Question 1

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 2

The main focus taken by the auditor in verifying liability balances is on the discovery of:
I.understated liabilities.
II.omitted liabilities.
A) I only
B) II only
C) both I and II
D) neither I nor II

Accepted Answer

The main focus of the auditor when verifying liability balances is to ensure that all liabilities are properly stated and included in the financial statements. Therefore, the auditor will look for both understated and omitted liabilities. Understated liabilities are liabilities that are not recognized, measured, or disclosed in the financial statements at their appropriate amount. Omitted liabilities, on the other hand, are liabilities that are not included in the financial statements at all. By detecting both understated and omitted liabilities, the auditor can determine whether the financial statements are fairly presented and in compliance with accounting standards.

Question 3

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 4

An inventory acquisition is received late in the afternoon of December 31 after the physical inventory is completed.If the acquisition is included in accounts payable and purchases,but excluded from inventory,the result:
A) is an understatement of net earnings.
B) is an overstatement of net earnings.
C) is an overstatement of working capital.
D) is an overstatement of owner's equity.

Accepted Answer

Since the acquisition is not included in inventory, the ending inventory will be understated, thereby leading to an understatement of cost of goods sold and an overstatement of net earnings. This, in turn, leads to an overstatement of working capital and owner's equity.

Question 5

The auditor has decided to use accounts payables confirmations when testing substantive testing for balances.Which two management assertions is she testing?
A) Existence and completeness
B) Existence and occurrence
C) Existence only
D) Completeness only

Accepted Answer

By using accounts payable confirmations, the auditor is testing whether the balances exist (existence assertion) and whether all of the payable balances are included in the financial statements (completeness assertion).

Question 6

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

Accepted Answer

This is because an understatement of accounts payable would result in an understatement of liabilities, thereby resulting in an understatement of expenses and an overstatement of net income. An overstatement of accounts payable, on the other hand, would result in an overstatement of liabilities, thereby resulting in an overstatement of expenses and an understatement of net income.

Question 7

In searching for unrecorded liabilities the purpose of the audit procedure to "examine underlying documentation for subsequent cash disbursements" is to:
A) uncover liabilities on the balance sheet which should not have been recorded until a subsequent period.
B) find the documentation relating to a cash disbursement.
C) uncover payments made in a subsequent accounting period for liabilities that existed at the balance sheet date.
D) uncover cash disbursements recorded in a subsequent accounting period which should be recorded in this period.

Accepted Answer

The purpose of examining underlying documentation for subsequent cash disbursements is to uncover payments made in a subsequent accounting period for liabilities that existed at the balance sheet date, which are unrecorded liabilities. This helps to ensure that all liabilities are properly recorded on the balance sheet.

Question 8

By tracing receiving reports issued at and before year-end to vendors' invoices and making sure they are included in accounts payable,the auditor is testing for:
A) theft of merchandise by employees.
B) unrecorded obligations.
C) lapping.
D) kiting.

Accepted Answer

By tracing receiving reports to vendors' invoices and making sure they are included in accounts payable, the auditor is testing for unrecorded obligations, which are expenses that have been incurred but not yet recorded in the accounting system. This can help ensure that the financial statements reflect an accurate representation of the company's liabilities. Theft of merchandise, lapping, and kiting are unrelated to this audit procedure.

Question 9

A company recorded an acquisition of merchandise and its related liability,but failed to include the merchandise in ending inventory.The effect on the financial statements was to:
A) understate liabilities.
B) understate net income.
C) overstate net income.
D) have no impact on the financial statements since the errors cancel each other out.

Accepted Answer

The answer of A company recorded an acquisition of merchandise...

Question 10

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

Accepted Answer

Realizable value is only applicable when auditing accounts receivable or inventory.

Question 11

When the client's physical inventory occurs before the last day of the year,it is still necessary to perform an accounts payable cutoff at the time of the count.In addition,the auditor must verify whether all acquisitions taking place between the count and the end of the year were added to:
A) the physical inventory.
B) accounts payable.
C) accounts payable and cost of goods sold.
D) the physical inventory and accounts payable.

Accepted Answer

When the physical inventory occurs before the last day of the year, it is necessary to perform an accounts payable cutoff to ensure that all goods received and recorded as payable before the cutoff date are included in the physical inventory. Additionally, the auditor must verify that all acquisitions between the count and the end of the year (i.e. after the cutoff date) were added to both the physical inventory and accounts payable. Therefore, the best choice is D, which includes both the physical inventory and accounts payable.

Question 12

In determining that the accounts payable cutoff is correct,it is essential that the cutoff tests be coordinated with the:
A) confirmation of payables.
B) tests of long-term liabilities.
C) observation of inventory.
D) cash count.

Accepted Answer

The answer of In determining that the accounts payable cutoff...

Question 13

To test for cutoff errors which overstate liabilities,the auditor should trace,to vendors' invoices,the receiving reports issued:
A) after year-end.
B) before year-end.
C) the last day of the fiscal year.
D) both before and after year-end.

Accepted Answer

If the auditor traces receiving reports issued before year-end, it is possible that they will not be recorded in the accounts payable at year-end, resulting in understated liabilities. However, if the auditor traces receiving reports issued after year-end, any cutoff errors that overstate liabilities will likely be caught. Therefore, option A is the best choice.

Question 14

Cutoff information for inventory acquisitions should be obtained during:
A) the interim period prior to year-end.
B) the interim period immediately following year-end.
C) the physical observation of inventory.
D) either the interim period prior to or immediately following year-end.

Accepted Answer

The answer of Cutoff information for inventory acquisitions should be...

Question 15

Peprah Company pays its accounts payable 45 days after receipt of the goods or services.In this case which audit procedure should be used to detect any unrecorded liabilities?
A) Examine cash disbursements for several weeks after the balance sheet date.
B) Reconcile purchase orders to requisition orders.
C) Reconcile purchase orders to receiving reports.
D) Reconcile purchase orders to vendor invoices.

Accepted Answer

Since Peprah Company pays its accounts payable after 45 days of receiving goods or services, examining cash disbursements for several weeks after the balance sheet date would be the most appropriate audit procedure to detect any unrecorded liabilities. This will help the auditors to identify any payments made for goods or services received before the balance sheet date but not recorded as of the balance sheet date. Reconciling purchase orders to requisition orders, receiving reports, or vendor invoices would not necessarily detect unrecorded liabilities that occur after the balance sheet date.

Question 16

A document review of which of the following is most likely to yield evidence of any unrecorded liabilities?
A) Debit memos
B) Vendor memos
C) Unpaid accounts payable
D) Sales invoices out of sequence

Accepted Answer

Unpaid accounts payable are most likely to yield evidence of any unrecorded liabilities as they represent bills that have been received but not yet paid, and therefore may include any liabilities that have been incurred but not yet recorded. Debit memos and vendor memos may provide some information, but they are not as reliable as actual unpaid bills. Sales invoices out of sequence may indicate some errors or discrepancies in the sales process, but they are unlikely to directly relate to unrecorded liabilities.

Question 17

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

FOB origin means that the buyer takes ownership of the goods as soon as they are shipped, so the inventory and related accounts payable should be recorded in the current period if the goods were shipped on or before the balance sheet date. If they were received after the balance sheet date, they would belong to the next period. If they were both shipped and received prior to the balance sheet date, they should have been recorded in a prior period. Payment terms are not relevant in this case.

Question 18

The extent of a search for unrecorded liabilities largely depends on:
A) materiality and inherent risk.
B) materiality and control risk.
C) materiality only.
D) inherent risk only.

Accepted Answer

The answer of The extent of a search for unrecorded...

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

When assets are being verified,auditors focus much of their attention on making sure that the accounts are not overstated.Alternatively,auditors focus their efforts on understatement when auditing liabilities.What is the primary reason for this difference in focus?
A) Auditors' legal liability
B) GAAP
C) GAAS requirements
D) All of the above

Accepted Answer

Auditors are primarily concerned with ensuring that financial statements are not materially misstated, which includes the risk of overstating assets and understating liabilities. However, auditors may focus more on understatement when auditing liabilities because a material understatement of liabilities could result in legal liability for the auditor, as it may cause financial harm to stakeholders. Additionally, GAAP and GAAS requirements are relevant to the auditing process but are not the primary reason for the difference in focus between assets and liabilities.

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

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

The main focus taken by the auditor in verifying liability balances is on the discovery of: I.understated liabilities. II.omitted liabilities.

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.

An inventory acquisition is received late in the afternoon of December 31 after the physical inventory is completed.If the acquisition is included in accounts payable and purchases,but excluded from inventory,the result:

The auditor has decided to use accounts payables confirmations when testing substantive testing for balances.Which two management assertions is she testing?

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

In searching for unrecorded liabilities the purpose of the audit procedure to "examine underlying documentation for subsequent cash disbursements" is to:

By tracing receiving reports issued at and before year-end to vendors' invoices and making sure they are included in accounts payable,the auditor is testing for:

A company recorded an acquisition of merchandise and its related liability,but failed to include the merchandise in ending inventory.The effect on the financial statements was to:

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

When the client's physical inventory occurs before the last day of the year,it is still necessary to perform an accounts payable cutoff at the time of the count.In addition,the auditor must verify whether all acquisitions taking place between the count and the end of the year were added to:

In determining that the accounts payable cutoff is correct,it is essential that the cutoff tests be coordinated with the:

To test for cutoff errors which overstate liabilities,the auditor should trace,to vendors' invoices,the receiving reports issued:

Cutoff information for inventory acquisitions should be obtained during:

Peprah Company pays its accounts payable 45 days after receipt of the goods or services.In this case which audit procedure should be used to detect any unrecorded liabilities?

A document review of which of the following is most likely to yield evidence of any unrecorded liabilities?

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:

The extent of a search for unrecorded liabilities largely depends on:

When assets are being verified,auditors focus much of their attention on making sure that the accounts are not overstated.Alternatively,auditors focus their efforts on understatement when auditing liabilities.What is the primary reason for this difference in focus?