures that control against the purchase of

a. Supplies purchased from a vendor who offers no trade or cash discounts.

b. Inventory acquired just-in-time.

c. Equipment that is needed but does not qualify for investment tax credit.

d. Supplies ordered without considering potential volume discounts.

a. Supplies purchased from a vendor who offers no trade or cash discounts.

Which of the following procedures relating to the audit of accounts payable could the auditor delegate entirely to the client's employees?

a. Test footings in the accounts payable ledger.

b. Reconcile unpaid invoices to vendors' statements.

c. Prepare a schedule of accounts payable.

d. Mail confirmations for selected account balances.

c. Prepare a schedule of accounts payable.

In order to establish accounts payable cutoff, an auditor will most likely

a. Coordinate cutoff tests with the physical inventory observation.

b. Compare cutoff reports with purchase orders.

c. Compare vendors' invoices with vendors' statements.

d. Coordinate the mailing of confirmations with cutoff tests.

a. Coordinate cutoff tests with the physical inventory observation.

An audit of accounts payable is ordinarily not designed to

a. Detect substantially past due accounts.

b. Verify that accounts payable were properly authorized.

c. Determine the reasonableness of recorded liabilities.

d. Determine that all existing liabilities at the statement of financial position date have been recorded.

b. Verify that accounts payable were properly authorized.

When an auditor selects a sample of items from the vouchers payable register for the last month of the period under audit and traces them to underlying documents, the auditor is gathering evidence primarily to support the assertion that

a. Recorded obligations were paid.

b. Incurred obligations were recorded in the correct period.

c. Recorded obligations were valid.

d. Cash disbursements were recorded as incurred obligations.

c. Recorded obligations were valid.

Which of the following audit procedures is the most efficient at detecting unrecorded liabilities at the statement of financial position date?

a. Confirm large accounts payable balances at the statement of financial position date.

b. Compare cash disbursements in the subsequent period with the accounts payable trial balance at year-end.

c. Examine purchase orders issued for several days prior to the close of the year.

d. Obtain a letter from the client's attorney.

b. Compare cash disbursements in the subsequent period with the accounts payable trial balance at year-end.

Which of the following audit procedures is least likely .to detect an unrecorded liability?

a. Analysis and re-computation of interest expense.

b. Analysis and re-computation of depreciation expense.

c. Mailing a standard bank confirmation form.

d. Reading the minutes of board of directors' meetings.

b. Analysis and re-computation of depreciation expense.

Applying independence, the auditor shall understand that management tends to understate liabilities in its FS.

FALSE

Test of completeness in the audit of current liabilities includes ensuring that all payables and their transactions occurred during the year have been recorded.

TRUE

No additional loss on purchase commitment is recognized when the fair value from the year-end declined.

FALSE

Only the ending period carrying amount of provision is disclosed.

FALSE

The entry to record a loss on litigation includes a debit to provision for litigation.

FALSE

In purchase commitment contracts, it is measured at cost at year-end when goods or services are not yet delivered or performed.

FALSE

When obtaining evidence regarding litigation against a client, the auditor would be least interested in determining

a. An estimate of when the matter will be resolved

b. The period in which the underlying cause of the litigation occurred

c. The probability of an unfavorable outcome

d. An estimate of the potential loss

a. An estimate of when the matter will be resolved

One of the procedures to test liability related to payroll is to investigate the handling of unclaimed payroll checks.

TRUE

Testing the valuation assertion in audit of liability includes ensuring that the balances are estimated correctly.

FALSE

Matching the supplier's invoice, the purchase, and the receiving report normally should be the responsibility of the accounting department.

TRUE

The treasury department prepares the vouchers.

FALSE

For control purposes, the quantities of materials ordered may be omitted from the copy of the purchase order that is

a. Forwarded to the accounting department

b. Retained in the purchasing department's files

c. Returned to the requisitioner

d. Forwarded to the receiving department

d. Forwarded to the receiving department

The effects of unreleased checks as payment to suppliers during year-end are increase in accounts payable and decrease in cash.

FALSE

Cutoff test assures that the liability is recorded for any goods received on the last day of the year and included in the physical inventory.

TRUE

Based on observations made during an audit, an independent auditor should discuss with management the effectiveness of procedures that control against the purchase of inventory acquired just-in-time.

TRUE

Based on observations made during an audit, an independent auditor should discuss with management the effectiveness of procedures that control against the purchase of supplies ordered without considering potential volume discounts.

FALSE

The following shall be disclosed by an entity for each class of contingent liability at the end of the reporting period, where practicable, except:

a. the possibility of any reimbursement

b. indication of the uncertainties relating to the amount or timing of any outflow

c. unused amounts reversed during the period

d. estimate of its financial effect

c. unused amounts reversed during the period

One of the criteria in classification of liability as current is that the liability is due to be settled within twelve months after the end of the reporting period.

TRUE

Service type warranty, when the warranty can be purchased separately, is accounted under PAS 37.

FALSE

Analysis and recomputation of depreciation expense is least likely to detect an unrecorded liability

TRUE

Reading the minutes of the board of directors' meeting can detect an unrecorded liability.

TRUE

During the few weeks preceding the balance sheet date, auditors will search for unrecorded liabilities.

FALSE

Cash disbursement subsequent to the release date of FS will reveal unrecorded liabilities.

FALSE

An auditor is planning the consideration of internal control over the expenditure/disbursement cycle. The auditor will be least influenced by

a. The availability of a company procedures manual describing purchasing and cash disbursement procedures.

b. The scope and results of work performed by the company's internal auditors.

c. The existence within the purchasing department of control procedures that offset deficiencies.

d. The strength or deficiency of control procedures in other areas, e.g., sales and accounts receivable.

d. The strength or deficiency of control procedures in other areas, e.g., sales and accounts receivable.

As an in-charge auditor, you are reviewing a write-up of internal control in cash receipt and disbursement procedures. Which of the following deficiencies alone should cause you the least concern?

a. Checks are signed by only one person.

b. Signed checks are distributed by the controller to approved payees.

c. The treasurer fails to establish bona fide names and addresses of check payees.

d. Cash disbursements are made directly out of cash receipts.

a. Checks are signed by only one person.

Which of the following is a necessary control procedure for cash disbursements?

a. Checks should be signed by the controller and at least one other employee of the company.

b. Checks should be sequentially numbered, and the numerical sequence should be accounted for by the person preparing the bank reconciliation.

c. Checks and supporting documents should be marked "Paid" immediately after the check is returned with the bank statement.

d. Checks should be sent directly to the payee by the employee who prepares documents that authorize check preparation.

b. Checks should be sequentially numbered, and the numerical sequence should be accounted for by the person preparing the bank reconciliation.

Which of the following is not a common activity of the expenditure/disbursement cycle?

a. Purchasing.

b. Fixed asset additions.

c. Receiving.

d. Recording.

b. Fixed asset additions.

Internal control is improved when the quantity of merchandise ordered is omitted from the copy of the purchase order sent to the

a. Department that initiated the requisition.

b. Receiving department.

c. Purchasing agent.

d. Accounts payable department.

b. Receiving department.

When goods are received, the receiving clerk should match the goods with the

a. Purchase order and requisition.

b. Vendor's invoice and the receiving report.

c. Vendor's shipping document and the purchase order.

d. Receiving report and the vendor's shipping document.

c. Vendor's shipping document and the purchase order.

The accounts payable department should compare the information on each vendor's invoice with the

a. Receiving report and the purchase order.

b. Receiving report and the voucher.

c. Vendor's packing slip and the purchase order.

d. Vendor's packing slip and the voucher.

a. Receiving report and the purchase order.

Effective internal control over the purchase of raw materials should usually include all of the following procedures except

a. Reporting product changes that will affect raw materials needs.

b. Determining the need for raw materials prior to preparing a purchase order.

c. Obtaining third-party written quality and quantity reports prior to paying for the raw materials.

d. Obtaining approval prior to making a purchase commitment.

c. Obtaining third-party written quality and quantity reports prior to paying for the raw materials.

To improve control over merchandise purchases, a company's receiving department should

a. Accept merchandise only if an approved purchase order is on hand.

b. Accept and count all merchandise received from known vendors.

c. Rely on shipping documents to prepare receiving reports.

d. Be responsible for handling merchandise but not for preparing receiving reports.

a. Accept merchandise only if an approved purchase order is on hand.

To assure that disbursements are neither improper nor inaccurate, an entity could require that all checks be

a. Signed by an officer after supporting documentation has been examined.

b. Reviewed by the treasurer before mailing.

c. Numbered sequentially and accounted for by internal auditors.

d. Canceled when they are returned with the bank statement.

b. Reviewed by the treasurer before mailing.

The mailing of disbursement checks and remittance advices should be controlled by the employee who

a. Signed the checks last.

b. Approved the vouchers for payment.

c. Matched the receiving reports, purchase orders, and vendor invoices.

d. Verified the mathematical accuracy of the vouchers and remittance advices.

a. Signed the checks last.

An auditor plans to examine a sample of 20 checks for countersignatures as prescribed by the client's internal control procedures. One of the checks in the sample cannot be found. The auditor should

a. Evaluate the results as if sample size had been 19.

b. Treat the missing check as a deviation.

c. Treat the missing check in the same manner as the majority of the other 19 checks, i.e., countersigned or not.

d. Choose another check to replace the missing check in the sample.

b. Treat the missing check as a deviation.

A company sells a product only in the last month of its fiscal year. The company uses commission agents and pays them 6 percent of their net sales 30 days after the sales are made. The agents' sales were $10,000,000. Experience indicates that 10 percent of the sales are usually not collected and 2 percent are returned in the first month of the new year. The auditor would expect the year-end balance in the accrued commissions account to be

a. $528,000.

b. $540,000.

c. $588,000.

d. $600,000.

c. $588,000.