chapter8

The acquisition and expenditure cycle primarily deals with a. Payroll and HR b. Inventory and sales c. Purchases and cash disbursements d. Revenue and collections

c. Purchases and cash disbursements

An inherent risk in the expenditure cycle is a. Inventory shrinkage b. Unrecorded liabilities c. Overstated revenue d. Duplicate deposits

b. Unrecorded liabilities

A common fraud red flag in vendor invoices is a. Sequential invoice numbers b. Invoices with round numbers c. Approved vendor list d. Dated receiving reports

b. Invoices with round numbers

If a vendor and employee share the same address this is a. Coincidence b. Indicator of payroll fraud c. Sign of possible fictitious vendor d. Related-party disclosure

c. Sign of possible fictitious vendor

The Amazon fraud case involved a. Fictitious vendors created by employees b. Channel stuffing c. Understated revenue d. Skimming from petty cash

a. Fictitious vendors created by employees

The Baltimore vendor fraud occurred because staff a. Ignored duplicate invoices b. Failed to confirm vendor bank changes c. Approved overpayments d. Misposted checks

b. Failed to confirm vendor bank changes

An inherent risk in the acquisition cycle is a. Improper revenue timing b. Capitalizing expenses that should be expensed c. Failure to record revenue d. Inventory shrinkage

b. Capitalizing expenses that should be expensed

Which of the following is an internal control in purchasing? a. Independent bank reconciliation b. Use of prenumbered purchase orders c. Monthly revenue cutoffs d. Physical inventory counts

b. Use of prenumbered purchase orders

Authorization of purchases should be based on a. Departmental preferences b. Budget limits and management hierarchy c. Verbal approvals d. Vendor loyalty

b. Budget limits and management hierarchy

An authorized vendor database helps prevent a. Duplicate shipping b. Purchases from unauthorized vendors c. Early revenue recognition d. Unapproved expense reports

b. Purchases from unauthorized vendors

Segregation of duties in the expenditure cycle means a. Same person authorizes and records b. Authorization custody and recording are separated c. All invoices reviewed by one employee d. Purchases approved after payment

b. Authorization, custody, and recording are separated

A blank copy of the purchase order is sent to receiving to a. Speed up approval b. Ensure an independent count of goods c. Simplify paperwork d. Authorize payments

b. Ensure an independent count of goods

A three-way match compares a. Invoice receiving report and purchase order b. Budget invoice and cash disbursement c. Credit memo PO and check d. Vendor statement requisition and bill

a. Invoice, receiving report, and purchase order

The purpose of a three-way match is to a. Avoid overpayment to vendors b. Detect duplicate inventory c. Verify vendor ownership d. Support revenue recognition

a. Avoid overpayment to vendors

Restricted access to vendor payments helps prevent a. Fictitious vendor setup b. Improper revenue c. Overstated liabilities d. Duplicate POs

a. Fictitious vendor setup

Supporting documents should be canceled after payment to a. Avoid duplicate payment b. Record accruals c. Prevent unmatched POs d. Reconcile payables

a. Avoid duplicate payment

Which internal control is not usually performed in the vouchers payable department? a. Approving vouchers for payment b. Indicating accounts to debit c. Accounting for unused purchase orders d. Matching invoice with receiving report

c. Accounting for unused purchase orders

The completeness assertion in the expenditure cycle is tested by a. Confirming vendor balances b. Searching for unrecorded liabilities c. Recalculating discounts d. Inspecting canceled checks

b. Searching for unrecorded liabilities

A search for unrecorded liabilities includes examining a. Cash receipts b. Unmatched receiving reports c. Bank confirmations d. Sales journals

b. Unmatched receiving reports

Testing subsequent disbursements helps auditors a. Detect unrecorded liabilities b. Verify existence of cash c. Confirm revenue d. Detect prepaid assets

a. Detect unrecorded liabilities

A disbursement made on January 5 for December services should a. Be recorded as a prepaid asset b. Be accrued as a liability at year-end c. Be excluded from AP d. Be deferred to the next period

b. Be accrued as a liability at year-end

Prepaid expenses are different from accrued liabilities because they a. Represent future benefits b. Are always material c. Do not affect cash flow d. Reduce revenues

a. Represent future benefits

Accrued liabilities often lack a. Vendor invoices b. Trial balances c. Purchase orders d. Authorization forms

a. Vendor invoices

To test accrued liabilities auditors typically a. Confirm cash b. Review payments after year-end c. Trace sales cutoffs d. Analyze payroll

b. Review payments after year-end

Which of the following is least likely to be performed before year-end? a. Confirmation of receivables b. Testing internal controls over cash c. Search for unrecorded liabilities d. Observation of inventory

c. Search for unrecorded liabilities

Unrecorded liabilities are most likely found in a. Unpaid bills b. Customer confirmations c. Shipping documents d. Journal entries

a. Unpaid bills

Depreciation expense is tested to a. Verify useful lives and consistency b. Confirm vendor terms c. Reconcile inventory d. Verify cutoff

a. Verify useful lives and consistency

Reviewing board minutes is most relevant to a. Revenue recognition b. PPE additions and disposals c. Payroll transactions d. Inventory valuation

b. PPE additions and disposals

Auditing PPE acquisitions includes a. Vouching to vendor invoices and board approval b. Confirming bank balances c. Tracing to AR subledger d. Reviewing returns

a. Vouching to vendor invoices and board approval

Disposals of PPE are tested by a. Tracing to purchase orders b. Vouching to cash receipts and board minutes c. Confirming with lenders d. Comparing to sales journal

b. Vouching to cash receipts and board minutes

Unrecorded disposals can be detected by a. Physically inspecting assets b. Reviewing revenue cutoffs c. Confirming vendor accounts d. Examining sales orders

a. Physically inspecting assets

To test valuation of AP auditors should a. Confirm vendor balances and review invoices b. Count inventory c. Analyze payroll d. Review depreciation schedules

a. Confirm vendor balances and review invoices

Lease agreements are examined to ensure a. Correct classification and disclosure b. Reasonable interest expense c. Proper cutoff d. Valuation of receivables

a. Correct classification and disclosure

Prenumbered documents in the purchasing process primarily support a. Completeness b. Valuation c. Authorization d. Rights and obligations

a. Completeness

Segregation of duties in payments prevents a. Unauthorized disbursements b. Overstated receivables c. Duplicate inventory d. Missed discounts

a. Unauthorized disbursements

Testing prepaid expenses requires auditors to a. Verify payments and agreements b. Confirm vendor balances c. Observe count of supplies d. Recalculate payables

a. Verify payments and agreements

Reviewing voucher packages helps auditors a. Verify validity of disbursements b. Detect lapping c. Confirm revenue d. Test payroll cutoff

a. Verify validity of disbursements

"Canceling" supporting documents means a. Marking paid documents to prevent reuse b. Deleting them from files c. Returning them to vendors d. Archiving electronically

a. Marking paid documents to prevent reuse

Unmatched vendor statements can reveal a. Unrecorded payables b. Duplicate payments c. Revenue cutoff errors d. Inventory miscounts

a. Unrecorded payables

An invoice dated January 20 for December cleaning services that was not included in accounts payable at December 31 should be classified as a. Properly excluded from accounts payable b. Properly included in accounts payable c. Improperly excluded from accounts payable d. Improperly included in accounts payable

c. Improperly excluded from accounts payable

In the expenditure cycle the assertion most at risk is a. Cutoff b. Existence c. Completeness d. Valuation

c. Completeness

Accounts payable recorded but unpaid vendors don't exist violate a. Valuation b. Rights c. Existence/Occurrence d. Completeness

c. Existence/Occurrence

Incorrect expense allocation violates which assertion? a. Valuation/Allocation b. Completeness c. Existence d. Presentation

a. Valuation/Allocation

The PCAOB emphasizes that accounts payable must be properly a. Classified and disclosed b. Offset against assets c. Excluded from current liabilities d. Reported as revenue

a. Classified and disclosed

An invoice dated December 20 for maintenance services that was unpaid at year-end but included in accounts payable at December 31 should be classified as a. Properly included in accounts payable b. Improperly excluded from accounts payable c. Improperly included in accounts payable d. Properly excluded from accounts payable

a. Properly included in accounts payable

A control that ensures all receiving reports are recorded supports a. Completeness b. Valuation c. Cutoff d. Authorization

a. Completeness

When auditing PPE; testing subsequent disbursements helps auditors a. Identify unrecorded asset additions b. Confirm depreciation expense c. Verify asset disposals d. Review lease classifications

a. Identify unrecorded asset additions