CH11 TB

Question 1

The acquisition and payment cycle includes processes for identifying products or services to be acquired, purchasing goods and services, receiving the goods, approving payments, and paying for goods and services received.

T or F?

Answer 1

TRUE

Question 2

The major accounts in the acquisition and payment cycle are inventory, cost of goods sold, accounts payable, and other expense accounts.

T or F?

Answer 2

TRUE

Question 3

An indication of potential inventory fraud is that inventory levels are growing faster than sales.

T or F?

Answer 3

TRUE

Question 4

The acquisition process begins with a purchase of goods or services.

T or F?

Answer 4

FALSE

Question 5

Supply chain management has helped many companies improve the efficiency of operations.

T or F?

Answer 5

TRUE

Question 6

Management may intentionally misstate inventory balances by overvaluing items that are obsolete.

T or F?

Answer 6

TRUE

Question 7

Understatement of either purchases or ending inventory will result in a lower cost of goods sold and higher net income.

T or F?

Answer 7

FALSE

Understating purchases or overstating ending inventory will result in a lower cost of goods sold and higher net income.

Question 8

Inventory turnover is often calculated by the auditor for proper disclosure in client financial statements.

T or F?

Answer 8

FALSE

Question 9

A networked software system linking a company’s information system to vendors whose offerings and prices have been preapproved by appropriate management is called an automated purchasing system.

T or F?

Answer 9

TRUE

Question 10

Cycle counts involve periodic testing of the accuracy of the perpetual inventory records.

T or F?

Answer 10

TRUE

Question 11

A purchase order identifies the quantity and description of products that have been received.

T or F?

Answer 11

FALSE

Question 12

Auditors should consider the inherent risk that management is more likely to understate, rather than overstate, accounts payable and expenses.

T or F?

Answer 12

TRUE

Question 13

A new vendor should be added to an authorized vendor database by an individual in the purchasing department.

T or F?

Answer 13

FALSE

Question 14

The auditor’s primary concern with accounts payable is that of existence.

T or F?

Answer 14

FALSE

Completeness

Question 15

Reconciliation of vendor statements to recorded payables provides assurance related to the completeness assertion.

T or F?

Answer 15

TRUE

Question 16

Approval of items for payment usually involves a three-way match among the vendor invoice, the purchase order, and the receiving report.

T or F?

Answer 16

TRUE

Question 17

The purchasing department should make sure that only authorized goods are received, the goods meet order specifications, an accurate count of the goods received is taken, and that accountability is established to assure that all receipts are recorded.

T or F?

Answer 17

FALSE

Question 18

In an audit where there is a heightened risk of fraud related to inventory, the auditors may want to observe all inventory locations simultaneously.

T or F?

Answer 18

TRUE

Question 19

The use of substantive analytical procedures applied to related expense accounts would not be used to determine if accounts payable were understated.

T or F?

Answer 19

FALSE

Question 20

Analytical review of related expense accounts when auditing accounts payable would be used when control risk is assessed as low.

T or F?

Answer 20

TRUE

Question 21

Testing cash disbursements subsequent to the year under audit allows the auditor to determine certain payables that may not have been recorded previously.

T or F?

Answer 21

TRUE

Question 22

When auditing accounts payable, the auditor would most likely review a sample of cash disbursements throughout the year to determine whether disbursements for goods and services are applicable to the subsequent year.

T or F?

Answer 22

FALSE

Question 23

The auditor tests significant repairs and maintenance expenses to ensure that an item that should be capitalized has not been expensed.

T or F?

Answer 23

TRUE

Question 24

The lower of cost or market assumption is not important to valuation of inventory.

T or F?

Answer 24

FALSE

Question 25

Proper internal control over the inventory account would require that inventory items should be reviewed for obsolescence and proper accounting treatment.

T or F?

Answer 25

TRUE

Question 26

Many frauds are committed by overstating inventory accounts.

T or F?

Answer 26

TRUE

Question 27

Inventory may become obsolete because of technological advances even though there are no signs of physical wear.

T or F?

Answer 27

TRUE

Question 28

Sources of information regarding a client’s inventory obsolescence can be partially noted during the inventory observation.

T or F?

Answer 28

TRUE

Question 29

Auditing standards require the auditor to observe the client taking physical inventory.

T or F?

Answer 29

TRUE

Question 30

One reason for observing inventory is to determine the accuracy of client counting procedures.

T or F?

Answer 30

TRUE

Question 31

Test counts are performed by physical inventory.

T or F?

Answer 31

FALSE

Question 32

It is likely in the acquisition and payment cycle that audit evidence from substantive analytical procedures alone will be sufficient for the auditor.

T or F?

Answer 32

FALSE

Question 33

During the inventory counting process, the client arranges not to ship or receive goods or segregates all goods received during the process to be labeled and counted as “after inventory.”

T or F?

Answer 33

TRUE

Question 34

Legal expenses are reviewed by auditors for possible litigation that would require recording or disclosure.

T or F?

Answer 34

TRUE

Question 35

A walkthrough is typically not a useful means of obtaining information about controls in the acquisition and payment cycle.

T or F?

Answer 35

FALSE

Question 36

The cash account is not part of the acquisition and payment cycle.

T or F?

Answer 36

FALSE

Question 37

The auditor may test a manufacturing client’s cost system to substantiate the valuation of inventory.

T or F?

Answer 37

TRUE

Question 38

Valuation is the most complex assertion related to inventory.

T or F?

Answer 38

TRUE

Question 39

Auditors observe the client taking physical inventory at year-end primarily to obtain assurance about the value of inventory.

T or F?

Answer 39

TRUE

Question 40

The acquisition cycle begins with the receipt of goods and services and ends with their payment as reflected in cash disbursements.

T or F?

Answer 40

FALSE

Question 41

Prenumbered receiving documents establish the completeness of the population and are useful in determining that all goods are recorded in the correct period.

T or F?

Answer 41

TRUE

Question 42

In computerized purchasing operations, the computer matches three documents—the purchase order, the receiving report, and the monthly statement—and if the three match within a prespecified tolerable limit, the invoice is approved for payment.

T or F?

Answer 42

FALSE

Question 43

The tracing of a sample of receiving reports through the recording process tests the completeness assertion.

T or F?

Answer 43

TRUE

Question 44

Substantive tests of accounts payable and related expense accounts for valuation usually involve simply verifying the mathematical accuracy of the accounts and agreeing them to general ledger and supporting documentation.

T or F?

Answer 44

TRUE

Question 45

In observing the client’s inventory at year-end, the auditor makes test counts that are later traced into the client’s inventory compilation.

T or F?

Answer 45

TRUE

Question 46

Stable relationships are expected between specific accounts (for example, cost of goods sold and sales) that can be investigated for unusual discrepancies.

T or F?

Answer 46

TRUE

Question 47

Which of the following activities is not included in the acquisition and payment cycle?
a. Receipt of goods and services.
b. Approval of items for payment.
c. Application of cash receipts.
d. Authorized request for goods and services.

Answer 47

C

Question 48

Which of the following accounts is not a major account in the acquisition and payment cycle?
a. Inventory.
b. Cost of goods sold.
c. Accounts payable.
d. All of the above are major accounts.

Answer 48

D

Question 49

Which of the following is a significant risk related to purchasing?
a. Competitive bids are not required for purchases below a specified dollar amount.
b. Purchase orders are generated electronically.
c. Purchasing agents may enter into kickback arrangements with vendors.
d. All of the above are significant risks.

Answer 49

C

Question 50

When a purchasing agent benefits personally by accepting payment from a vendor, the purchasing agent is guilty of which of the following?
a. Performing kiting.
b. Committing embezzlement.
c. Receiving kickbacks.
d. Stealing company assets.

Answer 50

C

Question 51

Reducing the risk of understated payables can be accomplished by focusing on which assertion?
a. Existence.
b. Rights.
c. Presentation and disclosure.
d. Completeness.

Answer 51

D

Question 52

Which of the following is not a management assertion relevant to inventory
a. Existence or occurrence.
b. Completeness.
c. Rights and obligations.
d. Accuracy.

Answer 52

D

Question 53

Which of the following is not an indicator of fraud in the acquisition and payment cycle?
a. Theft of inventory by employees.
b. Inventory shrinkage.
c. Large manual adjustments to inventory accounts.
d. Excess inventory because of a production slowdown.

Answer 53

D

Question 54

The internal control that requires that “checks are pre-numbered and accounted for” satisfies which assertion?
a. Accuracy.
b. Existence.
c. Completeness.
d. Posting and summarization.

Answer 54

C

Question 55

Which of the following would meet the need for additional control procedures when using computer-generated purchase orders?
a. Establishment of maximum quantity limits that can be ordered within a given time period.
b. Automated acceptance for high dollar levels.
c. Purchase order copies sent by purchasing to receiving.
d. Accounts payable department entering new vendors into the system.

Answer 55

A

Question 56

Which of the following signals a potential fraud that may cause the overstatement of inventory accounts?
a. Reserves for contingencies are reducing rapidly.
b. Inventory amounts are growing faster than sales.
c. Repairs and maintenance accounts have significant credit entries.
d. The purchase of manufacturing equipment is occurring at a rapid rate.

Answer 56

B

Question 57

Accounting for inventories is a major consideration for many companies because of its significance to which of the following financial statements?
a. Balance sheet.
b. Income statement.
c. Statement of cash flows.
d. Both A and B.

Answer 57

D

Question 58

Which of the following is a major factor in management’s ability to overvalue inventory without rapid detection by auditors?
a. The limited volume of transactions in the inventory accounts.
b. The auditor’s assessment of inventory as a low-risk area.
c. Complexity in the valuation of inventory.
d. Consideration by the auditor of non-financial indicators of inventory fraud.

Answer 58

C

Question 59

Which of the following is an example of the type of analytical procedures that an auditor would use for inventory?
a. Number of day’s sales in receivables compared to industry averages.
b. Inventory turnover for the previous five years.
c. Days outstanding in accounts payable.
d. Salaries of marketing personnel as a percent of total inventory.

Answer 59

B

Question 60

Which relationship might suggest a heightened risk of fraud in the acquisition and payment cycle?
a. Unexpected increases in the number of suppliers.
b. A reduction in raw material costs.
c. Maturing capital assets with no plan for replacement.
d. Sales expenses growing in proportion to sales revenue.

Answer 60

A

Question 61

During your audit of Brown Company you are trying to determine whether all accounts payable were recorded. Which assertion are you gathering evidence for?
a. Occurrence.
b. Presentation and disclosure.
c. Completeness.
d. Valuation or allocation.

Answer 61

C

Question 62

Which of the following procedures would the auditor perform in testing the completeness assertion for accounts payable?
a. Examine a sample of cash disbursements made after year-end to determine whether the disbursements were for goods acquired in the previous year.
b. Reconcile vendor’s statements with the accounts receivable trial balance.
c. Examine production equipment for useful lives.
d. Gather purchase orders immediately previous to and subsequent to year-end.

Answer 62

A

Question 63

Why should the client’s legal expenses be examined?
a. To compare with previously released attorneys’ letters.
b. To determine the types of fraud occurring in the organization.
c. To ensure proper recording of vendor payables.
d. To determine if there is any litigation pending or threatened.

Answer 63

D

Question 64

Which assertion has the greatest emphasis when auditing accounts payable?
a. Existence.
b. Completeness.
c. Presentation.
d. Obligations.

Answer 64

B

Question 65

An auditor may best test commissions expense for salespeople when control risk is low by performing which of the following procedures?
a. Analytical procedures.
b. Tagging and tracing.
c. Alternative procedures.
d. Subsequent proof of cash.

Answer 65

A

Question 66

Which of the following is a required disclosure for inventory?
a. Inventory valuation method used (FIFO, LIFO, moving average) and percentage of inventory valued under each method.
b. LIFO or current cost if the inventory is valued using FIFO.
c. Type of inventory system used (periodic or perpetual).
d. All of the above.

Answer 66

A

Question 67

A primary feature of automated control in the acquisition cycle includes which of the following?
a. Authorization is no longer required.
b. Limits as to the number of items that can be received by the warehouse.
c. Calculated order quantities based on set criteria.
d. Funds transfer at the request of the controller.

Answer 67

C

Question 68

Bar code scanning may best be utilized in the receiving process to accomplish which of the following?
a. Match incoming goods with purchase orders.
b. Notify the shipper that product has arrived.
c. Order new items on behalf of the purchasing department.
d. Record inventory that has been written off the books.

Answer 68

A

Question 69

When auditing expense accounts, which of the following would the auditor be least likely to subject to a detailed test of transactions?
a. Legal expense.
b. Utilities expense.
c. Repairs and maintenance expense.
d. Travel expense.

Answer 69

B

Question 70

Identify the proper sequence of the acquisition and payment cycle:
1. Approval of items for payment.
2. Authorized requisition for goods or services.
3. Cash disbursements.
4. Receipt of goods and services.
5. Authorized purchase of goods or services.

a. 2,5,4,1,3
b. 2, 4, 5, 1, 3
c. 2,1,4,5,3
d. 2, 5, 1, 4, 3

Answer 70

A

Question 71

Which one of the following accounts would an auditor most likely test by performing analytical procedures?
a. Sales commissions expense.
b. Legal expenses.
c. Repairs and maintenance expense.
d. Travel expense.

Answer 71

A

Question 72

Which of the following is NOT a reason why inventory is a complex accounting and auditing area?
a. Diversity of items in inventory.
b. Low volume of activity.
c. Easily transportable.
d. Difficulty in applying the lower of cost or market principle.

Answer 72

B

Question 73

Which of the following might an auditor do in testing for the existence of accounts payable?
a. Review client’s financial statement disclosure.
b. Review long-term purchase commitments.
c. Perform a cutoff test of purchases and cash disbursements.
d. Perform analytical review of related expense accounts.

Answer 73

C

Question 74

Which of the following is not an inherent risk associated with inventory?
a. Inventory accounts typically have a high volume of activity.
b. Inventory is easily transportable.
c. Inventory may become obsolete.
d. Inventory costing methods frequently change from one year to the next.

Answer 74

D

Question 75

Which of the following is not an element of internal control for inventory?
a. Authorization for all purchases.
b. Proper accounting for receipt of inventory.
c. Perpetual inventory system.
d. Rapid introduction of new products without market studies.

Answer 75

D

Question 76

Which of the following would the auditor most likely do when testing the existence assertion for inventory?
a. Observe the client’s count of the annual physical inventory and perform test counts.
b. Review vendor invoices for the amounts recorded.
c. Review open purchase orders at year-end.
d. Trace raw material purchases to invoices and to the general ledger.

Answer 76

A

Question 77

Which of the following would the auditor most likely do when testing the valuation assertion for inventory?
a. Confirm inventory on consignment.
b. Examine receiving reports for inventory, tracing the recorded amounts.
c. Observe the taking of physical inventory.
d. Vouch inventory purchases to vendor invoices.

Answer 77

D

Question 78

The auditor may discover that the recorded cost of inventory exceeds the designated market price when testing which assertion?
a. Existence.
b. Cutoff.
c. Valuation.
d. Rights.

Answer 78

C

Question 79

Which of the following procedures will usually be performed by the auditor to determine if obsolete inventory exists?
a. Confirmation of inventory with customers.
b. Footing the inventory subsidiary ledger.
c. Tracing inventory ordered by the client to receiving reports.
d. Analysis of inventory turnover and sales reports.

Answer 79

D

Question 80

A perpetual inventory system is preferable to a periodic system if adequately controlled and maintained because of which of the following?
a. It requires that a full inventory count be taken at year-end by all warehouse employees.
b. It allows management to calculate cost of goods sold at year-end.
c. It provides information to management where book inventory is continuously in agreement with inventory on hand within specified time periods.
d. It better controls the receipt of goods.

Answer 80

C

Question 81

Which of the following is not a procedure that the auditor should perform related to the physical inventory count?
a. Document the first and last tag numbers used.
b. Take notations of all items that appear to be obsolete or are in questionable condition.
c. Make counts of all items and record the counts for subsequent tracing into the client‘s inventory compilation.
d. Observe whether there is any physical movement of goods during the counting of the inventory.

Answer 81

C

Question 82

The principle of lower of cost or market and the potential obsolescence of inventory are concerns for the audit team because of which of the following?
a. They are uncommon and may not exist.
b. They are a burden to the auditor in the undue amount of work caused.
c. They are likely to occur in the last month of the year and cause cutoff problems.
d. They are an inherent component of complexity related to valuation.

Answer 82

D

Question 83

An auditor reviews purchase contracts to assess the conditions for the return of merchandise as a test related to which management assertion?
a. Existence.
b. Completeness.
c. Rights and obligations.
d. Valuation.

Answer 83

C

Question 84

Which of the following is not an item reviewed by the auditor to test the client’s assertion related to the presentation and disclosure of inventory?
a. The inventory valuation methods used.
b. The amount of obsolete inventory on hand.
c. The existence of contingent losses associated with long-term purchase commitments.
d. The classification of inventory as raw material, work in process or finished goods.

Answer 84

B

Question 85

Which of the following is a procedure used in an audit where there is a heightened risk of fraud related to accounts
payable and other related expense accounts?
a. Send blank confirmations to vendors that ask them to furnish information about all outstanding invoices, payment terms, and payment histories.
b. Scan journals for unusual or large year-end transactions and adjustments.
c. Obtain and examine documentation for payments of invoices that are for amounts just under the limit that typically
requires some level of approval.
d. All the above.

Answer 85

D

Question 86

When testing a standard cost system, the auditor does not normally make which of the following inquiries?
a. The method for developing standard costs.
b. The method for identifying components of overhead and of allocating overhead to products.
c. The method for identifying sales cutoff.
d. The method used for allocating variances to inventory and cost of goods sold.

Answer 86

C

Question 87

The acquisition cycle begins with which of the following?
a. A payment.
b. A purchase order.
c. A requisition.
d. A receiving report.

Answer 87

C

Question 88

Which of the following is not a potential fraud indicator in the acquisition and payment cycle?
a. Expenses that are significantly above or below industry norms.
b. Expense accounts that have significant debit entries.
c. Unexpected increases in gross margin.
d. Capital assets that seem to be growing faster than the business.

Answer 88

B

Question 89

Which of the following is not a standard procedure that the auditor normally should follow in the observation of inventory at year-end?
a. Observe the client taking inventory.
b. Make selected test counts and trace into client’s inventory compilation.
c. Look for slow-moving, obsolete, or damaged inventory.
d. Review disclosure of inventory valuation.

Answer 89

D

Question 90

Which of the following is a condition which would not create a conducive situation for a client to take a physical inventory at an interim date before year-end?
a. The control risk over inventory is high.
b. The auditor will be able to review material transactions in the roll-forward period.
c. The auditor can effectively test the year-end balance through a combination of analytical procedures and selective testing of transactions between the physical count and the year-end.
d. The auditor reviews the intervening transactions for evidence of any manipulation or unusual activity

Answer 90

A