Chapter 18

Question 1

The classes of transactions in the acquisition and payment cycle include acquisition of:

a. goods.
b. goods and services.
c. goods and services, and cash disbursements.
d. goods and services, cash disbursements, and purchase returns and allowances.

Answer 1

d. goods and services, cash disbursements, and purchase returns and allowances.

Question 2

The overall objective in the audit of the acquisition and payment cycle is:

a. to ensure the reliability of the affected accounts.
b. to ensure the accuracy of the affected accounts.
c. to evaluate whether the affected accounts are fairly stated in accordance with GAAP.
d. to evaluate whether fraudulent payments were made.

Answer 2

c. to evaluate whether the affected accounts are fairly stated in accordance with GAAP.

Question 3

The audit of the acquisition and payment cycle often takes ____ time to audit than other cycles.

a. less
b. about the same
c. more
d. no less

Answer 3

c. more

Question 4

What typically initiates the acquisitions and payment cycle?

a. Issuance of a purchase requisition or request for purchase of goods/services.
b. Issuance of payment to vendor.
c. Approval of a new vendor.
d. Purchase requisition.

Answer 4

a. Issuance of a purchase requisition or request for purchase of goods/services.

Question 5

What typically ends the acquisitions and payment cycle?

a. Issuance of a purchase requisition or request for purchase of goods/services.
b. Issuance of a payment to a vendor.
c. Approval of a new vendor.
d. Purchase requisition.

Answer 5

b. Issuance of a payment to a vendor.

Question 6

The receipt of goods and services in the normal course of business represents the date clients normally recognize:

a. income.
b. the liability.
c. warranty assets.
d. expenses.

Answer 6

b. the liability.

Question 7

Which of the following accounts is not included in the acquisitions class of transactions?

a. Inventory
b. Prepaid expenses.
c. Purchase discounts.
d. Accounts payable.

Answer 7

c. Purchase discounts.

Question 8

A document indicating a reduction in the amount owed to a vendor because of returned goods is:
a. debit memo.
b credit memo.
c. a receiving room report. d. a shipping room report.

Answer 8

a. debit memo.

Question 9

A document used by organizations to establish a formal means of recording and controlling acquisitions which usually contains a package of documents about the acquisition is the:

a. voucher
b. purchase order.
c. receiving report.
d. purchase requisition.

Answer 9

a. voucher

Question 10

The accounts payable account includes obligations for the acquisition of:

a. raw materials.
b. equipment.
c. utilities.
d. all three of the above.

Answer 10

d. all three of the above.

Question 11

Comparing expenses to prior years is an effective analytical procedure for accounts payable because expenses from year to year are:

a. erratic.
b. variable.
c. dynamic.
d. relatively stable.

Answer 11

d. relatively stable.

Question 12

The overall objective in the audit of accounts payable is to determine whether accounts payable:

a. is fairly stated and properly disclosed.
b. is overstated.
c. is understated.
d. is accurately stated.

Answer 12

a. is fairly stated and properly disclosed.

Question 13

At what point do most companies recognize liabilities in the acquisition and payment cycle?

a. The issuance of a purchase order.
b. Receipt of acknowledgement of order by vendor.
c. Receipt of goods or services.
d. The receipt of a vendor statement.

Answer 13

c. Receipt of goods or services.

Question 14

The computer-generated file which records acquisitions, disbursements and allowances for each vendor is the

a. Accounts payable master file
b. Cash disbursements file.
c. Acquisitions transaction file.
d. Purchase approval file.

Answer 14

a. Accounts payable master file

Question 15

The is a computer-generated file that includes all acquisition transactions during a given period is the

a. Accounts payable file
b. Cash disbursements file. c. Acquisitions transaction file.
d. Purchase approval file.

Answer 15

c. Acquisitions transaction file.

Question 16

The major balance sheet account in the acquisition and payment cycle is:

a. Notes payable.
b. Accruals payable.
c. Accounts payable.
d. Accrued liabilities.

Answer 16

c. Accounts payable.

Question 17

Which of the following business functions is not considered to be part of the acquisitions class of transactions?

a. Processing purchase orders.
b. Recognizing liabilities.
c. Receiving goods and services.
d. Processing cash disbursements.

Answer 17

d. Processing cash disbursements.

Question 18

It usually takes more time to audit the acquisition and payment cycle than other cycles because:

a. there is a greater possibility of fraud in these transactions.
b. internal controls in this area are usually the weakest.
c. of the large number of accounts affected.
d. there is a greater likelihood of lawsuits against the CPA relating to these accounts.

Answer 18

c. of the large number of accounts affected.

Question 19

A written purchase order is a legal document that is:

a. an offer to buy.
b. not enforceable if it is not in writing.
c. a binding agreement between purchaser and vendor. d. an acceptance of a vendor’s catalog offer to sell.

Answer 19

a. an offer to buy.

Question 20

For good internal control, the purchasing department should not be responsible for:

a. finding the lowest cost vendor.
b. reviewing vendors’ catalog descriptions and prices for standardized items.
c. designing the purchase order form.
d. authorizing the acquisition of goods.

Answer 20

d. authorizing the acquisition of goods.

Question 21

The accounts payable department usually has responsibility for verifying the propriety of acquisitions by comparing the details on the:

a. vendor’s invoice and the receiving report.
b. vendor’s invoice and the purchase requisition.
c. purchase order, receiving report, and vendor’s invoice.
d. purchase requisition, purchase order, and receiving report.

Answer 21

c. purchase order, receiving report, and vendor’s invoice.

Question 22

Tests of controls for the acquisition and payment cycle are usually divided into:

a. Tests of acquisitions and classification.
b. Tests of authorization and acquisition.
c. tests of authorization and disbursement.
d. tests of acquisitions and disbursements.

Answer 22

d. tests of acquisitions and disbursements.

Question 23

Many companies do not maintain an accounts payable master file by vendor. These companies pay on the basis of:

a. vendors’ monthly statements.
b. individual vendors’ invoices.
c. the accounts payable account in the general ledger.
d. dunning letters.

Answer 23

b. individual vendors’ invoices.

Question 24

An important control in the accounts payable and IT departments is to ensure that those personnel who record acquisitions do not have access to:

a. vendors’ price lists.
b. the accounts payable master file.
c. lists of vendors’ names and addresses.
d. cash, marketable securities, and other easily convertible assets.

Answer 24

d. cash, marketable securities, and other easily convertible assets.

Question 25

Which of the following is not a key control in the acquisition and payment cycle?

a. Authorization of purchases.
b. Authorization of credit.
c. Timely recording and independent review of transactions. d. Authorization of payments.

Answer 25

b. Authorization of credit.

Question 26

Proper authorization for acquisition is essential because it:

a. ensures that goods/services are used efficiently by company employees.
b. ensures that goods/services were purchased from approved vendors.
c. ensures that goods/services are for authorized company purposes.
d. ensures that goods/services were purchased at the lowest possible price.

Answer 26

c. ensures that goods/services are for authorized company purposes.

Question 27

Which department should initiate a report when goods arrive from a vendor?

a. Manufacturing
b. Receiving
c. Accounting
d. Treasury

Answer 27

b. Receiving

Question 28

After a purchase requisition is approved, a _________ must be initiated to purchase the goods or services.

a. purchase order
b. vendor order
c. call order
d. vendor invoice

Answer 28

a. purchase order

Question 29

When a client uses perpetual inventory records, the tests of details of balances for inventory can be significantly reduced if the auditor believes the records are accurate. The controls over the acquisitions included in the records are normally tested as a part of the:

a. tests of controls.
b. tests of controls and tests of transactions.
c. tests of details of balances.
d. analytical procedures and tests of controls.

Answer 29

b. tests of controls and tests of transactions.

Question 30

Which of the following acquisition transactions is likely to be covered by a general authorization by company policy?
(Purchase of office equipment maintenance services / Purchase of office buildings for company use)
a. Yes Yes
b. No No
c. Yes No
d. No Yes

Answer 30

c. Yes No

Question 31

The auditor’s internal control objective to determine that “recorded acquisitions are for goods and services received” satisfies the audit objective of:

a. accuracy.
b. occurrence.
c. authorization.
d. completeness.

Answer 31

b. occurrence.

Question 32

Failure to record the acquisition of goods is a violation of which audit objective?
a. Accuracy
b, Occurrence
c. Authorization 
d. Completeness

Answer 32

d. Completeness

Question 33

Once the auditor has decided on the specific procedures, the acquisitions tests and the cash disbursements tests are typically performed:

a. concurrently.
b. sequentially.
c. independently.
d. separately.

Answer 33

a. concurrently.

Question 34

The internal control that requires that “checks are prenumbered and accounted for” satisfies the objective of:

a. accuracy.
b. existence.
c. completeness.
d. posting and summarization.

Answer 34

c. completeness.

Question 35

The most important controls over cash disbursements include all but which of the following?

a. Signing of checks by an authorized employee.
b. Random examination of the supporting documents by the authorized check signer before signing checks.
c. Separation of responsibilities for signing the checks and performing the accounts payable function.
d. Prenumbering of checks and investigations of missing checks.

Answer 35

b. Random examination of the supporting documents by the authorized check signer before signing checks.

Question 36

Because of the importance of tests of controls and substantive tests of transactions for acquisitions and cash disbursements, it is common in this audit area to use:

a. block sampling.
b. variables sampling.
c. attributes sampling.
d. probability proportional to size sampling.

Answer 36

c. attributes sampling.

Question 37

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 will be:

a. low.
b. high.
c. average.
d. very high.

Answer 37

a. low.

Question 38

The main focus taken by the auditor in verifying liability balances is on the discovery of:

a. understated liabilities.
b. overstated liabilities.
c. understated or omitted liabilities.
d. overstated or extraneous liabilities.

Answer 38

c. understated or omitted liabilities.

Question 39

Which of the following tests of controls is least useful in assessing the transaction-related audit objective related to occurrence?

a. Examine documents in voucher package for occurrence.
b. Examine supporting documents for indication of approval.
c. Account for sequence of vouchers.
d. Attempt to input transactions with valid and invalid vendors.

Answer 39

c. Account for sequence of vouchers.

Question 40

The test of details of balances procedure to “trace from account payable list to vendors’ invoices and statements” satisfies the objective of:

a. occurrence.
b. completeness.
c. classification.
d. detail tie-in.

Answer 40

a. occurrence.

Question 41

By tracing receiving reports issued at and before year-end to vendors’ invoices and making sure they are included in accounts payable, the auditor is testing for:

a. theft of merchandise by employees.
b. unrecorded obligations.
c. lapping.
d. kiting.

Answer 41

b. unrecorded obligations.

Question 42

The extent of a search for unrecorded liabilities largely depends on:

a. materiality and inherent risk.
b. materiality and control risk.
c. materiality only.
d. inherent risk only.

Answer 42

b. materiality and control risk.

Question 43

A failure to record acquisitions of goods most likely will affect all but which of the following?

a. Accounts payable.
b. Net income.
c. Retained earnings.
d. Cash.

Answer 43

d. Cash.

Question 44

When the client’s physical inventory occurs before the last day of the year, it is still necessary to perform an accounts payable cutoff at the time of the count. In addition, the auditor must verify whether all acquisitions taking place between the count and the end of the year were added to:

a. the physical inventory.
b. Accounts Payable.
c. Accounts Payable and Cost of Goods Sold.
d. the physical inventory and Accounts Payable.

Answer 44

d. the physical inventory and Accounts Payable.

Question 45

When the auditor uses sampling to examine transactions in the acquisition and payment cycle, the tolerable exception rate is typically set at a(n) _______ level.

a. low.
b. medium.
c. high.
d. indeterminate.

Answer 45

a. low.

Question 46

Which of the following is most reliable for verifying the correct balance of accounts payable?

a. Vendors’ invoices.
b. Vendors’ statements.
c. Confirmations.
d. Bills of lading.

Answer 46

c. Confirmations.

Question 47

Vendors’ statements and vendors’ invoices are both relatively reliable evidence because they:

a. come directly to the auditor without being in client’s possession.
b. originate from a third party.
c. validate the effectiveness of the control system.
d. are compared to and reconciled with sales invoices.

Answer 47

b. originate from a third party.

Question 48

For effective internal control, the accounts payable department should compare the information on each vendor’s invoice with the:

a. receiving report and the voucher.
b. vendor’s packing slip and the voucher.
c. receiving report and the purchase order.
d. vendor’s packing slip and the purchase order.

Answer 48

c. receiving report and the purchase order.

Question 49

Which of the following is the most effective control procedure to detect vouchers that were prepared for the payment of goods that were not received?

a. Count goods upon receipt in storeroom.
b. Match purchase order, receiving report, and vendor’s invoice for each voucher in accounts payable department.
c. Compare goods received with goods requisitioned in receiving department. d. Verify vouchers for accuracy and approval in internal audit department.

Answer 49

b. Match purchase order, receiving report, and vendor’s invoice for each voucher in accounts payable department.

Question 50

Cutoff information for inventory acquisitions should be obtained during:

a. the interim period prior to year-end.
b. the interim period immediately following year-end.
c. the physical observation of inventory.
d. either the interim period prior to or immediately following year-end..

Answer 50

c. the physical observation of inventory.

Question 51

Assume that during cutoff testing you determined that the last receiving report number for inventory was 24986. Which of the following receiving report numbers would you not expect to be included in inventory and accounts payable at year-end?

a. 24980
b. 19773
c. 23019
d. 24990

Answer 51

d. 24990

Question 52

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

Answer 52

b. there is likely to be other reliable external evidence available to support the balances.

Question 53

Under which of the following circumstances would it be advisable for the auditor to confirm accounts payable with creditors?
a. Internal accounting control over accounts payable is adequate, and there is sufficient
evidence on hand to minimize the risk of a material misstatement.
b. Confirmation response is expected to be favorable, and accounts payable balances are of
immaterial amounts.
c. Creditor statements are not available and internal control over payables is unsatisfactory.
d. The majority of accounts payable balances are with associated companies.

Answer 53

c. Creditor statements are not available and internal control over payables is unsatisfactory.

Question 54

Internal control is strengthened when the quantity of merchandise ordered is omitted from the copy of the purchase order sent to the:

a. department that initiated the requisition.
b. receiving department.
c. purchasing agent.
d. accounts payable department.

Answer 54

b. receiving department.

Question 55

Which of the following should sign checks under conditions of effective internal control?

a. Treasurer
b. Purchasing agent.
c. Accounts payable clerk.
d. Person preparing the checks.

Answer 55

a. Treasurer

Question 56

Which of the following is an effective internal accounting control over cash payments?

a. Signed checks should be mailed under the supervision of the check signer.
b. Spoiled checks that have been voided should be disposed of immediately.
c. Checks should be prepared only by persons responsible for cash receipts and disbursements.
d. A check-signing machine with two signatures should be used.

Answer 56

a. Signed checks should be mailed under the supervision of the check signer.

Question 57

When assets are being verified, auditors focus much of their attention on making sure that the accounts are not overstated. Alternatively, auditors focus their efforts on understatement when auditing liabilities. What is the primary reason for this difference in focus?

a. Auditors’ legal liability.
b. GAAP.
c. GAAS requirements.
d. All of the above.

Answer 57

a. Auditors’ legal liability.

Question 58

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. existing acquisitions are recorded.
c. acquisitions are correctly classified.
d. recorded acquisitions are for goods and services received.

Answer 58

d. recorded acquisitions are for goods and services received.

Question 59

A company failed to record an acquisition of merchandise and its related liability, but the merchandise was included in ending inventory. The effect on the financial statements was to:

a. understate both assets and liabilities
b. understate net income and owners’ equity.
c. understate assets and owners’ equity.
d. understate liabilities, and overstate both net income and owners’ equity.

Answer 59

d. understate liabilities, and overstate both net income and owners’ equity.

Question 60

The test of transactions which requires one to “reconcile recorded cash disbursements with the cash disbursements on the bank statement” satisfies the objective of:

a. occurrence.
b. completeness.
c. accuracy.
d. posting and summarization.

Answer 60

b. completeness.

Question 61

Which of the following statements is false?

a. The ownership objective is an important part of verifying assets but not liabilities.
b. In auditing liabilities, the emphasis is on the search for understatements rather than overstatements.
c. Because of the emphasis on understatements in liability accounts, out-of-period liability tests are important for accounts payable.
d. The success of the auditor’s search for unrecorded liabilities is not dependent upon the materiality of the potential balance in the account.

Answer 61

d. The success of the auditor’s search for unrecorded liabilities is not dependent upon the materiality of the potential balance in the account.

Question 62

The purpose of the audit procedure to “examine underlying documentation for subsequent cash disbursements” is to:
a. uncover liabilities on the balance sheet which should not have been recorded until a subsequent period.
b. find the documentation relating to a cash disbursement.
c. uncover payments made in a subsequent accounting period for liabilities that existed at the
balance sheet date.
d. uncover cash disbursements recorded in a subsequent accounting period which should be
recorded in this period.

Answer 62

c. uncover payments made in a subsequent accounting period for liabilities that existed at the
balance sheet date.

Question 63

To test for cutoff errors which overstate liabilities, the auditor should trace, to vendors’ invoices, the receiving reports issued:

a. after year-end.
b. before year-end.
c. the last day of the fiscal year. d. both before and after year-end.

Answer 63

a. after year-end.

Question 64

In determining that the accounts payable cutoff is correct, it is essential that the cutoff tests be coordinated with the:

a. confirmation of payables.
b. tests on long-term liabilities.
c. observation of inventory.
d. cash count.

Answer 64

c. observation of inventory.

Question 65

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. is an understatement of net earnings.
b. is an overstatement of net earnings.
c. is an overstatement of working capital.
d. is an overstatement of owner’s equity.

Answer 65

a. is an understatement of net earnings.

Question 66

When an acquisition is on an FOB 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 in advance.

Answer 66

b. shipped prior to the balance sheet date.

Question 67

The auditor gets highly reliable evidence about individual transactions by examining:

a. vendors’ invoices.
b. vendors’ statements.
c. confirmations of accounts payable balances.
d. detailed inventory counting instructions.

Answer 67

a. vendors’ invoices.

Question 68

Which of the following documents is best for verifying the correct balance in accounts payable?

a. Bills of lading.
b. Confirmations.
c. Vendors’ invoices.
d. Vendors’ statements.

Answer 68

d. Vendors’ statements.

Question 69

When goods are received, the receiving clerk should match the goods with the:

a. purchase order and the requisition form.
b. vendor’s invoice and the receiving report.
c. vendor’s shipping document and the purchase order.
d. receiving report and the vendor’s shipping document.

Answer 69

c. vendor’s shipping document and the purchase order.

Question 70

For effective internal control purposes, the vouchers payable department generally should:
a. obliterate the quantity ordered on the receiving department copy of the purchase order.
b. stamp, perforate, or otherwise cancel supporting documentation after payment is mailed.
c. establish the agreement of the vendor’s invoice with the receiving report and purchase order
d. ascertain that each requisition is approved as to price, quantity, and quality by an
authorized employee.

Answer 70

c. establish the agreement of the vendor’s invoice with the receiving report and purchase order

Question 71

An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all:

a. merchandise received.
b. vendors’ invoices.
c. canceled checks.
d. receiving reports.

Answer 71

b. vendors’ invoices.

Question 72

Matching the supplier’s invoice, the purchase order, and the receiving report normally should be the responsibility of the:

a. warehouse receiving function.
b. purchasing function.
c. general accounting function.
d. treasury function.

Answer 72

c. general accounting function.

Question 73

A CPA 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. attachment of the receiving report to the disbursement report.
b. prenumbering of disbursement vouchers.
c. use of a limit or reasonableness test.
d. prenumbering of receiving reports.

Answer 73

a. attachment of the receiving report to the disbursement report.

Question 74

With respect to a small company’s system of purchasing supplies, an auditor’s primary concern should be to obtain satisfaction that supplies ordered and paid for have been:
a. requested by and approved by authorized individuals who have no incompatible duties.
b. used in the course of business and solely for business purposes during the year under audit.
c. received, counted, and checked to quantities and amounts on purchase orders and invoices.
d. properly recorded as assets and systematically amortized over the estimated useful life of
the supplies.

Answer 74

c. received, counted, and checked to quantities and amounts on purchase orders and invoices.