AT.14 Audit of Acquisition and Payment Cycle Drill

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

Choices:

• Vendors with whom the entity has previously done business.

• Amounts recorded in the accounts payable subsidiary ledger.

• Payees of checks drawn in the month after the year-end.

• Invoices filed in the entity's open invoice file

Correct answer: Vendors with whom the entity has previously done business.

The auditor will most likely perform extensive tests for possible understatement of

Choices:

• Revenues.

• Assets.

• Liabilities.

• Capital.

Correct answer: Liabilities.

The auditor may conclude that depreciation charges are insufficient by noting

Choices:

• Large amounts of fully depreciated assets.

• Continuous trade-ins of relatively new assets.

• Excessive recurring losses on assets retired.

• Insured values greatly in excess of book values

Correct answer: Excessive recurring losses on assets retired.

In testing for unrecorded retirements of equipment, an auditor most likely would

Choices:

• Select items of equipment from the accounting records and then locate them during the plant tour.

• Compare depreciation journal entries with similar prior year entries in search of fully depreciated equipment.

• Inspect items of equipment observed during the plant tour and then trace them to the equipment subsidiary ledger.

• Scan the general journal for unusual equipment additions and excessive debits to repairs and maintenance expense

Correct answer: Select items of equipment from the accounting records and then locate them during the plant tour.

To improve accountability for fixed asset retirements, management most likely would implement control that includes

Choices:

• Continuous analysis of the repairs and maintenance account.

• Periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired.

• Continuous utilization of serially numbered retirement work orders.

• Periodic inspection of insurance policies by the internal auditors.

Correct answer: Continuous utilization of serially numbered retirement work orders.

Which of the following tests of details most likely would help an auditor determine whether accounts payable have been misstated?

Choices:

• Examining reported purchase returns that appear too low.

• Examining vendor statements for amounts not reported as purchases.

• Search for customer-returned goods that were not reported as returns.

• Reviewing bank transfers recorded as cash received from customers

Correct answer: Examining vendor statements for amounts not reported as purchases.

When title to merchandise in transit has passed to the audit client, the auditor examining a vendor's invoices as a purchase cutoff on December 31, the last day of the client's year, will encounter the greatest difficulty in gaining assurance with respect to the

Choices:

• Quantity.

• Quality.

• Price.

• Terms

Correct answer: Quality.

Which of the following is a substantive procedure that an auditor most likely would perform to verify the existence and valuation of recorded accounts payable?

Choices:

• Investigating the open purchase order file to ascertain that prenumbered purchase orders are used and accounted for.

• Receiving the client's mail, unopened, for a reasonable period of time after the year-end to search for unrecorded vendors' invoices.

• Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.

• Confirming accounts payable balances with known suppliers who have zero balances

Correct answer: Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports

Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because

Choices:

• This is a duplication of cutoff tests.

• Accounts payable balances at the balance sheet date may not be paid before the audit is completed.

• Correspondence with the audit client’s attorney will reveal all legal action by vendors for nonpayment.

• There is likely to be other reliable external evidence to support the balances

Correct answer: There is likely to be other reliable external evidence to support the balances

Which of the following describes a weakness in accounts payable procedures?

Choices:

• The accounts payable clerk files invoices and supporting documentation after payment.

• The accounts payable clerk manually verifies arithmetic on the vendor invoice.

• The accounts payable system compares the receiving report to the vendor invoice.

• The accounts payable manager issues purchase orders

Correct answer: The accounts payable manager issues purchase orders.

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

Choices:

• Test footings in the accounts payable ledger.

• Reconcile unpaid invoices to vendors’ statements.

• Prepare a schedule of accounts payable.

• Mail confirmations for selected account balances.

Correct answer: Prepare a schedule of accounts payable.

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

Choices:

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

• Examine unusual relationships between monthly accounts payable balances and recorded purchases.

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

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

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

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

Choices:

• Reconcile receiving reports with related cash payments made just prior to the year end.

• Review the responses of accounts receivable confirmations for indications of disputes with customers.

• Compare cash payments made after the balance sheet date with the accounts payable trial balance.

• Examine a sample of creditor balances to supporting invoices, receiving reports, and purchase orders

Correct answer: Compare cash payments made after the balance sheet date with the accounts payable trial balance

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

Choices:

• Recorded obligations were paid.

• Incurred obligations were recorded in the correct period.

• Recorded obligations were valid.

• Cash disbursements were recorded as incurred obligations.

Correct answer: Recorded obligations were valid.

Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?

Choices:

• Trace a sample of accounts payable entries recorded just before year-end to the unmatched receiving report file.

• Compare a sample of purchase orders issued just after year-end with the year-end accounts payable trial balance.

• Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices.

• Scan the cash disbursements entries recorded just before year-end for indications of unusual transactions

Correct answer: Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices.

The auditor is most likely to verify accrued commissions payable in conjunction with the

Choices:

• Sales cutoff review.

• Verification of contingent liabilities.

• Review of post balance sheet date disbursements.

• Examination of trade accounts payable

Correct answer: Sales cutoff review.

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

Choices:

• Observation of inventory.

• Review of internal control over cash disbursements.

• Search for unrecorded liabilities.

• Confirmation of receivables

Correct answer: Search for unrecorded liabilities.

Which of the following procedures would best detect a liability omission by management?

Choices:

• Inquiry of senior support staff and recently departed employees.

• Review and check mathematical accuracy of financial statements.

• Review articles of incorporation and corporate bylaws.

• Review purchase contracts and other legal documents

Correct answer: Review purchase contracts and other legal documents.

A weakness in internal control over recording retirements of equipment may cause the auditor to

Choices:

• Inspect certain items of equipment in the plant and trace those items to the accounting records.

• Review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year.

• Trace additions to the "other assets" account to search for equipment that is still on hand but no longer being used.

• Select certain items of equipment from the accounting records and locate them in the plant.

Correct answer: Select certain items of equipment from the accounting records and locate them in the plant

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

Choices:

• Analysis and recomputation of interest expense.

• Analysis and recomputation of depreciation expense.

• Mailing of standard bank confirmation form.

• Reading of the minutes of meetings of the board of directors

Correct answer: Analysis and recomputation of depreciation expense.

In the examination of property, plant, and equipment, the auditor tries to determine all of the following except the

Choices:

• Adequacy of internal control.

• Extent of property abandoned during the year.

• Adequacy of replacement funds.

• Reasonableness of the depreciation

Correct answer: Adequacy of replacement funds.

Which of the following is the most important internal control activity over acquisitions of property, plant, and equipment?

Choices:

• Establishing a written company policy distinguishing between capital and revenue expenditures.

• Using a budget to forecast and control acquisitions and retirements.

• Analyzing monthly variances between authorized expenditures and actual costs.

• Requiring acquisitions to be made by user departments.

Correct answer: Using a budget to forecast and control acquisitions and retirements.

Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by a control that provides for

Choices:

• Segregation of duties of employees in the accounts payable department.

• Independent verification of invoices for disbursements reported as equipment acquisitions.

• Investigation of variances within a formal budgeting system.

• Authorization by the board of directors of significant equipment acquisitions

Correct answer: Investigation of variances within a formal budgeting system.

A client’s procurement system ends with the assumption of a liability and the eventual payment of the liability. Which of the following best describes the auditor’s primary concern with respect to liabilities resulting from the procurement system?

Choices:

• Accounts payable are not materially understated.

• Authority to incur liabilities is restricted to one designated person.

• Acquisition of materials is not made from one vendor or one group of vendors.

• Commitments for all purchases are made only after established competitive bidding procedures are followed

Correct answer: Accounts payable are not materially understated.

An examination of the balance in the accounts payable account as a part of a financial statement audit is ordinarily not designed to

Choices:

• Detect accounts payable which are substantially past due.

• Verify that accounts payable were properly authorized.

• Ascertain the reasonableness of recorded liabilities.

• Determine that all existing liabilities at the balance sheet date have been recorded

Correct answer: Verify that accounts payable were properly authorized