Audit Ch 8 Quizlet Test 4

Which of the following would not overstate current-period net income?

Capitalizing an expenditure that should be expensed.

Failing to record a liability as an expense.

Failing to record a check paying an item in Vouchers

Payable.

All of the above would overstate net income.

Failing to record a check paying an item in Vouchers Payable.

Has no effect on net income

Which of the following is an internal control activity that could prevent a paid disbursement voucher from being presented for payment a second time?

Disbursement vouchers should be approved by at least two responsible management officials.

The date on a disbursement voucher should be within a few days of the date the voucher is presented for payment.

The official who signs the check should compare the check with the voucher and should stamp "PAID" on the voucher documents.

Vouchers should be prepared by individuals who are responsible for signing disbursement checks.

The official who signs the check should compare the check with the voucher and should stamp "PAID" on the voucher documents.

Cancellation of vouchers (by marking them as PAID) prevents their use a second time.

Budd, the purchasing agent of Lake Hardware Wholesalers, has a relative who owns a retail hardware store. Budd arranged for hardware to be delivered by manufacturers to the retail store on a cash-on-delivery (COD) basis, thereby enabling his relative to buy at Lake's wholesale prices. Budd was probably able to accomplish this because of Lake's poor internal control over.

Purchase requisitions.

Purchase orders.

Cash receipts.

Perpetual inventory records.

Purchase orders.

Nobody at Lake was reviewing purchase orders to notice the delivery and payment by another party (Budd's relative's store). This deviation caused no direct loss to Lake, but it is a misuse of Lake's pricing agreements with its vendors and puts Lake at risk.

When verifying debits to the perpetual inventory records of a nonmanufacturing company, auditors would be most interested in examining a sample of purchase

Orders.

Approvals.

Requisitions.

Invoices.

Invoices.

Invoices supply relevant information about the quantities purchased and the prices paid.

A furniture company ordered 84 tables from a supplier. The supplier accidentally sent only 48 tables, but the receiving department at the furniture company accepted the tables. The invoice was eventually received but was for the original 84 tables. The furniture company paid the entire amount. Which of the following controls would have been least likely to have prevented this erroneous payment?

Personnel in the furniture company's purchasing department should compare the purchase requisition with the purchase order.

The copy of the purchase order sent to the furniture company's receiving department should not have shown an expected quantity.

Personnel in the furniture company's cash disbursements department should compare the check that is prepared to all of the backup documentation.

Personnel in the furniture company's accounts payable department should compare the receiving report to the purchase invoice before creation of the voucher.

Personnel in the furniture company's purchasing department should compare the purchase requisition with the purchase order.

The purchase order and requisition would both show 84 tables.

Curtis, a maintenance supervisor, submitted maintenance invoices from a phony repair company and received the checks at a post office box. This should have been prevented by

Comparison of the company name to the approved vendor list by the check signer.

Recognition of the excess maintenance costs by Curtis's supervisor.

Refusal by the purchasing department to approve the vendor.

All of the above.

Refusal by the purchasing department to approve the vendor.

Vendors should be approved by an independent purchasing department before an order can be placed.

In a test of controls, auditors may trace receiving reports to vouchers recorded in the voucher register. This is a test for

Classification.

Cutoff.

Occurrence.

Completeness.

Completeness.

This test ensures that liabilities generated by the receipt of goods are recorded in the voucher register.

A company employs three accounts payable clerks and one treasurer. Their responsibilities are as follows:

Employee Responsibility

Clerk 1 Reviews vendor invoices for proper signature approval

Clerk 2 Enters vendor invoices into the accounting system and verifies payment terms

Clerk 3 Posts entered vendor invoices to the accounts payable ledger for payment and mails checks

Treasurer Reviews the vendor invoices and signs each check

Which of the following would indicate a weakness in the company's internal control?

Clerk 1 opens all of the incoming mail.

Clerk 3 mails the checks and remittances after they have been signed.

Clerk 2 reconciles the accounts payable ledger with the general ledger monthly.

The treasurer uses a stamp for signing checks.

Clerk 3 mails the checks and remittances after they have been signed.

Clerk 3 has recordkeeping responsibilities. Providing a signed check to Clerk 3 provides the clerk access to an asset and violates the separation of duties.

The basic acquisition and expenditure activities are: (1) purchasing goods and services. (2) receiving the goods or services. (3) recording the asset or expense and related liability. (4) paying the vendors.

True

Checks are signed by the accounts payable department after assembling the invoice, purchase order, and receiving report.

False

Purchase orders are "open" from the time they are issued until the goods are received.

True

Normally, liabilities should be recorded on the date the goods are received and accepted.

True

Auditors can inspect the "unmatched invoice file" and compare it to the "unmatched receiving report" file to determine whether liabilities are unrecorded.

False

Proper separation of duties involves authorization of purchases by persons who do not have custody, recording, or reconciliation duties.

True

If the risk of material misstatement is assessed as very low, it is likely that additional substantive procedures will be required.

False

Evidence is much easier to obtain to verify the completeness assertion for liabilities than the existence assertion for assets.

False

The principal goal of the physical inspection of PP&E is to determine actual existence and condition of property.

True

The auditors' "search for unrecorded liabilities" should emphasize payments made shortly after the end of the year.

True

The principal goal of the physical inspection of property, plant, and equipment is to determine actual valuation of property.

False

The transactions typically classified in the acquisition and expenditure cycle flow do not include

accounting for accounts payable.

receiving, inspecting, and accepting the assets.

placing the sales order.

requesting goods, services or assets.

placing the sales order.

The internal control questionnaire for receipt of purchases completeness objective would not include which of the following questions?

Are the purchase order forms prenumbered and the numerical sequence checked for missing documents?

Are competitive bids received and reviewed for certain items?

Are receiving report forms prenumbered and the numerical sequence checked for missing documents?

Is the accounts payable department notified of goods returned to vendors?

Are competitive bids received and reviewed for certain items?

A voucher typically does not have attached to it a copy of which of the following documents?

requisition.

purchase order.

check register.

vendor's invoice.

check register.

Specific balance assertions typical of accounts payable would not include

accounts payable are not pledged as collateral.

recorded liabilities are obligations of the entity.

estimated liabilities are properly valued.

payables are recorded in the proper period.

accounts payable are not pledged as collateral.

The inherent risk that accounts payable may be omitted or otherwise understated typically is

low.

indeterminate.

high.

moderate.

high.

The test of controls for purchases, cash disbursements, and accounts payable include the following audit procedures. Next to each of the procedures indicate the related transaction assertion.

Test of Controls

1. Select a sample of receiving reports and trace to inventory record posting of additions.

2. Vouch a sample of receiving reports to related purchase orders.

3. Trace a sample of voucher debits to general and subsidiary ledger accounts.

4. Scan a sample of vouchers for missing numbers.

5. Select a sample of open accounts payable and vouch to supporting documents of purchase.

6. Trace debits arising from accounts payable transactions for proper account.

7. Test a sample of cash disbursement voucher documents for accurate mathematics.

Assertion:

1. Completeness

2.Occurrence

3.Accuracy

4.Completeness

5.Occurrence

6.Classification

7. Accuracy

Cash disbursements are authorized by

purchase orders.

invoices.

receiving reports.

a complete voucher package.

a complete voucher package.

Which of the following client control activities is not usually performed in the vouchers payable (accounts payable) department?

Determining the mathematical accuracy of the vendors' invoices

Writing checks for the treasurer's signature to take advantage of purchase discounts

Controlling the mailing of the check and remittance advice

Checking the prices on the vendor's invoice

Controlling the mailing of the check and remittance advice

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

all goods purchased before year-end are received before the physical inventory count.

no goods held on consignment for customers are included in the inventory balance.

no goods observed during the physical count are pledged or sold.

all goods owned at year-end are included in the inventory balance.

all goods owned at year-end are included in the inventory balance.

Which of the following would not be included in the supporting documents for a voucher?

Purchase order

Vendor invoice

Receiving report

Blank check

Blank check

Which of the following is the best audit procedure for determining the existence of unrecorded liabilities?

Examine unusual relationships between monthly accounts payable and recorded purchases.

Examine a sample of invoices a few days prior to and subsequent to the year-end to ascertain whether they have been properly recorded.

Examine a sample of cash disbursements in the period subsequent to year-end.

Examine confirmation requests returned by creditors whose accounts are on a subsidiary trial balance of accounts payable.

Examine a sample of cash disbursements in the period subsequent to year-end.

Auditors may be able to determine that cash disbursements in the subsequent period are paying liabilities of the period under

audit.

Which of the following procedures is least likely to be performed before the balance-sheet date?

Search for unrecorded liabilities.

Review of internal control over cash disbursements.

Observation of inventory.

Confirmation of receivables.

Search for unrecorded liabilities.

The search for unrecorded liabilities generally depends upon using accounting records created in the period after the year end.

To determine whether accounts payable are complete, auditors perform a test to verify that all merchandise received has been recorded. The population for this test consists of all

Canceled checks.

Purchase orders.

Vendors' invoices.

Receiving reports.

Receiving reports.

The receiving reports are the population that contains the record of all goods received for which liabilities should be recorded.

An audit team would most likely examine the detail support for charges to which of the following accounts?

Payroll expense.

Supplies expense.

Legal expense.

Cost of goods sold.

Legal expense.

The auditor examines the specific charges to determine potential litigation.

Which of the following accounts would most likely be audited in connection with a related balance-sheet account?

Payroll Expense.

Property Tax Expense.

Legal Expense.

Research and Development.

Property Tax Expense.

Property tax expense is audited in conjunction with accrued property taxes.

When auditing account balances of liabilities, auditors are most concerned with management's assertion about

Completeness.

Valuation and allocation.

Existence.

Rights and obligations.

Completeness.

Completeness is the most important assertion in this cycle. The hiding of liabilities is a primary concern for all auditors in the

liability and expense areas. Supplies expense is generally audited in connection with supplies inventory.

This question contains three items that are management assertions about property and equipment. Following them are several substantive procedures for obtaining evidence about management's assertions.

Assertions

1. The entity has legal right to property and equipment acquired during the year.

2. Recorded property and equipment represent assets that actually exist at the balance-sheet date.

3. Net property and equipment are properly valued at the balance-sheet date.

Substantive Procedures

a. Trace opening balances in the summary schedules to the prior-year audit documentation.

b. Review the provision for depreciation expense and determine whether depreciable lives and methods used in the current year are consistent with those used in the prior year.

c. Determine whether the responsibility for maintaining the property and equipment records is separated from the responsibility for custody of property and equipment.

d. Examine deeds and title insurance certificates.

e. Perform cutoff tests to verify that property and equipment additions are recorded in the proper period.

f. Determine whether property and equipment are adequately insured.

g. Physically examine all major property and equipment additions.

Required:

For each of the three assertions (1, 2, and 3), select the one best substantive audit procedure (a-g) for obtaining competent evidence. A procedure may be selected only once or not at all.

Assertions

1. The entity has legal right to property and equipment acquired during the year.

2. Recorded property and equipment represent assets that actually exist at the balance-sheet date.

3. Net property and equipment are properly valued at the balance-sheet date.

1. d

2. g

3. b

Which of the following would not typically be a specific relevant assertion about fixed asset accounts?

fixed assets in the accounts exist and are in productive use.

depreciation has been calculated properly, using accepted methods and reasonable estimates of useful life and other factors.

fixed assets are properly classified in the balance sheet under appropriate descriptive captions.

net carrying book values in the accounts are reflected at current market values.

net carrying book values in the accounts are reflected at current market values.

1. When searching for unrecorded liabilities, the auditors consider transactions recorded _____ year-end.

2. Accounts payable _______ can be mailed to vendors from whom substantial purchases have been made.

3. To gain overall assurance as to the reasonableness of accounts payable, the auditor may consider ________.

4. When auditors find unrecorded liabilities, before adjusting they must consider _______.

5. Auditors need to consider _____ terms for determining ownership and whether a liability should be recorded.

1. after

2. confirmations

3. ratios

4. materiality

5. shipping

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

Accounts with small or zero balances

All accounts should be equally emphasized.

Accounts with large balances

Accounts listed in the accounts payable subsidiary

Accounts with small or zero balances

Which of the following accounts would most likely be reviewed by the auditor to gain reasonable assurance that additions to the equipment account are not understated?

Depreciation expense

Gain on disposal of equipment

Accounts payable

Repairs and maintenance expense

Repairs and maintenance expense

When auditing PP&E, the auditor's approach is generally to

examine evidence supporting the amounts in the ending balance.

examine evidence supporting additions during the year.

follow a reliance strategy, testing internal controls and analytical procedures.

concentrate on finding unrecorded assets.

examine evidence supporting additions during the year.