chapter 8 Flashcards
Audit evidence in management reports and data files
- open purchase orders
- unmatched receiving reports
- unmatched vendor invoices
- AP (vouchers) payable trial balance
- purchases journal
- fixed asset reports
How does an auditor generally test for unrecorded liabilities?
- inquire of client about procedures for identifying and recording liabilities
- scan open purchase order file
- examine all unmatched vendor statements or invoices
- examine all unmatched receiving reports occurring near year-end
- confirm AP with normal suppliers (especially those with 0 balances)
- review cash disbursements occurring after year-end.
how does an auditor generally test prepaid expenses?
- agree balances to PY workpapers
- verify payments
- examine underlying agreements
- recalculate amounts
- search for unrecorded accruals
- analytical procedures
other accounts in the acquisition and expenditure cycle besides AP
- prepaid expenses
- accrued liabilities
- expenses
- inventory
- PPE
An audit team most likely would assess control risk at the maximum if the payroll department supervisor is responsible for…
a. Comparing payroll registers with the original batch transmittal data.
b. Examining authorization forms for new employees.
c. Hiring all subordinate payroll department employees.
d. Authorizing payroll rate changes for all employees.
d. Authorizing payroll rate changes for all employees.
Which of the following accounts does not appear in the acquisition and expenditure cycle?
a. Sales returns
b. Purchase returns
c. Cash
d. Prepaid insurance
a. Sales returns
Which of the following is the best audit procedure for determining the existence of unrecorded liabilities?
a. Examine unusual relationships between monthly accounts payable and recorded purchases.
b. Examine a sample of invoices a few days prior to and subsequent to the year-end to ascertain whether they have been properly recorded.
c. Examine a sample of cash disbursements in the period subsequent to year-end.
d. Examine confirmation requests returned by creditors whose accounts are on a subsidiary trial balance of accounts payable.
c. Examine a sample of cash disbursements in the period subsequent to year-end.
Which of the following procedures is least likely to be performed before the balance-sheet date?
a. Review of internal control over cash disbursements.
b. Confirmation of receivables.
c. Observation of inventory.
d. Search for unrecorded liabilities.
d. Search for unrecorded liabilities.
When auditing account balances of liabilities, auditors are most concerned with management’s assertion about…
a. Existence.
b. Completeness.
c. Rights and obligations.
d. Valuation and allocation.
b. Completeness.
In a test of controls, auditors may trace receiving reports to vouchers recorded in the voucher register. This is a test for…
a. Presentation Disclosure
b. Completeness.
c. Occurrence.
d. Valuation and allocation.
b. Completeness.
The Search for Unrecorded Liabilities includes all of the following except:
a. Scan the open purchase order file
b. Confirm AP with normal regular suppliers with $0 balances
c. Select cash disbursement subsequent to fiscal year end and determine proper exclusion/inclusion
d. Examine the bank statement from December and vouch cash payments
d. Examine the bank statement from December and vouch cash payments
A common procedure when examining prepaid expenses is to vouch additions to supporting contract evidence.
True or False
True
Other than the search for unrecorded liabilities, important procedures when testing the completeness of liabilities includes all EXECPT the below:
a. Examine bank cash confirmations
b. Analyze Cash Collections
c. Review the attorney letter
d. Read Board of Director Minutes
b. Analyze Cash Collections
- A company employs three accounts payable clerks and one treasurer. Their responsibilities are as follows:
Clerk 1: Reviews vendor invoices for proper signature approval
Clerk 2: Enters vendor invoices into the accounting system and verifies payment terms
Clerk 3: Posts entered vendor invoices to the accounts payable ledger for payment and mails checks
Treasurer: Review the vendor invoices and signs each check
Which of the following would indicate a weakness in the company’s internal control?
a. The treasurer uses a stamp for signing checks
b. Clerk 1 opens all the incoming mail
c. Clerk 3 mails the checks and remittances after they have been signed
d. Clerk 2 reconciles the accounts payable ledger with the general ledger monthly
c. Clerk 3 mails the checks and remittances after they have been signed
A client’s purchasing system ends with the recording of a liability and its eventual payment. Which of the following best describes auditor’s primary concern with respect to liabilities resulting from the purchasing system?
a. Acquisition of materials is not made from one vendor or one group of vendors
b. Authority to incur liabilities is restricted to one designated person
c. Commitments for all purchases are made only after established competitive bidding procedures are followed
d. Accounts payable are not materially understated
d. Accounts payable are not materially understated
