Question 1

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.

Accepted Answer

Vendors' statements and vendors' invoices both originate from a third party, which provides greater reliability than evidence that is internally generated by the client. While they may not validate the effectiveness of the control system, they are still considered reliable evidence due to their external source. Sales invoices may not always be relevant or available to compare and reconcile with vendors' statements and invoices.

Question 2

When auditing accounts payable, the auditor is more concerned about the possibility of understatements than overstatements.

Accepted Answer

This is because understatements in accounts payable mean that the company could be concealing liabilities, which has a bigger impact on financial statements compared to overstatements. Overstatements are easier to detect because they usually involve duplicate payments or misclassification of expenses.

Question 3

The balance-related audit objective realizable value is not applicable when auditing accounts payable.

Accepted Answer

The realizable value audit objective is typically used for assessing the value of assets, not liabilities like accounts payable. It is used to determine if the recorded value of an asset can be realistically attained by the company through a sale or exchange, and is not relevant to accounts payable.

Question 4

The "rights "aspect of the "rights and obligations" objective is not applicable to liabilities.

Accepted Answer

The term "rights" refers to the legal entitlements that a person or entity holds under a contract or in relation to a particular asset or property. Liabilities, on the other hand, represent the obligations that a person or entity owes to others. While rights may be associated with obligations, liabilities do not have a corresponding "rights" aspect. Therefore, the statement is true.

Question 5

Auditors primarily emphasize the understatement of liabilities in the audit of accounts payable because they are concerned about potential legal liability.

Accepted Answer

Auditors are concerned about potential legal liability if they fail to detect an understatement of liabilities, particularly accounts payable. This is because accounts payable represent a legal obligation for the company to pay its vendors and suppliers, and understating them could result in legal and financial consequences. Therefore, auditors give special attention to accounts payable during the audit process.

Question 6

Under which of the following circumstances would it be advisable for the auditor to confirm accounts payable with creditors?
A) The internal accounting control over accounts payable is effective, and there is sufficient evidence on hand to minimize the risk of a material misstatement.
B) The confirmation response is expected to be favorable, and accounts payable balances are of immaterial amounts.
C) The creditor statements are not available and internal control over payables is deficient.
D) The majority of accounts payable balances are with associated companies.

Accepted Answer

If creditor statements are not available and internal control over payables is deficient, then confirming accounts payable balances with creditors would be advisable to obtain necessary information and ensure accuracy. In all other circumstances described in the options, confirming accounts payable may not be necessary or the benefits may not outweigh the costs.

Question 7

Describe the audit procedures typically used to test for out-of-period liabilities (also referred to as the search for unrecorded accounts payable).

Accepted Answer

The answer of Describe the audit procedures typically used to...

Question 8

The auditor is performing substantive tests of balances for accounts payable. What documentation would provide the best evidence for the ending balance?
A) vendors' invoices
B) vendors' statements
C) receiving reports
D) purchase orders

Accepted Answer

Vendors' statements provide a direct confirmation of the amounts owed to vendors at the balance sheet date, offering strong evidence for the ending balance of accounts payable.

Question 9

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.

Accepted Answer

Vendors' invoices provide direct evidence of individual transactions, making them highly reliable for auditing purposes.

Question 10

Auditor confirmation of accounts payable balances at the balance sheet date may not need to be performed by the auditor 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.

Accepted Answer

Auditor confirmation of accounts payable balances at the balance sheet date may not need to be performed because there is likely to be other reliable external evidence available to support the balances, such as invoices, purchase orders, and receiving reports.

Question 11

To test for overstatement cutoff amounts when auditing accounts payable, the auditor should trace receiving reports issued before year-end to related vendors' invoices to make sure they are not recorded as accounts payable.

Accepted Answer

To test for overstatement of accounts payable, the auditor should ensure that liabilities are not overstated by verifying that only valid transactions are recorded. Tracing receiving reports issued before year-end to related vendors' invoices checks that liabilities incurred before year-end are recorded in the correct period, which is a test for understatement, not overstatement.

Question 12

When verifying the correct balance in accounts payable, vendors' invoices are more useful than vendors' statements.

Accepted Answer

Vendors' statements provide a summary of all transactions and outstanding balances, making them more useful for verifying the correct balance in accounts payable than individual invoices.

Question 13

The auditor is performing tests of transactions for individual accounts payable transactions with vendors. Which document provides more reliable information about individual transactions with vendors?
A) receiving report
B) vendors' invoices
C) vendors' statements
D) purchase orders

Accepted Answer

Vendors' invoices provide detailed information about each individual transaction with the vendor, including the amount, description of the goods or services provided, and terms of the sale. Receiving reports provide information about the receipt of goods but do not include information about the costs or terms of the transaction. Vendors' statements provide a summary of all transactions with the vendor, which may not be as reliable for testing individual transactions. Purchase orders provide information about the goods or services to be purchased but do not provide information about the actual transaction itself.

Question 14

The documents typically used to reconcile the balance on the accounts payable list with the confirmation or vendors' statements include all of the following except for
A) receiving reports.
B) vendors' invoices.
C) sales invoices.
D) cancelled checks.

Accepted Answer

The documents typically used to reconcile the balance on the accounts payable list with the confirmation or vendors' statements include receiving reports, vendors' invoices, and cancelled checks. Sales invoices are not typically used in the reconciliation process for accounts payable.

Question 15

When auditors examine vendors' statements or receive confirmations, there must be a reconciliation of the statement or confirmation with the
A) accounts payable list.
B) vendors' invoices.
C) purchase orders.
D) receiving reports.

Accepted Answer

Auditors would reconcile the statement or confirmation with the accounts payable list to ensure that all vendor invoices have been recorded and accounted for accurately. While the purchase orders and receiving reports may provide additional information to support the accounts payable balance, they would not be the primary source for reconciling the vendor statements or confirmations.

Question 16

A vendor's statement is unreliable and auditors rarely use it.

Accepted Answer

A vendor's statement can be reliable and auditors may use it as a source of information for their audit. However, auditors will still need to corroborate the information provided and perform additional procedures to verify the accuracy and completeness of the vendor's statement.

Question 17

You are performing an audit of Hawk Company. In evaluating the accounts payable balance you are concerned with the completeness assertion. Which of the following audit procedures best satisfies your concern?
A) Send confirmations to only vendors with large balances.
B) Send confirmations to vendors with large, active, zero balance accounts and a representative sample of all others.
C) Send confirmations to vendors chosen from sample stratified by the dollar balance.
D) Send confirmations to all vendors.

Accepted Answer

Option B covers a representative sample of all vendors, not just those with large balances. This ensures completeness in detecting unrecorded liabilities. Sending confirmations to all vendors (Option D) would be ideal but may be impractical due to time and cost limitations.

Question 18

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

Accepted Answer

Confirmations are the most reliable source for verifying the correct balance of accounts payable as they directly confirm the amount owed to vendors with the vendor themselves. Vendors' invoices and bills of lading can be inaccurate or incomplete, and vendors' statements may not reflect the most up-to-date information.

Question 19

Auditors examine supporting documentation for cash disbursements subsequent to the balance sheet date in order to determine whether the cash disbursement was for a current period liability.
Describe at least two audit procedures the auditor would perform to provide evidence that the cash disbursement was made for a current period liability.

Accepted Answer

The answer of Auditors examine supporting documentation for cash disbursements...

Question 20

If the client counts inventory at year end, it is essential that cutoff tests be coordinated with the physical observation of inventory.

Accepted Answer

The answer of If the client counts inventory at year...

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

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

When auditing accounts payable, the auditor is more concerned about the possibility of understatements than overstatements.

The balance-related audit objective realizable value is not applicable when auditing accounts payable.

The "rights "aspect of the "rights and obligations" objective is not applicable to liabilities.

Auditors primarily emphasize the understatement of liabilities in the audit of accounts payable because they are concerned about potential legal liability.

Under which of the following circumstances would it be advisable for the auditor to confirm accounts payable with creditors?

Describe the audit procedures typically used to test for out-of-period liabilities (also referred to as the search for unrecorded accounts payable).

The auditor is performing substantive tests of balances for accounts payable. What documentation would provide the best evidence for the ending balance?

The auditor gets highly reliable evidence about individual transactions by examining

Auditor confirmation of accounts payable balances at the balance sheet date may not need to be performed by the auditor because

To test for overstatement cutoff amounts when auditing accounts payable, the auditor should trace receiving reports issued before year-end to related vendors' invoices to make sure they are not recorded as accounts payable.

When verifying the correct balance in accounts payable, vendors' invoices are more useful than vendors' statements.

The auditor is performing tests of transactions for individual accounts payable transactions with vendors. Which document provides more reliable information about individual transactions with vendors?

The documents typically used to reconcile the balance on the accounts payable list with the confirmation or vendors' statements include all of the following except for

When auditors examine vendors' statements or receive confirmations, there must be a reconciliation of the statement or confirmation with the

A vendor's statement is unreliable and auditors rarely use it.

You are performing an audit of Hawk Company. In evaluating the accounts payable balance you are concerned with the completeness assertion. Which of the following audit procedures best satisfies your concern?

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

If the client counts inventory at year end, it is essential that cutoff tests be coordinated with the physical observation of inventory.