Acquisition and Expenditure Cycle

Question 1

Payments to suppliers made on December 31, 2020 were not recorded until January 3, 2021 violates which management assertion and could be tested with which substantive procedure?

Answer 1

Existence (of A/P), Confirmation (of balance w/ vendor)

Question 2

Invoices for purchases were posted to incorrect vendor accounts violates which management assertion and could be tested with which substantive procedure?

Answer 2

Classification (of A/P), Confirmation (of balance w/ vendor)

Question 3

Inventory is being stolen upon receipt prior to being placed in the company warehouse violates which management assertion and could be tested with which substantive procedure?

Answer 3

Existence (of inventory), perform an inventory count

Question 4

Inventory costing $1,254,721 was shipped to customers on January 3, 2021, and was recorded as COGS on December 31, 2020 violates which management assertion and could be tested with which substantive procedure?

Answer 4

Completeness (of inventory), Perform an inventory count, Confirm A/P with vendors

Question 5

Some purchase transactions were not recorded violates which management assertion and could be tested with which substantive procedure?

Answer 5

Completeness of Inventory or A/P, Perform and inventory count, Confirm A/P with vendor, perform purchase cutoff tests

Question 6

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

Answer 6

after

Question 7

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

Answer 7

confirmations

Question 8

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

Answer 8

ratios

Question 9

When auditors find unrecorded liabilities, before adjusting they must consider_______.

Answer 9

materiality

Question 10

Auditors need to consider _____terms for determining ownership and whether a liability should be recorded.

Answer 10

shipping

Question 11

Federal and state governments do not specify the exact _____to be maintained, but do specify the amounts to be withheld.

Answer 11

records

Question 12

Income taxes withheld from employees but not yet submitted to the government are considered to be a(n) _______.

Answer 12

liability

Question 13

When testing customer deposits, auditors typically review a(n) ______of the individual deposits.

Answer 13

list

Question 14

When testing other accrued liabilities, auditors may independently calculate the amount and ______ it to management’s estimate.

Answer 14

compare

Question 15

Property tax payments are typically ______in number.

Answer 15

few

Question 16

It is important for the auditor to verify that the controls described by the employees during the auditor’s survey of controls over property, plant, and equipment have actually been _____.

Answer 16

implemented

Question 17

Auditors must confirm that the ____________ of Property, Plant, and Equipment agree with the general ledger.

Answer 17

detail ledgers

Question 18

After obtaining an understanding of the client and its environment, auditors must identify the ______risks related to the accounts.

Answer 18

inherent

Question 19

Auditors test effectiveness of controls to ensure they can justify their planned levels of ______ risk.

Answer 19

control

Question 20

A (blank) contains documentation supporting the recording of a transaction.

Answer 20

voucher

Question 21

A “blind purchase order” is a

Answer 21

Purchase order with the quantity deleted to be used in the receiving department.

Question 22

Canceling invoices with a “PAID” stamp after payment is a control that relates to which assertion?

Answer 22

Existence/occurrence

Question 23

Preparation of receiving reports ensures that only items received can be recorded, which relates to ____ management assertion

Answer 23

existence and occurrence

Question 24

Auditors usually focus on which assertion when auditing current liabilities?

Answer 24

Completeness (concern that current liabilities are not recorded)

Question 25

If goods ordered under a binding purchase commitment permanently decline in value below the agreed on purchase prices, a company should.

Answer 25

Record a loss for items not yet received.

Question 26

The 4 basic activities in the acquisition and expenditure cycle:

Answer 26

1. purchase goods and services, receiving goods or services, recording the asset or expense and related liability, paying the invoice through cash disbursement

Question 27

the 5 relevant assertions of A/P

Answer 27

completeness, cutoff, valuation (primary 3), existence, presentation (not recorded in proper accts and disclosed in footnotes),

Question 28

the 4 relevant assertions of expense account

Answer 28

completeness, cutoff, accuracy (incorrect amount), classification (incorrectly capitalized)

Question 29

Name information 5 processing controls for the acquisition cycle

Answer 29

1. Compare PO number on BOL with company PO
2. Compare quantities against receiving report and purchase order
3. Compare prices against quoted price or catalog listing
4. Recompute vendor’s invoices
5. Properly prepare voucher

Question 30

Authorization of the purchase is done by the (blank) department to maintain separation of duties

Answer 30

purchasing

Question 31

Custody of the inventory item(s) is held by the (blank) department and, ultimately, the requesting department to maintain separation of duties in purchasing

Answer 31

receiving

Question 32

General accounting records transactions to the (blank) account and accounts payable records transactions to the (blank) account to maintain separation of duties in purchasing

Answer 32

control, subsidiary

Question 33

Liabilities should be (blanked) between the GL and customer statements as a control procedure

Answer 33

reconciled

Question 34

Who receives bids during the purchasing decision

Answer 34

Someone independent of purchase decider

Question 35

This should be used by the receiving department to fill in after an independent inspection and count of goods received

Answer 35

blind purchase order (missing quantity)

Question 36

Accounts payable attaches which documents for a voucher package for entry into assets, inventory, or expense accounts and A/P

Answer 36

voucher (w/ approvals, accounts and amounts to be recorded), purchase order, vendor’s invoice, receiving report

Question 37

Two risks in the acquisition and expenditure cycle include

Answer 37

unrecorded liabilities and non-cancelable purchase agreements

Question 38

Receiving reports/vouchers should be prenumbered and used in order, accounted for in the period, is an internal control for what management assertion? How is it tested by auditors?

Answer 38

A/P and Expenses, completeness

Scan for sequence, inspect unmatched receiving reports

Question 39

A three-way match of completed voucher packages and vendors on an approved vendor list is an internal control for what management assertion? How is it tested by auditors?

Answer 39

A/P, existence

Vouch sample of payments to completed three-way match, trace vendors to approved list, test automated system for exception reports

Question 40

A chart of accounts used for classifying purchase transaction is an internal control for what management assertion? How is it tested by auditors?

Answer 40

A/P, presentation

Observe reporting software and pre-populated chart of accounts

Question 41

Vendor invoices traced to approved price listing and recalculated is an internal control for what management assertion? How is it tested by auditors?

Answer 41

A/P, valuation

Vouch prices to approved listing, observe client testing for accuracy

Question 42

Expenses matched with vendor invoices or work orders for proper cost of items or services is an internal control for what management assertion? How is it tested by auditors?

Answer 42

Expenses, Accuracy

Inspect evidence of comparison b/w expenses and invoices

Question 43

Reviewing expenses to determine they’re recorded in the proper account is an internal control for what management assertion? How is it tested by auditors?

Answer 43

Expenses, Classification

Inspect evidence of journal entry review procedures

Question 44

Types of audit evidence in management reports and data files that can be used to audit acquisition and expenses

Answer 44

Open purchase orders
Unmatched receiving reports
Unmatched vendor invoices
Accounts (vouchers) payable trial balance
Purchases journal
Fixed asset reports

Question 45

How is occurrence tested for vendor invoices?

Answer 45

Vouch sample of recorded purchases to vendor invoices (did recorded purchases occur).

Vouch sample of invoices to receiving reports (did invoiced purchases occur).

Question 46

How is completeness tested for vendor invoices?

Answer 46

Trace sample of receiving reports to vendor invoices (were all receipts invoiced by vendor).

Trace sample of vendor invoices to purchases journal (were all vendor invoices recorded).

Question 47

What are two primary means of gathering evidence to support management’s assertions of PPE?

Answer 47

Inspection (existence and valuation - condition) and vouching.

Question 48

Four inherent risks in the payroll cycle

Answer 48

Ghost employees
Overpaying (padding) for time or production
Incorrect accounting (classification)
Failure to pay third-parties (e.g. payroll taxes, insurance)

Question 49

An account used for special purposes such as payroll or branch banking that is maintained at a zero or fixed balance in the general ledger. Checks written on the account are offset by deposits of the same amount.

Answer 49

Imprest bank account

Question 50

If completeness controls are strong Blank

Answer 50

only large items need to be examined when searching for unrecorded liabilities in accounts payable

Question 51

Tests of the additions to the expense accounts is an example of tests of controls over

Answer 51

occurrence

Question 52

Confirmation letters may be sent to vendors with small or zero balances if (blank)
controls are weak.

Answer 52

completeness

Question 53

When considering assertions and obtaining evidence about accounts payables and other liabilities, auditors must emphasize the (blank) assertion

Answer 53

completeness

Question 54

The accounts payable trial balance should agree with the accounts payable (blank blank)

Answer 54

control account

Question 55

(Blank) may be extensive in the areas of R&D.

Answer 55

Vouching

Question 56

Auditors should ask (blank blank) about any lawsuits or defects related to intangible assets.

Answer 56

company counsel

Question 57

The most significant risks in the expenditure cycle generally relate to the (Blank) of expenditures and (Blank)
of acquisitions.

Answer 57

completeness, valuation

Question 58

If the risk of material misstatement is high, auditors can look for evidence that significant transactions are properly recorded using

Answer 58

tests of details

Question 59

According to the FASB Statement of Concepts, expenses may be recognized when they are

Answer 59

incurred, allocated to future periods, matched to revenue

Question 60

Expenses may be improperly classified to

Answer 60

increase total assets

lower total expenses

Question 61

Managements’ claim that all listed PP&E items are used in operations relates to the ______ assertion.

Answer 61

classification

Question 62

To search for unrecorded liabilities, auditors should inspect and compare the unmatched receiving report file with the (blank blank) file

Answer 62

unmatched invoice

Question 63

Managements’ claim that no repair & maintenance expenses should be capitalized relates to the ______ assertion.

Answer 63

completeness

Question 64

If occurrence controls are weak, the auditor may

Answer 64

recalculate and test a sample of payments for monetary errors

Question 65

Auditors may discover evidence of losses on purchase commitments by examining the

Answer 65

open purchase order file

Question 66

Vouching of expenses may be limited to significant items if
(Blank) controls are strong.

Answer 66

occurrence

Question 67

Recalculation based on audited costs and rates is/is not sufficient appropriate audit evidence for amortization of intangible assets.

Answer 67

is

Question 68

Continual management review, proper authorizations, and a place where inappropriate behavior may be reported are all
(blank)
- level controls in the expenditure process.

Answer 68

entity