Inventory and Accounts Payable

Question 1

What assertion is the auditor testing when tracing purchased items though the AIS, verifying all documentation is matching?

Answer 1

Completeness

Question 2

What departments and documents are involved when auditing inventory and accounts payable?

Answer 2

Departments

Requesting department
purchasing 
receiving 
warehouse
accounts payable
cash disbursements

Documents

purchase requisition
purchase order
receiving report
vendor's invoice
accounts payable voucher
check

Question 3

What types of comparisons are most likely when analytical procedures for inventory and accounts payable?

Answer 3

gross profit percentage

inventory turnover

changes in age of average inventory

Question 4

What some general potential problems in substantive testing for inventory and accounts payable?

Answer 4

inventory damaged/obsolete

inventory miscounted or misidentified

cut-off of purchases, receipts and consumption of inventory incorrect

inventory not owned by client, also could be on consignment

deliberate misstatement of inventory by client

Question 5

If inventory is intentionally or unintentionally overstated, what effect does that misstatement have on net income for that year?

Answer 5

ending inventory too high. then COGS will be too low. NI will be inflated. misrepresentation of assets and NI.

Question 6

If inventory is intentionally or unintentionally understated, what effect does that misstatement have on net income for that year?

Answer 6

ending inventory too low. then COGS will be too high. NI will be understated. misrepresentation of ending inventory and NI.

Question 7

After the purchasing department receives the purchase requisition, what is the next step in the purchasing process?

Answer 7

scan the request to make sure it is within the authority of department making the request

check the authorization signatures

follow set procedure for placing an order

Question 8

When goods arrive at an entity’s receiving department, what are the appropriate procedures for these entity personnel?

Answer 8

verify the description of the physical goods with the purchase order

count the goods

check the condition of the goods

Question 9

What happens to goods after they have been accepted by the receiving department?

Answer 9

goods are transferred

check the condition and description and quantity of the items being conveyed

get signed receipt or other sign off

Question 10

How should an entity’s control of its inventory items be organized?

Answer 10

requisitioning department

receiving

warehouse

shipping

Question 11

What documents are generated and sent from the vendor after goods are ordered by entity?

Answer 11

order acknowledgement and an invoice

Question 12

Which department receives the vendor’s invoice, and what actions should be taken with it?

Answer 12

accounts payable

reviewed for terms and informational accuracy

compared to purchase requisition, purchase order and receiving report - all authorizations, all agree

Question 13

What document is generated once all documents have been reconciled and all authorizations have been verified?

Answer 13

an accounts payable voucher

Question 14

After receiving the approved voucher, what roles and responsibilities does the cash disbursements department have?

Answer 14

filed by due date, taking into consideration any discount terms

prepare a check

deliver check and voucher package to authorized signer

create check register

Question 15

A department needs a particular item of inventory or a new asset such as a computer. What document is initially generated when there is need for such items?

Answer 15

a purchase requisition

Question 16

After a requisition is reviewed and authorized what happens to this requisition form?

Answer 16

transmitted to the purchasing department for fulfillment

Question 17

After a purchase order is generated where does the purchase order go?

Answer 17

copy goes to the receiving department to serve as approval for accepting the merchandise

another copy goes to the accounts payable as documentation of the purchase

Question 18

A sample of cleared checks for purchases is taken and support is looked for. What assertion is the auditor testing?

Answer 18

occurrence, completeness, classification and accuracy

Question 19

An auditor is examining reported inventory balances to determine if freight-in has been properly recognized. What assertion is being testing?

Answer 19

valuation

Question 20

Does the auditor typically confirm accounts payable?

Answer 20

the auditor is more concerned with completeness rather than existance

Question 21

An auditor takes a sample of accounts payable recorded during the 3 - 5 days prior to the end of Year 1 and verifies that they were not supposed be reported in Year 2. What assertion(s) is being tested?

Answer 21

occurrence and the cutoff assertions

Question 22

When a check is prepared to pay an account payable voucher, what exactly takes place within the accounting records?

Answer 22

the check should be supported by the check register or cash disbursements journal

the total is the credit to cash and a debit to accounts payable

Question 23

An auditor takes a sample of accounts payable recorded during the 3 - 5 days after the end of Year 1 and verifies that they were not supposed be reported in Year 1. What assertion(s) is being tested?

Answer 23

completeness and cutoff

Question 24

What types of evidence would the auditor look for in the subsequent period in substantiating inventory and accounts payable?

Answer 24

cash payments that indicated year-end liabilities not recorded

receipt of inventory that might have belonged to the company at year-end, but was not recorded

invoices received by the company that might indicate year-end liabilities

Perishable, obsolete, slow-moving and other inventory that fails to sell, which might indicate it should have been written down at year end

Question 25

An auditor is concerned that a company might have physical inventory on consignment, how might he gather evidence in this matter?

Answer 25

review contracts file for such arrangements

investigate transactions where bill of lading was prepared but no sales invoice

Watches for suspicious receivable transactions where cash payments are made in periodic or random intervals

review all returned accounts receivable confirmations to determine if mentions are made of consignment

Question 26

When should a company take its physical inventory?

Answer 26

periodic inventory - as close to year end as possible

perpetual inventory - any time unless auditor’s assessment of IR or CR is high

Question 27

What is the auditor’s role in connection with the physical inventory count?

Answer 27

test company’s inventory testing controls

verify the existence of inventory

Question 28

Why is it important to see all obsolete and damaged inventory separated from salable inventory? What assertion is being tested?

Answer 28

obsolete and damaged inventory should be valued at its net realizable value

valuation

Question 29

The auditor takes and records test counts at year end inventory, what is the purpose of this audit step?

Answer 29

to verify accuracy of the clients count

Question 30

Which management assertion is affected when the number of units of inventory is understated?

Answer 30

completeness

Question 31

Which management assertion is affected when the number of units of inventory is overstated?

Answer 31

existance

Question 32

Inventory turnover rate has decreased significantly during the reporting year, what types of problems might this indicate?

Answer 32

obsolete or damaged inventory or just excess inventory is being held

year end cutoff of transactions were perhaps handled incorrectly

application of FIFO or LIFO is computed incorrectly

Question 33

After a check is written, signed, and mailed. What happens to the accounts payable voucher?

Answer 33

defaced or marked in some way to prevent reuse.

Question 34

What management assertion is mots important when an auditor examines accounts payable?

Answer 34

completeness

Question 35

What information should be found on a purchase order prepared by the purchasing department?

Answer 35

vendors name

quantity and price of the item ordered

vendor item number and description of item ordered

proposed terms of the invoice document

destination and timing as to where and when the goods are to be shipped

Question 36

What department gets a purchase requisition document?

Answer 36

purchasing

Question 37

What is an approved vendor list and its purpose?

Answer 37

authorized list or file of vendors that purchase may be made without further authorization

the company can ensure that each vendor is legitimate and of good quality and reputation

Question 38

What document is prepared by the receiving department when goods are received? who gets a copy?

Answer 38

the receiving department prepares a receiving report

accounts payable, inventory, and purchasing all get copies

Question 39

What happens after the accounts payable voucher has been prepared, reviewed and approved?

Answer 39

recorded in the voucher register

physically sent to the cash disbursements department