Chapter 13 - Acquisition and Payment Cycle

Question 1

1) The major balance sheet account in the acquisition and payment cycle is
A) accounts payable. B) purchases.
C) common stock. D) merchandise inventory.

Answer 1

A

Question 2

2) Which of the following areas are tested as part of the audit of the acquisition and payment cycle?
A) payment for raw materials, receipt of raw materials, shipment of goods to customers
B) processing vendor invoices, vendor master file changes, shipment of goods to customers
C) processing purchase orders, processing cash disbursements, receiving goods and services
D) processing of sales orders, production of goods for clients, and subsequent invoicing

Answer 2

C

Question 3

3) A document identifying the description, vendor, quantity, and related information for goods and services the
company intends to purchase is the
A) purchase requisition. B) purchases catalogue.
C) receiving report. D) purchase order.

Answer 3

D

Question 4

6) The proper recognition of accounts payable liabilities are crucial to ensure fair statement of the ending accounts
payable balance. What documents are required to support accounts payable adequately?
A) vendor invoices matched to receiving reports and authorized purchase documents
B) purchase requisition (authorized) matched with the purchase order to the vendor
C) bill of lading documents matched to the internal purchase requisition
D) receiving reports and bill of lading documents that indicate dates shipped

Answer 4

A

Question 5

4) The purchase order, usually in writing, is a legal document that is
A) an offer to buy.
B) not enforceable if it is not in writing.
C) an acceptance of a vendor’s catalogue offer to sell.
D) a non-binding agreement between client and vendor.

Answer 5

A

Question 6

5) When accounts payable and purchasing systems are highly automated, more detail is included in the
transaction files. This deeper level of detail is illustrated by including
A) sequentially numbered purchase requisitions and purchase orders (with matching numbers).
B) economic order quantities for each item that is held in inventory, including delivery times.
C) receiving report numbers that match the numbers on the vendor invoices for improved tracking.
D) quantities, prices, and item descriptions from each line of the vendor invoice.

Answer 6

D

Question 7

7) The point at which most companies first recognize the acquisition and related liability on their records is when
the
A) purchase order is completed. B) receiving report is completed.
C) purchase requisition is completed. D) vendor’s invoice is paid.

Answer 7

B

Question 8

8) What documentary evidence is appropriate for determining if recorded purchase transactions are valid and
prices on the vendors’ invoices are correct?
A) purchase orders and bid quotes
B) purchase requisitions and purchases orders
C) receiving report and purchase orders
D) purchase requisitions and accounts payable entries

Answer 8

C

Question 9

9) To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise
received is recorded. Which of the following is the population for this test?
A) receiving reports B) purchase orders C) customer invoices D) supplier invoices

Answer 9

A

Question 10

Which business functions are part of the acquisition and payment cycle?

Answer 10

Business functions that are part of the acquisition and payment cycle are:
1. Processing purchase orders.
2. Receiving goods and services.
3. Recognizing the liability in the books and records.
4. Processing and recording cash disbursements.

Question 11

12) The most common fraud in the acquisitions area is for the perpetrator to
A) change the optical characters at the bottom of a cheque to alter the account to be credited.
B) alter the cheque payment file before it is printed so that the payee name is changed.
C) issue payments to fictitious vendors and deposit the cheques to a fictitious account.
D) issue duplicate payments for invoices and then pocket the second cheque.

Answer 11

C

Question 12

13) Many companies have inventory that is easy to steal and is readily marketable. Which of the following controls
helps to prevent theft and misuse of inventory?
A) physical control of inventory from time of receipt until use
B) dual signatures required on all purchase orders over $10 000
C) proper access controls over the inventory master and transaction files
D) purchase requisitions are to be approved by the production manager

Answer 12

A

Question 13

14) One of the ways to prevent the use of fictitious vendors to steal company funds is to
A) reconcile the accounts payable trial balance to the general ledger.
B) establish controls to establish only approved vendors.
C) have adequate network access controls to prevent unauthorized access to transaction files.
D) ensure that accounts payable programs are available only in source code.

Answer 13

B

Question 14

One of the ways to prevent the use of fictitious vendors to steal company funds is by
A) having authorized personnel carefully scrutinize documentation supporting payments.
B) having software automatically check for duplicate invoice numbers before payment.
C) having adequate network access controls to prevent unauthorized access to transaction files.
D) ensuring that accounts payable programs are available only in source code.

Answer 14

A

Question 15

16) One form of accounts payable fraud occurs when the accounts payable clerk or another employee steals a
cheque made payable to a legitimate vendor. The purchaser’s information is then resubmitted for payment and
the second cheque sent to the vendor. How could such a theft be prevented?
A) Make sure that all payments are supported by valid documents.
B) Reconcile the transaction files to the accounts payable master file.
C) Cancel supporting documents to prevent their being re-used.
D) Have receiving reports authorized independently.

Answer 15

C

Question 16

17) To protect against theft of physical assets (such as computer equipment), the company should
A) have equipment engraved or otherwise permanently labelled and a subsidiary ledger maintained.
B) use strong access controls (such as login passwords) to prevent access.
C) assign computers to specific areas within the company.
D) assign computers to specific individuals at the company.

Answer 16

A

Question 17

18) Which of the following situations would indicate increased inherent risk in the accounts payable and
acquisition cycle?
A) significant related party transactions
B) good quality internal controls for cash handling
C) the use of packaged software for accounting (including accounts payable)
D) the use of clear, standard terms when negotiating vendor discounts

Answer 17

A

Question 17

22) To ensure that goods and services acquired are for authorized company purposes, and to help acquire only
needed items,
A) purchase requisitions should be approved and matched to purchase orders.
B) proper authorization for acquisitions and changes to the master file should take place.
C) account allocations of vendor invoices should be carefully checked.
D) receiving reports should be independently signed and reconciled to the purchase order.

Answer 17

B

Question 18

23) When automatic purchase orders are generated, to help make sure that goods are ordered for products that the
company still needs, the company should
A) have vendors automatically replenish the shelves.
B) have all purchase orders approved by the purchasing manager.
C) have receiving reports matched to the purchase order amounts.
D) ensure that re-order points are monitored.

Answer 18

D

Question 18

27) After the vendor master file data has been entered, to best improve internal controls the
A) transaction file detail should be matched to the vendor master file.
B) data entry should be independently verified.
C) vendor master file data should be matched to the accounts payable files.
D) accounting department should file the new vendor authorization form sequentially.

Answer 18

B

Question 19

24) Segregation of duties has an important role in providing for good quality internal controls. Which of the
following segregation of duties improve controls over the inventory and distribution cycle?
A) The accounting staff should not be responsible for the data entry of vendor invoice detail.
B) The inventory transaction processing systems should not be accessible to the receiving department.
C) The purchasing department should not be responsible for authorizing the acquisition of or receiving the
goods.
D) The purchasing department should not be responsible for updating the economic order quantity

Answer 19

C

Question 20

26) Before a new vendor is added into the vendor master file (or the purchasing master file), the company should
A) have the vendor detail matched against the invoice detail.
B) ask the purchasing manager to verify the authenticity of the vendor.
C) conduct a credit check on the new vendor.
D) have the accounting department enter the necessary detail about the vendor.

Answer 20

C

Question 21

25) An important control in the accounts payable and information systems departments is to require that those
personnel who record acquisitions do not have access to
A) the accounts payable master file. B) lists of vendors’ names and addresses.
C) vendors’ price lists. D) cash, marketable securities, and other assets.

Answer 21

D

Question 22

28) ZyCo has recently converted to a new online accounts payable system. To test that only authorized vendors
have been converted to the vendor master file (occurrence), the auditor would
A) conduct tests of programs to verify that programs in the new systems are functioning as designed.
B) conduct cutoff tests for receiving reports and vendor invoices.
C) on a test basis, agree vendor file details for each vendor from the new (online) system to the old (batch)
system.
D) on a test basis, agree vendor file details for each vendor from the old (batch) system to the new (online)
system.

Answer 22

C

Question 23

29) ZyCo has recently converted to a new online accounts payable system. To test that all vendor balances have
been converted to the vendor master file (completeness), the auditor would
A) on a test basis, agree vendor file details for each vendor from the new (online) system to the old (batch)
system.
B) conduct cutoff tests for receiving reports and vendor invoices.
C) conduct tests of programs to verify that programs in the new systems are functioning as designed.
D) on a test basis, agree vendor file details for each vendor from the old (batch) system to the new (online)
system.

Answer 23

D

Question 24

30) When processing and recording cash disbursements, it is important to have a method of cancelling the
supporting documents to prevent their reuse as support for another cheque at a later time. A common method is
to
A) move the documents to a permanent off-site facility such as a warehouse.
B) transfer possession of the documents to a bank vault such as a safety deposit box.
C) shred the documents so they can’t be reused.
D) write the cheque number and payment date on the supporting documents.

Answer 24

D

Question 25

31) Since the audit of accounts payable generally takes a considerable amount of audit time, effective and properly
tested internal controls can significantly reduce audit costs by reducing
A) tests of details of balances. B) confirmations.
C) analytical procedures. D) tests of controls.

Answer 25

A

Question 25

34) An auditor learns that his client has paid a vendor twice for the same shipment, once based upon the original
invoice and once based upon the monthly statement. A control procedure that should have prevented this
duplicate payment is
A) prenumbering of receiving reports.
B) prenumbering of disbursement vouchers.
C) attachment of the receiving report to the invoice only.
D) use of a limit or reasonableness test.

Answer 25

C

Question 26

Because of the importance of tests of controls for acquisitions and cash disbursements, it is common in this audit
area to use
A) variables sampling. B) attributes sampling.
C) block sampling. D) probability-proportional-to-size sampling.

Answer 26

B

Question 27

36) Because many of the types of errors and irregularities that may be found in the acquisition and payment cycle
represent a misstatement of earnings and are of significant concern to the auditor, the tolerable exception rate
selected by the auditor for attribute testing of this cycle will be
A) high. B) low. C) 15% or less. D) average.

Answer 27

B

Question 28

37) Internal controls that are likely to prevent the client from including as a business expense those transactions that
primarily benefit management or other employees rather than the entity being audited satisfy the control
objective that
A) acquisitions are correctly valued.
B) recorded acquisitions are for goods and services received.
C) acquisitions are correctly classified.
D) existing acquisitions are recorded.

Answer 28

B

Question 29

38) The internal control that requires “approval of acquisitions at the proper level” satisfies the objective of
A) accuracy. B) completeness.
C) occurrence. D) posting and summarization.

Answer 29

C

Question 30

39) The internal control that requires receiving reports to be prenumbered and accounted for satisfies the objective
of
A) classification. B) completeness. C) occurrence. D) accuracy.

Answer 30

B

Question 31

40) The control test that requires “the auditor to compare recorded transactions in the acquisitions journal with the
vendor’s invoice, receiving report, and other supporting documentation” satisfies the objective of
A) classification. B) accuracy. C) completeness. D) occurrence.

Answer 31

B

Question 32

41) The test of transactions that requires the recomputing of cash discounts satisfies the objective of
A) completeness. B) posting and summarization.
C) accuracy. D) occurrence.

Answer 32

C

Question 33

42) Which of the following controls help to ensure that the receipt of raw materials for inventory is recorded in the
correct period?
A) The transaction date entered must be the same as the system date.
B) Accounting staff record the date that goods are received in the accounting systems.
C) Vendor details are automatically retrieved from the vendor master file.
D) Receiving staff write down the date goods are received on the bill of lading.

Answer 33

A

Question 34

43) The statement that items on the accounts payable register must be supported by a completed voucher package
containing a services purchase order and evidence the service was provided is a specific example of which
control objective?
A) completeness B) validity
C) accuracy D) presentation and disclosure

Answer 34

B

Question 35

44) In assessing control risk for purchases, an auditor vouches a sample of entries in the accounts payable trial
balance to the supporting documents. Which account assertion(s) would this test of controls most likely
support?
A) completeness B) existence and occurrence
C) presentation and disclosure D) valuation and allocation

Answer 35

B

Question 36

45) The statement that all purchase orders must be supported by properly approved purchase requisitions is a
specific example of which general objective?
A) classification B) valuation C) authorization D) completeness

Answer 36

C

Question 37

45) The statement that all purchase orders must be supported by properly approved purchase requisitions is a
specific example of which general objective?
A) classification B) valuation C) authorization D) completeness

Answer 37

B

Question 38

49) The test of details of balances procedure to “inspect the accounts payable trial balance and master file for related
parties, notes, or other interest-bearing liabilities” satisfies the objective of
A) completeness. B) existence. C) classification. D) detail tie-in.

Answer 38

C

Question 39

50) Comparing expenses to prior years is an effective analytical procedure for accounts payable because expenses
from year to year are
A) variable. B) relatively stable. C) erratic. D) dynamic

Answer 39

B

Question 40

52) The main focus taken by the auditor in verifying liability balances is on the discovery of
A) understated or omitted liabilities. B) liabilities posted to the wrong account.
C) overstated liabilities. D) overstated or extraneous liabilities.

Answer 40

A

Question 40

51) The analytical procedure that requires the auditor to “inspect the list of accounts payable for unusual or
non-vendor payables” would have the best chance of discovering which possible error?
A) classification error for non-trade liabilities B) misstatement of accounts payable and expenses
C) unrecorded accounts or misstatements D) invalid accounts or misstatements

Answer 40

A

Question 41

53) In determining that the accounts payable cutoff is correct, it is essential that the cutoff tests be coordinated with
the
A) cash count. B) observation of inventory.
C) confirmation of accounts payable. D) tests on long-term liabilities

Answer 41

B

Question 42

54) The purpose of the audit procedure to “examine underlying documentation for subsequent cash disbursements”
is to
A) uncover liabilities on the balance sheet that should not have been recorded until a subsequent period.
B) uncover cash disbursements recorded in a subsequent accounting period that should be recorded in that
period.
C) find the documentation relating to a cash disbursement.
D) uncover payments made in a subsequent accounting period that represent liabilities at the balance sheet
date.

Answer 42

D

Question 43

57) When an acquisition is on an FOB (freight on board) origin basis, the inventory and related accounts payable
must be recorded in the current period if the goods were
A) received prior to the balance sheet date.
B) shipped prior to the balance sheet date.
C) both shipped and received prior to the balance sheet date.
D) paid for.

Answer 43

B

Question 44

56) An inventory acquisition is received late in the afternoon of December 31 after the physical inventory is
completed. If the acquisition is included in accounts payable and purchases, but excluded from inventory, the
result
A) does not affect earnings. B) is an overstatement of net earnings.
C) is an understatement of net earnings. D) is indeterminable from the information given.

Answer 44

C

Question 44

55) The purpose of the audit procedure to “trace receiving reports issued before year-end to related vendors’
invoices” is to determine that all
A) invoices have been paid.
B) merchandise received is included in accounts payable.
C) merchandise was received.
D) merchandise received is included in inventory.

Answer 44

B

Question 45

59) When verifying current-year additions to manufacturing equipment, the two major objectives for this part of
the audit are
A) disclosure and completeness. B) detail tie-in and cutoff.
C) accuracy and classification. D) rights and existence.

Answer 45

C

Question 45

Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because
A) correspondence with the audit client’s lawyer will reveal all legal action by vendors for nonpayment.
B) there is likely to be other reliable external evidence available to support the balances.
C) this is a duplication of cutoff tests.
D) accounts payable balances at the balance sheet date may not be paid before the audit is completed.

Answer 45

B

Question 45

60) The tests of details of balances procedure for manufacturing equipment that requires the auditor to examine
vendors’ invoices of closely related accounts (such as repairs and maintenance) to uncover items that should be
manufacturing equipment would satisfy the audit objective of
A) existence. B) accuracy. C) classification. D) detail tie-in.

Answer 45

C

Question 46

61) Ordinarily, it is unnecessary to test the valuation of capital assets recorded in prior periods because
A) the related amortization calculations for the current period are more important.
B) the emphasis of the audit is on the income statement items, not the balance sheet items.
C) it will not affect the current valuations.
D) they were verified in previous audits.

Answer 46

D

Question 47

62) A normal audit procedure is to analyze the current year’s repairs and maintenance accounts to provide evidence
in support of the audit proposition that
A) capital expenditures have been properly authorized.
B) expenditures for capital assets have been capitalized.
C) expenditures for capital assets have been recorded in the proper period.
D) non-capitalizable expenditures have been properly expensed.

Answer 47

B

Question 48

63) The most important objectives for amortization expense are valuation and
A) understandability. B) classification. C) accuracy. D) cutoff.

Answer 48

C

Question 49

71) There are a number of reasons for auditing property, plant, and equipment differently than current asset
accounts. Which of the following statements is true?
A) The amount of any given acquisition of property, plant, and equipment is often material.
B) There are usually more acquisitions of manufacturing equipment than acquisitions of current assets each
year.
C) Misallocations between property, plant, and equipment, and repairs and maintenance are likely to be
immaterial.
D) Current assets are likely to be kept and maintained in the accounting records for several years.

Answer 49

A

Question 50

72) When performing test of details of transactions for current year acquisitions of equipment, the auditor is most
concerned about which of the following audit objectives?
A) occurrence and accuracy objectives B) existence and completeness objectives
C) accuracy and classification objectives D) valuation and accuracy objectives

Answer 50

C

Question 51

73) When performing test of details of transactions for current year disposals of equipment, the auditor is most
concerned about which of the following audit objectives?
A) occurrence and accuracy objectives B) existence and completeness objectives
C) accuracy and classification objectives D) valuation and accuracy objectives

Answer 51

A

Question 52

74) When performing test of details of transactions for amortization expense, the auditor is most concerned about
which of the following audit objectives?
A) occurrence and accuracy objectives B) existence and completeness objectives
C) accuracy and classification objectives D) valuation and accuracy objectives

Answer 52

D

Question 53

75) When assessing amortization policy, there are several factors the auditor must consider. Which of the following
is not relevant in assessing amortization policy?
A) the fair market value of the assets B) the estimated salvage/residual value
C) the method of amortization D) the remaining useful life of assets

Answer 53

A

Question 54

76) When performing test of details of balances for property, plant, and equipment, the auditor is most concerned
about which of the following audit objectives?
A) cut-off and accuracy objectives B) accuracy and classification objectives
C) occurrence and accuracy objectives D) existence and valuation objectives

Answer 54

D