Exam 3 Chapter 8

Question 1

What is the main assertion for Accounts Payable

Answer 1

Completeness

Question 2

What 6 accounts are associated with the Acquisition and Expenditure Cycle?

Answer 2

Accounts Payable
Expenses
Accrued Liabilities
Intangible Assets
PPE
Prepaid Expenses

Question 3

What are the 5 assertions associated with Accounts Payable?

Answer 3

Completeness
Cutoff
Existence
Presentation
Valuation

Question 4

Do we use Confirmations for the Accounts Payable account

Answer 4

Not usually because they mostly check for the Existence assertion

Question 5

Search for Unrecorded Liabilities

Answer 5

When you are searching for liabilities that do not exist since they were not written correctly

Question 6

What is the main procedure you do in the Search for Unrecorded Liabilities?

Answer 6

Tracing

Question 7

Why does the Search for Unrecorded Liabilities have a bunch of Alternative Procedures attached to it?

Answer 7

There need to be multiple alternative procedures because we are looking for liabilities that do not exist

Question 8

What is Purchase to Pay Cycle?

Answer 8

Describes the events and accounts effected between purchasing items and paying for them by the client

Question 9

What does BOL stand for?

Answer 9

Bill of Lading

Question 10

3 Way Match

Answer 10

Take purchase order
Match to receiving report
Match that to vendor bill

Question 11

Who are 3 Way Matches done by?

Answer 11

The client, auditors just have to check if the client is doing them

Question 12

For AR are we required to do Confirmations?

Answer 12

YES

Question 13

How are Accrued Liabilities different from Accounts Payable?

Answer 13

They do not have receiving reports or purchase orders

Question 14

Accrued Liablities vs Accounts Payable

Answer 14

Accrued liabilities are current expenses (interest, property taxes, wages, income taxes payable)
Accounts Payable are for goods

Question 15

What are we most concerned with in regards to PPE?

Answer 15

Unrecorded disposals

Question 16

4 Basic Activities in the Acquisition and Expenditure Cycle?

Answer 16

Purchase goods and services
Receive goods and services
Record asset or expense liability
Pay invoice through cash disbursement

Question 17

Who prepares the Purchase Requisition?

Answer 17

The department requesting the purchase of items

Question 18

When might Bidding be required?

Answer 18

On high dollar purchases

Question 19

What does Purchasing require?

Answer 19

A purchase order approved by the appropriate person (usually dependent on dollar amount of purchase)

Question 20

How is the receipt of goods evidenced?

Answer 20

By a receiving report

Question 21

4 Assertions related to the Expenses account?

Answer 21

Completeness
Cutoff
Accuracy
Classification

Question 22

6 Information Processing Controls (READ)

Answer 22

Compare PO on BOL with company PO
Compare quantities against receiving report and PO
Compare prices against quoted price
Recompute vendor invoices
Determine when to pay invoice
Properly prepare voucher

Question 23

5 Separations of Duties (READ)

Answer 23

Authorization of purchase done by purchasing department
Custody of inventory held by receiving department and requesting department
Transactions recorded by general accounting and AP department
Reconcile liabilities to customer statements and general ledger
Bids received by someone independent of purchasing

Question 24

3 Physical Controls (READ)

Answer 24

Prepare receiving report on receipt of inventory
Count inventory quantities on delivery
Restrict access to inventory

Question 25

2 Performance Review (controls) READ

Answer 25

Compare purchase data to previous years or expected purchases
Review bids to ensure documentation exists for selecting vendor

Question 26

6 parts of the Search for Unrecorded Liablities (READ)

Answer 26

Ask about procedures for recording liabilities
Scan open PO file
Examine unmatched vendor statements
Examine unmatched receiving reports near year end
Confirm AP with normal suppliers
Review cash disbursements after year end

Question 27

How do we verify cut-offs for purchases?

Answer 27

Examine receiving reports and vendor sales invoices near year end to ensure inventory received is included in correct period

Question 28

Is detecting unrecorded accrued liabilities easier or harder than with AP?

Answer 28

Harder because you don’t have documentation to help determine if a liability has been recorded

Question 29

6 parts of auditing Accrued Liabilities and Prepaid Expenses (READ)

Answer 29

Agree balances to prior year workpapers
Verify payments
Examine underlying agreements
Recalculate amounts
Search for unrecorded accruals (by reviewing year end cash disbursements and looking for expected accruals)
Analytical procedures

Question 30

5 Aspects of Auditing Income Taxes Payable (READ)

Answer 30

Extremely complex area (since client may operate in multiple tax jurisdictions)
Usually requires tax specialist
Vouch payments
Examine correspondence with government agencies
Follow audit standard for estimates

Question 31

4 Aspects of Auditing PPE

Answer 31

Small number of transactions with high $
Authorization of transactions is important
Less concerned with access to assets
More concerned with unrecorded disposals

Question 32

3 ways to audit purchases of PPE

Answer 32

Vouch new PPE to invoice or cost records
Inspect the title to PPE
Vouch purchase to board minutes

Question 33

2 ways to audit expenditures related to PPE

Answer 33

Vouch expenses to invoice and work descriptions
Consider whether to expense or capitalize the expense

Question 34

3 ways to audit recorded disposals of PPE

Answer 34

Vouch and Trace disposals from PPE board minutes
Vouch disposals to cash receipts journal and validated deposit slip
Recalculate gain/loss

Question 35

3 ways to look for unrecorded disposals

Answer 35

Agree balances to prior year workpapers
Examine documentation
Physically inspect and confirm fixed assets

Question 36

3 ways to audit depreciation expense of PPE

Answer 36

Recalculate it (using useful life, salvage value, cost, and method)
Evaluate reasonableness of factors used in depreciation expense
Check if depreciation is consistent with company policy

Question 37

2 ways to audit lease agreements of PPE

Answer 37

Verify proper treatment (capitalized or operating?)
Ensure footnote disclosure is good

Question 38

4 parts of auditing Cost and Expense accounts

Answer 38

Analytical procedures
Agree to related balance sheet accounts
Substantive tests of transactions
Vouch details

Question 39

Ways to inspect for Fraud in Accounts Payable (READ)

Answer 39

Inspect invoices in files for photocopies
Inspect vendor invoices submitted in numerical order
Inspect vendor invoices that are always round numbers
Scan vendor invoices for invoices that are always slightly lower than review threshold
Scan vendor invoices for vendors with only post office box addresses
Scan vendor invoices for invoices with no listed telephone number
Match vendor and employee address and telephone numbers
Scan multiple vendors at the same address and telephone number
Vouch sample of vendor invoices to approved vendor list
Review invoices for addresses of local mail drops

Question 40

What could go wrong with the Completeness Assertion for Accounts Payable?

Answer 40

Liabilities could not be recorded

Question 41

What could go wrong with the Cutoff Assertion for Accounts Payable?

Answer 41

Liabilities could be recorded in the wrong period

Question 42

What could go wrong with the Existence Assertion for Accounts Payable?

Answer 42

Liabilities may not represent the actual obligations of the company

Question 43

What could go wrong with the Presentation Assertion for Accounts Payable

Answer 43

Liabilities could not be recorded in the proper accounts and properly disclosed in the footnotes

Question 44

What could go wrong with the Valuation Assertion for Accounts Payable?

Answer 44

Payables could be recorded at the wrong amount

Question 45

What could go wrong with the Completeness Assertion for Expenses?

Answer 45

Not all expenses could be recorded

Question 46

What could go wrong with the Cutoff Assertion for Expenses?

Answer 46

Expenses could be recorded in the wrong period

Question 47

What could go wrong with the Accuracy Assertion for Expenses?

Answer 47

Expenses could be recorded at the wrong amount

Question 48

What could go wrong with the Classification Assertion for Expenses?

Answer 48

Expenses could be recorded in the wrong account