Chap 13 - Audit of the Acquisition and Payment Cycle

Question 1

​Budd, the purchasing agent of Lake Hardware​ Wholesalers, has a relative who owns a retail hardware store. Budd arranged for hardware to be delivered by manufacturers to the​ relative's retail store on a COD​ basis, thereby enabling his relative to buy at​ Lake's wholesale prices. Budd was probably able to accomplish this because of​ Lake's poor internal control over
1.
cash receipts.
2.
perpetual inventory records.
3.
purchase requisitions.
4.
purchase orders.

Answer 1

4

Question 2

What is the importance of cash discounts to the​ client?
A.
The importance of cash discounts to the client is that the client can improve its working relationship with its vendors. This will allow the client to receive higher quality of materials.
B.
The importance of cash discounts to the client is that the client can reduce profits by taking cash discounts. Reducing profits will save taxes.
C.
The importance of cash discounts to the client is that taking cash discounts will allow the client to increase the price charged for its products. This will increase profits.
D.
The importance of cash discounts to the client is that the client can produce a substantial savings if it makes use of the cash discounts available.

Answer 2

D

Question 3

How can the auditor verify whether cash discounts are being taken in accordance with company​ policy?
A.
The auditor should examine vouchers and invoices to determine whether discounts are being taken in accordance with the terms available.
B.
The auditor should trace the transaction from a file of receiving reports to the acquisitions journal.
C.
The auditor should test clerical accuracy by footing the journals and tracing the posting to the general ledger and account payable and inventory master files.
D.
The auditor should review the acquisitions​ journal, for general​ ledger, and accounts payable master file for large or unusual amounts.

Answer 3

A

Question 4

Explain why most auditors consider the receipt of goods and services the most important point in the acquisition and payment cycle.
The point at which goods and services are received is ordinarily​ when:
A.
a purchase requisition is issued. Once a requisition is issued a liability and an intent to pay is established.
B.
payment is made and the purchase and related liability are guaranteed.
C.
a purchase order is completed. It is at this point that the company first recognizes the acquisition and related liability on their records.
D.
title to the goods and services passes and a liability that should be included in the financial statements is established.

Answer 4

D

Question 5

In auditing accounts​ payable, an​ auditor's procedures most likely will focus primarily on​ management's assertion of
1.
completeness.
2.
existence.
3.
valuation and allocation.
4.
realizable value.

Answer 5

1.

Question 6

For effective internal​ control, the accounts payable department generally should
1.
​stamp, perforate, or otherwise cancel supporting documentation after payment is mailed.
2.
ascertain that each requisition is approved as to​ price, quantity, and quality by an authorized employee.
3.
establish the agreement of the​ vendor’s invoice with the receiving report and purchase order.
4.
omit information about the quantity ordered on the copy of the purchase order forwarded to the receiving department prior to receipt of goods.

Answer 6

3.

Question 7

​Designs, Inc. is a small manufacturer of​ women’s casual-wear​ jewellery, including​ bracelets, necklaces,​ earrings, and other moderately priced accessory items. Most of its products are made from​ silver, various​ low-cost stones,​ beads, and other decorative jewellery pieces. Designs is not involved in the manufacturing of​ high-end jewellery​ items, such as those made of gold and semiprecious or precious stones.
Personnel responsible for purchasing raw material jewellery items for Designs would like to place orders directly with suppliers who offer their products for sale through websites. Most suppliers provide pictures of all jewellery components on their​ websites, along with pricing and other​ sales-term information. Customers who have valid business licenses are able to purchase the products at​ wholesale, rather than retail prices. Customers can place orders online and pay for those goods immediately by using a valid credit card. Purchases made by credit card are shipped by the suppliers after the credit approval is received from the credit card​ agency, which usually occurs the same day. Customers can also place orders online with payment being later made by cheque.​ However, in that​ event, purchases are not shipped until the cheque is received and cashed by the supplier. Some of the suppliers allow a​ 30-day full-payment refund​ policy, whereas other suppliers accept returns but only grant credit toward future purchases from that supplier.

1. Identify advantages for Designs if management allows purchasing personnel to order goods online through supplier websites:
   a. Faster delivery of purchases
   b. Increased product selection
   c. Improve product quality
   d. Improve supplier reliability
   e. More product info
2. Identify potential risks associated with ​Designs’s purchase of jewellery pieces through supplier websites.
   a. Decreased product selection.
   b. Inconsistent product quality.
   c. Less product info
   d. Privacy protection of Donnen credit cards (vendors will not adequately protect credit card information).
   e. Slower delivery of purchases
   f. Uncertainty of supplier reliability
   g. Unauthorized purchases using Donnen credit cards.
3. Describe advantages of allowing purchasing agents to purchase products online using a Designs credit card.
   a. Faster delivery of purchases than if purchased by cheque.
   b. Increased privacy protection (vendors will adequately protect credit card information).
   c. Improved security over purchases by cheque.
   d. Improved supplier reliability
4. Describe advantages of allowing purchasing agents to purchase products online with payment made only by cheque. ​
   a. Faster delivery of purchases than if purchased by credit card.
   b. Increased privacy protection (of credit card information).
   c. Improved security over purchases by credit card.
   d. Improved supplier reliability

Answer 7

1. a, b, e
2. b, d, f, g
3. a
4. b, c

Question 8

In testing the​ cut-off of accounts payable at the balance sheet​ date, explain why it is important that auditors coordinate their tests with the physical observation of inventory.
A.
It is important that the​ cut-off of accounts payable be coordinated with that of the physical inventory to determine that they are established at different points in time. If these​ cut-offs are the​ same, goods may be counted in the physical inventory more than once and the liability in accounts payable would be duplicated as well. Such a situation would result in an overstatement of accounts payable and cost of goods sold.
B.
It is important that the​ cut-off of accounts payable be coordinated with that of the physical inventory to determine that they are established at the same point in time. If these​ cut-offs are not​ consistent, goods may be counted in the physical inventory for which no liability in accounts payable has been​ recorded, or vice versa. Such a situation would result in an understatement of accounts payable and cost of goods sold or an overstatement of these two​ accounts, respectively.
C.
It is important that the​ cut-off of accounts payable be coordinated with that of the physical inventory to maximize the efficiency of the audit and keep audit fees to a minimum.
D.
It is important that the​ cut-off of accounts payable be coordinated with that of the physical inventory to ensure that all inventory in storage is priced correctly.

Answer 8

B

Question 9

What can the auditor do during the physical inventory to enhance the likelihood of an accurate​ cut-off?
A.
During the physical​ inventory, the auditor should gather​ cut-off information​ (such as the last several receiving reports and shipping​ documents) to assist in the determination that an accurate​ cut-off was established.
B.
During the physical​ inventory, the auditor should document the staff that was on hand for the physical inventory to assist in the determination that an accurate​ cut-off was established.
C.
During the physical​ inventory, the auditor should gather a current price list to assist in the determination that an accurate​ cut-off was established.
D.
During the physical​ inventory, the auditor should photograph inventory that is being valued to assist in the determination that an accurate​ cut-off was established.

Answer 9

A

Question 10

Explain the relationship between tests of the acquisition and payment cycle and tests of inventory.
A.
The acquisition and payment cycle is related to the inventory accounts in that normally all purchases of​ long-term, depreciable assets are recorded through this cycle and are recorded as inventory.
B.
The acquisition and payment cycle is related to the inventory accounts in that normally all purchases of raw materials or merchandise are recorded through this cycle.
C.
The acquisition and payment cycle includes the recording of liabilities that are set up in the inventory account.
D.
The acquisition and payment cycle is related to the inventory accounts in that normally all purchases of raw materials or merchandise result in a reduction to inventory.

Answer 10

B

Question 11

Give specific examples of how tests of the acquisition and payment cycle and tests of inventory affect each other.
A.
If the tests of internal controls of the acquisition and payment cycle indicate that strong controls exist to ensure that the proper cost is used in valuing the inventory and that new purchases of inventory are recorded at the correct​ period, the correct amount and in the proper​ account, tests concerned with the accuracy and​ cut-off of the inventory accounts may be reduced from that level required if the controls were not adequate.
B.
It is never necessary for an auditor to perform both tests of internal controls of the acquisition and payment cycle and tests of inventory. The auditor can choose which test will be more efficient.
C.
If the tests of internal controls of the acquisition and payment cycle indicate that strong controls do not exist to ensure that the proper cost is used in valuing the inventory and that new purchases of inventory are recorded at the correct​ period, the correct amount and in the proper​ account, tests concerned with the accuracy and​ cut-off of the inventory accounts are not necessary.
D.
The auditor must always perform full tests of internal controls of the acquisition and payment cycle and tests of inventory. The results of one test have no bearing on the extent of the other test.

Answer 11

A

Question 12

You were in the final stages of your audit of the financial statements of Ozine Corporation for the year ended December​ 31, 2018, when the​ corporation’s president came to talk to you. He believes that there is no point to your examining the year 2019 acquisitions data files and testing data in support of 2019 entries. He stated that​ (1) bills pertaining to 2018 that were received too late to be included in the December acquisitions data files were recorded by the corporation as of the yearend by journal​ entry, (2) the internal auditor made tests after the​ year-end, and​ (3) he would furnish you with a letter confirming that there were no unrecorded liabilities.

1. Should a public​ accountant’s test for unrecorded liabilities be affected by the fact that the client made a journal entry to record 2018 bills that were received​ late? Explain.
   The fact that the client made a journal entry to record​ vendors’ invoices that were received late (1)________ the public​ accountant’s test for unrecorded liabilities. It (2)____ need for a further​ adjustment, (3)_____.
   Clients (4)____ adjustments to their books so that the public accountant (5)____. If the client has not journalized late​ invoices, the public accountant (6)_____ in his or her testing to substantiate what will be recorded as an adjusting entry. In this​ examination, (7)_______ test entries in the 2019 data files (8)__ that all items that were applicable to 2018 have been included in the journal entry recorded by the client.

(1): should simplify
will have no effect on
will complicate
(2): will eliminate the
may reduce the possibility of a
will increase the
will have no effect on the
(3): therefore, the public accountant’s test is not required.
but the public accountant’s test is nevertheless required.
(4): should never make
normally are expected to make necessary
(5): may examine financial statements that the client
believes are complete and correct.
can examine the financial statements as they exist in their true form.
(6): is compelled
is not required
(7): the public accountant should
it is not necessary for the public accountant to
(8): to be sure
because it is certain

Answer 12

(1) : should simplify
(2) : may reduce the possibility of a
(3) : but the public accountant’s test is nevertheless required.
(4) : normally are expected to make necessary
(5) : may examine financial statements that the client believes are complete and correct.
(6) : is compelled
(7) : the public accountant should
(8) : to be sure

Question 13

Distinguish between a​ vendor’s invoice and a​ vendor’s statement.
A​ vendor’s invoice (1)____. A​ vendor’s statement (2)___.

(1), (2): contains the individual open items and the ending balance due in the account
is a document used to order goods and services from vendors.
states the amount of goods shipped, the price, and other details. It is the vendor’s bill

Answer 13

(1) : states the amount of goods shipped, the price, and other details. It is the vendor’s bill
(2) : contains the individual open items and the ending balance due in the account

Question 14

Which document should ideally be used as evidence in auditing acquisition​ transactions? Why?
​Ideally, the(1)__should be used as evidence in auditing acquisition transactions. A (2)__ is not as meaningful as (3)_____ to verify individual transactions because (4)_ and not (5)_____.
(1): vendor’s invoice
vendor’s statement
(2): vendor’s invoice
vendor’s statement
(3): an invoice
a statemen
(4): an invoice includes the details making up the shipment
a statement includes only the total amount of the transactions
(5): the details making up the shipment
the total amount of the transactions

Answer 14

(1) : vendor’s invoice
(2) : vendor’s statement
(3) : an invoice
(4) : a statement includes only the total amount of the transactions
(5) : the details making up the shipment

Question 15

Which document should ideally be used for verifying accounts payable​ balances? Why?
The (1)___ can be used to verify the correct balance in accounts payable for an individual vendor. The (2)___ contains (3)_____ required to reconcile the accounts payable listings and determine the propriety of the balances shown for individual vendors.

(1): vendor’s invoice
vendor’s statement
(2): invoice
statement
(3): the amount of goods shipped, the price, and other details
the ending balance and the individual transactions

Answer 15

(1) : vendor’s statement
(2) : statement
(3) : the ending balance and the individual transactions

Question 16

Explain why it is common for auditors to send confirmation requests to vendors with​ “zero balances” on the​ client’s accounts payable listing but uncommon to follow the same approach in verifying accounts receivable.
In verifying accounts​ payable, the auditor assumes that the client is more likely to (1)___ accounts​ payable, and therefore concentrates on the vendors (2)_____at the confirmation date.
In verifying accounts​ receivable, the auditor assumes that the client is more likely to (3)___ account balances​ and, therefore concentrates more on the (4)____.

(1): overstate
understate
(2):with larger dollar balances
with whom the client deals actively, especially if that vendor’s balance appears to be lower than normal
(3): overstate
understate
(4): clients with whom the client deals actively, especially if that vendor’s balance appears lower than normal
larger dollar balances and is not as concerned with “zero balances.”

Answer 16

(1) : understate
(2) : with whom the client deals actively, especially if that vendor’s balance appears to be lower than normal
(3) ; overstate
(4) :larger dollar balances and is not as concerned with “zero balances.”

Question 17

List and briefly explain the purpose of all audit procedures that might reasonably be applied by an auditor to determine that all capital asset retirements have been recorded in the books.
A.
Make inquiries of management and production personnel about the disposal of assets.
B.
Review transactions near the balance sheet end date to ensure proper recording of assets have been made in the accounting system.
C.
Review whether newly acquired assets replace existing assets and inquire as to whether the old asset has been removed from the books.
D.
Analyze gains on the disposal of assets and miscellaneous income for receipts from the disposal of assets. Compare these to capital assets to see whether the asset has been removed from the books.
E.
Compare the list of assets from the fixed asset master file to the​ property, plant, and equipment accounts at year end.
F.
Examine​ vendors’ invoices of closely related​ accounts, such as repairs and​ maintenance, to uncover items that should be recorded as capital assets.
G.
Compare depreciation expense divided by gross equipment cost with previous​ years’ amounts to ensure no misstatement exists in the capital assets account.
H.
Review planned modification and changes in product​ lines, taxes, or insurance coverage for indications of deletions of equipment.

Answer 17

A, C, D, H

Question 18

In auditing amortization​ expense, what assertions should the auditor keep in​ mind? Explain how each can be verified.
A.
When auditing amortization​ expense, the auditor should consider whether the client has adequate physical controls over assets and whether the assets are being booked according to appropriate accounting standards. To​ verify, the auditor should obtain the fixed asset master file and review the calculation for total net​ assets, and review the​ client’s disposal policy.
B.
Two considerations when auditing amortization expense are whether the client is following a consistent amortization policy from period to period and verifying the accuracy of the​ client’s calculations. To​ verify, the auditor must test the calculation of the amortization rate for the year times the unamortized fixed​ assets, and check the accuracy of the amortization calculation.
C.
When auditing amortization​ expense, the auditor should consider the acquisition invoices of assets and what assets are retired. To​ verify, the auditor should obtain each invoice and compare it against the balance sheet​ accounts, and check the accuracy of the net assets at year end.
D.
Two considerations when auditing amortization expense are whether the client is improperly booking repairs to the​ property, plant, and equipment accounts and if the books are undervaluing total assets because of this improper booking. To​ verify, the auditor should foot the fixed asset master file and reconcile it to the general​ ledger, and they should tie total amortization by each property asset class.

Answer 18

B

Question 19

Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by an internal control that provides for which of the​ following?
1.
Authorization by the board of directors of significant equipment acquisitions
2.
Independent verification of invoices for disbursements recorded as equipment acquisitions
3.
Investigations of variances within a formal budgeting system
4.
Segregation of duties of employees in the accounts payable department

Answer 19

3

Question 20

Which of the following analytical procedure results might suggest that certain repairs and maintenance expenses have been inappropriately​ capitalized?
1.
The balance in the repairs and maintenance expense account is noticeably lower than amounts recorded in the past several years.
2.
The balance in the gross equipment account has decreased this year compared to the prior year.
3.
The ratio of amortization expense divided by gross equipment is higher in the current year compared to prior years.
4.
The ratio of additions to equipment divided by the beginning balance in the equipment account is significantly lower than the same ratio from the prior three years.

Answer 20

1