Acquisition and Expenditure Cycle Flashcards
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?
Existence (of A/P), Confirmation (of balance w/ vendor)
Invoices for purchases were posted to incorrect vendor accounts violates which management assertion and could be tested with which substantive procedure?
Classification (of A/P), Confirmation (of balance w/ vendor)
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?
Existence (of inventory), perform an inventory count
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?
Completeness (of inventory), Perform an inventory count, Confirm A/P with vendors
Some purchase transactions were not recorded violates which management assertion and could be tested with which substantive procedure?
Completeness of Inventory or A/P, Perform and inventory count, Confirm A/P with vendor, perform purchase cutoff tests
When searching for unrecorded liabilities, the auditors consider transactions recorded _____ year-end.
after
Accounts payable _______ can be mailed to vendors from whom substantial purchases have been made.
confirmations
To gain overall assurance as to the reasonableness of accounts payable, the auditor may consider ________.
ratios
When auditors find unrecorded liabilities, before adjusting they must consider_______.
materiality
Auditors need to consider _____terms for determining ownership and whether a liability should be recorded.
shipping
Federal and state governments do not specify the exact _____to be maintained, but do specify the amounts to be withheld.
records
Income taxes withheld from employees but not yet submitted to the government are considered to be a(n) _______.
liability
When testing customer deposits, auditors typically review a(n) ______of the individual deposits.
list
When testing other accrued liabilities, auditors may independently calculate the amount and ______ it to management’s estimate.
compare
Property tax payments are typically ______in number.
few
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 _____.
implemented
Auditors must confirm that the ____________ of Property, Plant, and Equipment agree with the general ledger.
detail ledgers
After obtaining an understanding of the client and its environment, auditors must identify the ______risks related to the accounts.
inherent
Auditors test effectiveness of controls to ensure they can justify their planned levels of ______ risk.
control
A (blank) contains documentation supporting the recording of a transaction.
voucher
A “blind purchase order” is a
Purchase order with the quantity deleted to be used in the receiving department.
Canceling invoices with a “PAID” stamp after payment is a control that relates to which assertion?
Existence/occurrence
Preparation of receiving reports ensures that only items received can be recorded, which relates to ____ management assertion
existence and occurrence
Auditors usually focus on which assertion when auditing current liabilities?
Completeness (concern that current liabilities are not recorded)
If goods ordered under a binding purchase commitment permanently decline in value below the agreed on purchase prices, a company should.
Record a loss for items not yet received.
The 4 basic activities in the acquisition and expenditure cycle:
- purchase goods and services, receiving goods or services, recording the asset or expense and related liability, paying the invoice through cash disbursement
the 5 relevant assertions of A/P
completeness, cutoff, valuation (primary 3), existence, presentation (not recorded in proper accts and disclosed in footnotes),
the 4 relevant assertions of expense account
completeness, cutoff, accuracy (incorrect amount), classification (incorrectly capitalized)
Name information 5 processing controls for the acquisition cycle
- Compare PO number on BOL with company PO
- Compare quantities against receiving report and purchase order
- Compare prices against quoted price or catalog listing
- Recompute vendor’s invoices
- Properly prepare voucher
Authorization of the purchase is done by the (blank) department to maintain separation of duties
purchasing
Custody of the inventory item(s) is held by the (blank) department and, ultimately, the requesting department to maintain separation of duties in purchasing
receiving
General accounting records transactions to the (blank) account and accounts payable records transactions to the (blank) account to maintain separation of duties in purchasing
control, subsidiary
Liabilities should be (blanked) between the GL and customer statements as a control procedure
reconciled
Who receives bids during the purchasing decision
Someone independent of purchase decider
This should be used by the receiving department to fill in after an independent inspection and count of goods received
blind purchase order (missing quantity)
Accounts payable attaches which documents for a voucher package for entry into assets, inventory, or expense accounts and A/P
voucher (w/ approvals, accounts and amounts to be recorded), purchase order, vendor’s invoice, receiving report
Two risks in the acquisition and expenditure cycle include
unrecorded liabilities and non-cancelable purchase agreements
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?
A/P and Expenses, completeness
Scan for sequence, inspect unmatched receiving reports
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?
A/P, existence
Vouch sample of payments to completed three-way match, trace vendors to approved list, test automated system for exception reports
A chart of accounts used for classifying purchase transaction is an internal control for what management assertion? How is it tested by auditors?
A/P, presentation
Observe reporting software and pre-populated chart of accounts
Vendor invoices traced to approved price listing and recalculated is an internal control for what management assertion? How is it tested by auditors?
A/P, valuation
Vouch prices to approved listing, observe client testing for accuracy
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?
Expenses, Accuracy
Inspect evidence of comparison b/w expenses and invoices
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?
Expenses, Classification
Inspect evidence of journal entry review procedures
Types of audit evidence in management reports and data files that can be used to audit acquisition and expenses
Open purchase orders
Unmatched receiving reports
Unmatched vendor invoices
Accounts (vouchers) payable trial balance
Purchases journal
Fixed asset reports
How is occurrence tested for vendor invoices?
Vouch sample of recorded purchases to vendor invoices (did recorded purchases occur).
Vouch sample of invoices to receiving reports (did invoiced purchases occur).
How is completeness tested for vendor invoices?
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).
What are two primary means of gathering evidence to support management’s assertions of PPE?
Inspection (existence and valuation - condition) and vouching.
Four inherent risks in the payroll cycle
Ghost employees
Overpaying (padding) for time or production
Incorrect accounting (classification)
Failure to pay third-parties (e.g. payroll taxes, insurance)
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.
Imprest bank account
If completeness controls are strong Blank
only large items need to be examined when searching for unrecorded liabilities in accounts payable
Tests of the additions to the expense accounts is an example of tests of controls over
occurrence
Confirmation letters may be sent to vendors with small or zero balances if (blank)
controls are weak.
completeness
When considering assertions and obtaining evidence about accounts payables and other liabilities, auditors must emphasize the (blank) assertion
completeness
The accounts payable trial balance should agree with the accounts payable (blank blank)
control account
(Blank) may be extensive in the areas of R&D.
Vouching
Auditors should ask (blank blank) about any lawsuits or defects related to intangible assets.
company counsel
The most significant risks in the expenditure cycle generally relate to the (Blank) of expenditures and (Blank)
of acquisitions.
completeness, valuation
If the risk of material misstatement is high, auditors can look for evidence that significant transactions are properly recorded using
tests of details
According to the FASB Statement of Concepts, expenses may be recognized when they are
incurred, allocated to future periods, matched to revenue
Expenses may be improperly classified to
increase total assets
lower total expenses
Managements’ claim that all listed PP&E items are used in operations relates to the ______ assertion.
classification
To search for unrecorded liabilities, auditors should inspect and compare the unmatched receiving report file with the (blank blank) file
unmatched invoice
Managements’ claim that no repair & maintenance expenses should be capitalized relates to the ______ assertion.
completeness
If occurrence controls are weak, the auditor may
recalculate and test a sample of payments for monetary errors
Auditors may discover evidence of losses on purchase commitments by examining the
open purchase order file
Vouching of expenses may be limited to significant items if
(Blank) controls are strong.
occurrence
Recalculation based on audited costs and rates is/is not sufficient appropriate audit evidence for amortization of intangible assets.
is
Continual management review, proper authorizations, and a place where inappropriate behavior may be reported are all
(blank)
- level controls in the expenditure process.
entity
