Question 1

Once the auditor concludes that internal controls are operating effectively in the acquisition and the payment cycle, the verification of accounts payable should require little audit effort.

Accepted Answer

If internal controls are operating effectively, there is less risk of material misstatement in the accounts payable balance. Therefore, the audit effort can be reduced, but it is still necessary to perform some substantive procedures to ensure the completeness and accuracy of the balance.

Question 2

How do auditors determine the extent of testing of internal controls in the acquisition and payment cycle?

Accepted Answer

The answer of How do auditors determine the extent of...

Question 3

Auditors are especially concerned about the ________ and ________ balance-related audit objectives because of the potential for understatements in the account balance.
A) completeness; cutoff
B) completeness; accuracy
C) classification; realizable value
D) classification; cutoff

Accepted Answer

Completeness and cutoff are crucial for auditors because they ensure all transactions are recorded in the correct accounting period and that the account balances include all relevant transactions, minimizing the risk of understatements.

Question 4

Examples of a client not using prenumbered receiving reports, a client not recording acquisitions until cash disbursements are actually made, and because of cash shortages paying bills several months after their due date generally force the auditor to perform more extensive substantive testing of the details of accounts payable.

Accepted Answer

If a client does not use prenumbered receiving reports, it is difficult to verify the completeness of accounts payable and the auditor may need to perform more extensive testing. Similarly, if a client does not record acquisitions until cash disbursements are made or pays bills late due to cash shortages, the auditor may need to perform more extensive testing to ensure the completeness and accuracy of accounts payable.

Question 5

When determining the methodology for designing tests of details of balances for accounts payable,
A) the focus by many companies on improving their supply-chain management activities has led to numerous changes in the design of systems used to initiate and record acquisition and payment activities.
B) it is relatively inexpensive to audit accounts payable.
C) performance materiality for accounts payable is set relatively low.
D) inherent risk is often set at low.

Accepted Answer

The focus on improving supply-chain management activities has led to changes in the design of systems used to initiate and record acquisition and payment activities, which can affect the methodology for designing tests of details of balances for accounts payable.

Question 6

Which substantive analytical procedure would help determine if there are unrecorded or nonexistent accounts?
A) Review the list of accounts payable for unusual items.
B) Compare acquisition-related expense account balances with prior years.
C) Calculate ratios, such as accounts payable divided by current liabilities.
D) Calculate ratios, such as sales divided by gross profit.

Accepted Answer

The answer of Which substantive analytical procedure would help determine...

Question 7

A misstatement of an expense account usually also results in an equal misstatement of accounts receivable.

Accepted Answer

Misstatement of an expense account does not necessarily result in a misstatement of accounts receivable.

Question 8

Auditors must also take into consideration the identification of material contracts, commitments, and related party transactions which require disclosure in the financial statements and/or the footnotes to the financial statements.

Accepted Answer

Auditors are responsible for identifying material contracts, commitments, and related party transactions that may impact the financial statements and should be disclosed to stakeholders. These items can have a significant impact on the financial health of the company and must be disclosed to ensure transparency and accuracy in financial reporting.

Question 9

Auditors typically set performance materiality for accounts payable relatively low.

Accepted Answer

The answer of Auditors typically set performance materiality for accounts...

Question 10

Describe the methodology for designing tests of details of balances for accounts payable.

Accepted Answer

The answer of Describe the methodology for designing tests of...

Question 11

The auditors' ultimate substantive tests depend on the relative effectiveness of internal controls related to accounts payable.

Accepted Answer

The effectiveness of internal controls related to accounts payable impacts the auditors' reliance on those controls and ultimately determines the extent and nature of substantive testing required.

Question 12

Listed below are some management assertions made for the acquisition and payment cycle. For each one, give an example of how the auditor, by using the documents normally found in the process, can apply an auditing procedure to test the assertion.
completeness
timing
accuracy

Accepted Answer

The answer of Listed below are some management assertions made...

Question 13

Most accrued liabilities can be identified by the existence of vendors' invoices for the obligation.

Accepted Answer

Accrued liabilities often relate to expenses that have been incurred but not yet invoiced, such as wages, utilities, and interest expenses, thus there may not be a vendor's invoice present.

Question 14

Discuss the key internal controls that should be present in the processing purchase orders function in the acquisitions and payment cycle.

Accepted Answer

The answer of Discuss the key internal controls that should...

Question 15

Explain why auditors should compare current year expense totals with prior year expense totals as an analytical procedure for accounts payable.

Accepted Answer

The answer of Explain why auditors should compare current year...

Question 16

A liability is properly accounted for as an account payable if
A) the amount is known and owed as of the balance sheet date.
B) the amount can be estimated and is owed at the balance sheet date.
C) the amount is known at the balance sheet date and owed by the end of the next fiscal year.
D) the amount is estimated and owed within 90 days of the balance sheet date.

Accepted Answer

A liability is properly accounted for as an account payable only if the amount is known and owed as of the balance sheet date. If the amount can be estimated, it is recorded as a accrued liability, and if the liability is not due within a year, it is recorded as a long-term liability. Only option A meets the criteria given in the question.

Question 17

Because of double-entry accounting, misstatement of an expense account usually also results in an equal misstatement of accounts payable.

Accepted Answer

Double-entry accounting requires every transaction to have an equal and opposite entry, so misstating an expense account will also impact the corresponding accounts payable account.

Question 18

What are the three most important controls over cash disbursements?

Accepted Answer

The answer of What are the three most important controls...

Question 19

A key internal control in the acquisition and payment cycle is someone matching the key information contained on the purchase requisition, the purchase order, the receiving report, and the vendor's invoice to the payment voucher.

Accepted Answer

Matching these key documents ensures that the goods or services were received and that the invoice is accurate before payment is made. This helps to prevent errors, fraud, and waste of company funds.

Question 20

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 on or before the balance sheet date.
C) both shipped and received prior to the balance sheet date.
D) paid for in advance.

Accepted Answer

The answer of When an acquisition is on an FOB...

Quiz 18: Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Accounts Payable

Once the auditor concludes that internal controls are operating effectively in the acquisition and the payment cycle, the verification of accounts payable should require little audit effort.

How do auditors determine the extent of testing of internal controls in the acquisition and payment cycle?

Auditors are especially concerned about the and balance-related audit objectives because of the potential for understatements in the account balance.

When determining the methodology for designing tests of details of balances for accounts payable,

Which substantive analytical procedure would help determine if there are unrecorded or nonexistent accounts?