Deck 15: Audit of transaction cycles and financial statement balances I

Question 1

The major balance sheet account in the acquisition and payment cycle is:

A) accounts payable.
B) ordinary shares.
C) purchases.
D) merchandise inventory.

Answer 1

A

Question 2

Once the auditor has decided on procedures, the acquisitions and cash payments tests are typically performed:

A) concurrently, to achieve efficiency without reducing the effectiveness of the tests.
B) by different audit staff, to maintain independence.
C) separately, to maximise the effectiveness of the tests.
D) consecutively, to achieve efficiency without reducing the effectiveness of the tests.

Answer 2

A

Question 3

Which document indicates a reduction in the amount owed to a vendor because of returned goods?

A) debit note
B) credit note
C) shipping room report
D) receiving room report

Answer 3

A

Question 4

When goods are received, adequate control requires examination for:

A) quantity.
B) description.
C) condition.
D) all of the above

Question 5

Why is inherent risk often assessed as relatively high for inventory?

A) potential for obsolescence
B) complex pricing
C) multiple storage locations
D) all of the above

Question 6

Necessary controls in the accounts payable and information technology departments include:

A) adequate documents and records, and proper procedures for record keeping.
B) independent checks on performance.
C) that personnel who record transactions do not have access to cash, marketable securities, or other assets.
D) all of the above

Question 7

Matching the vendor's invoice, the purchase order, and the receiving report normally should be the responsibility of the:

A) treasury function.
B) warehouse receiving function.
C) purchasing function.
D) accounts payable department.

Question 8

An auditor learns that his client has paid a vendor twice for the same shipment, once based upon the original invoice and once based upon the monthly statement.A control procedure that should have prevented this duplicate payment is:

A) use of a limit or reasonableness test.
B) prenumbering of receiving reports.
C) prenumbering of payment vouchers.
D) examination of supporting documentation by an authorized person before the signing of cheques.

Question 9

For effective internal control purposes, the accounts payable department generally should:

A) stamp, perforate, or otherwise cancel supporting documentation after payment is mailed.
B) obliterate the quantity ordered on the receiving department copy of the purchase order.
C) establish the agreement of the vendor's invoice with the receiving report and purchase order.
D) ascertain that each requisition is approved as to price, quantity, and quality by an authorised employee.

Question 10

When auditing accounts payable, auditors are usually especially concerned about the:

A) completeness and cutoff objectives.
B) existence and completion objectives.
C) existence and accuracy objectives.
D) existence and cutoff objectives.

Question 11

A document frequently used by organisations to establish a formal means of recording the controlling acquisitions, and which usually contains a package of documents relevant to the acquisition, is the:

A) receiving report.
B) voucher.
C) purchase order.
D) purchase requisition.

Question 12

The document that indicates the description and quantity of goods and services received, price, freight charges, discount terms, and date of the billing is the:

A) purchase requisition.
B) purchase order.
C) receiving report.
D) vendor's invoice.

Question 13

Which one of the following internal accounting control procedures is effective in preventing duplicate payment of vendors' invoices?

A) The invoices should be stamped, perforated, or otherwise effectively cancelled before submission for approval of the voucher.
B) Cancelled cheques should be sent to persons other than the cashier or accounting department personnel.
C) Unused voucher forms should be prenumbered and accounted for.
D) Properly authorised and approved vouchers with appropriate documentation should be the basis for cheque preparation.

Question 14

Internal control over accounts payable is strengthened when a monthly reconciliation of the vendors' statements with recorded liabilities and the accounts payable master file with the general ledger is performed by:

A) the auditor.
B) the purchasing agent.
C) an independent person.
D) any of the above.

Question 15

The classes of transactions in the acquisition and payment cycle include acquisition of goods:

A) and services.
B) only.
C) and services, and cash payments.
D) and services, cash payments, and purchase returns and discounts.

Question 16

A document identifying the description, supplier, quantity, and related information for goods and services the company intends to purchase is the:

A) purchase order.
B) receiving report.
C) purchase requisition.
D) purchase catalogue.

Question 17

The analytical procedure that requires the auditor to review the list of accounts payable for unusual or non-vendor payables would have the best chance of discovering which possible error?

A) classification error for non-trade liabilities
B) invalid accounts or misstatements
C) unrecorded accounts or misstatements
D) misstatement of accounts payable and expenses

Question 18

A request by an authorised employee for goods or services is made on the:

A) debit note.
B) purchase order.
C) purchase requisition.
D) acquisition transaction file.

Question 19

The test of transactions, which requires 'compare paid cheques with the related acquisitions journal and cash payments journal', satisfies which transaction-related audit objective for cash payments?

A) existence
B) completeness
C) accuracy
D) posting and summarisation

Question 20

Receipt of ordered materials by the receiving department will generate the completion of a form called the:

A) inventory acquisition summary.
B) materials requisition.
C) receiving report.
D) bill of lading.

Question 21

Perpetual inventory master files maintained by persons who do not have custody of or access to assets are a useful cost accounting control, because:

A) they are a record that can be used to pinpoint responsibility for custody when there are differences between physical counts and amounts shown on records.
B) they provide a record of items on hand, which is used to initiate production or acquisition of additional materials or goods.
C) they provide a record of the use of raw materials and sale of finished goods, which can be reviewed for obsolete or slow-moving items.
D) all of the above

Question 22

To BEST ascertain that a company has properly included merchandise that it owns in its ending inventory, the auditor should review and test the:

A) contractual commitments made by the purchasing department.
B) purchase invoices received on or around year-end.
C) purchase cutoff procedures.
D) terms of the open purchase orders.

Question 23

A zero balance confirmation

A) is similar to a positive confirmation.
B) involves sending confirmations to all vendors.
C) involves sending confirmations to active vendors whose balance has not been included in accounts payable.
D) involves sending confirmations to all vendors who have not been included in accounts payable.

Question 24

The overall objective of the audit of the inventory and warehousing cycle is to determine that:

A) errors in the acquisitions and payroll cycles have not impacted on inventory pricing.
B) raw materials, work-in-process, finished goods inventory, and cost of goods sold are fairly stated in the financial statements.
C) raw materials, work-in-process, finished goods inventory, and cost of goods sold are accurate.
D) inventory is not obsolete.

Question 25

Cost accounting controls are divided into which broad categories?

A) physical controls over finished goods and related costs
B) physical controls over raw materials, work in progress, finished goods, and controls over related costs
C) physical controls over raw materials, work in progress, and finished goods
D) physical controls over raw materials and work in progress

Question 26

The purpose of the audit procedure 'examine underlying documentation for subsequent cash payments' is to:

A) uncover payments made in a subsequent accounting period that represent liabilities at the balance sheet date.
B) uncover cash payments recorded in a subsequent accounting period which should be recorded in this period.
C) uncover liabilities on the balance sheet which should not have been recorded until a subsequent period.
D) find the documentation relating to a cash payment.

Question 27

Cost accounting controls are those related to the physical inventory and the consequent costs from the point at which:

A) the customer's order is received until the finished product is shipped.
B) materials are ordered for purchase until the finished product is sold.
C) raw materials are requisitioned until the finished product is completely manufactured.
D) raw materials are requisitioned until the finished product is sent to storage.

Question 28

A company failed to record an acquisition of merchandise and its attendant liability, but it was included in the physical count of ending inventory.The effect on the financial statements would be to:

A) overstate net income and owners' equity.
B) understate assets and owners' equity.
C) understate both assets and liabilities.
D) understate liabilities and overstate both net income and owners' equity.

Question 29

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) kiting.
B) unrecorded obligations.
C) theft of merchandise by employees.
D) lapping.

Question 30

In connection with the client's physical count of inventory, adequate controls include:

A) adequate control over count sheets or tags.
B) proper instructions for the physical count and supervision by responsible personnel.
C) independent internal verification including reconciliation of physical counts with perpetual inventory master files.
D) all of the above

Question 31

Statistical sampling is less commonly used for the audit of accounts payable than for accounts receivable because it is more difficult to:

A) mathematically calculate and interpret the results.
B) determine the tolerable exception rate.
C) define the population.
D) decide on attributes or variables sampling.

Question 32

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

A) accounts payable and cost of goods sold.
B) the physical inventory and accounts payable.
C) the physical inventory.
D) accounts payable.

Question 33

Comparing expenses to prior years' expenses is an effective analytical procedure for accounts payable because expenses from year to year are:

A) relatively stable.
B) variable.
C) erratic.
D) dynamic.

Question 34

What is the overall objective in the audit of accounts payable?

A) to determine if the balance accurately stated
B) to determine if the balance is understated
C) to determine if the balance is fairly stated and properly disclosed
D) to determine if the balance is overstated

Question 35

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

A) tests on long-term liabilities.
B) cash count.
C) confirmation of payables.
D) physical observation of inventory.

Question 36

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

Question 37

The auditor should be satisfied that acquisitions of raw materials are correctly stated at the completion of the:

A) payroll and personnel cycle.
B) inventory and warehousing cycle.
C) acquisitions and payments cycle.
D) cash cycle.

Question 38

Which one of the following is NOT an element of the audit of the inventory and warehousing cycle?

A) Review timekeeping procedures for manufacturing employees.
B) Physically observe inventory.
C) Check how goods are shipped and revenue and costs are recorded.
D) Price and compile inventory.

Question 39

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) does not affect earnings.
B) is indeterminable from the information given.
C) is an understatement of net earnings.
D) is an overstatement of net earnings.

Question 40

Which of the following is NOT a factor affecting the complexity of the audit of inventory?

A) inventory often being the largest item on the balance sheet
B) different acceptable valuation methods
C) counting inventory at different locations
D) inventory being stored at more than one location

Question 41

The test of details of balance procedure which requires the auditor to inquire of management for the possibility of the inclusion of consigned or other non-owned inventory is associated with which audit objective?

A) rights
B) completeness
C) existence
D) realisable value

Question 42

Sample size in physical observation of inventory is:

A) determined using dollar-unit sampling.
B) impossible to specify in units because the emphasis is on observing the client's procedures.
C) determined using variables sampling.
D) determined using attributes sampling.

Question 43

Which items should auditors select when testing inventory for pricing?

A) high-priced items
B) items with stable prices
C) representative items
D) both A and C

Question 44

A file recording payroll transactions for each employee and maintaining total wages paid for year to date is the:

A) summary payroll report.
B) payroll master file.
C) deduction authorisation form.
D) rate authorisation form.

Question 45

Why does the auditor recount the client's inventory?

A) to ensure that none is lost or intentionally omitted (completeness)
B) to obtain proper cutoff information for sales and acquisitions (cutoff)
C) to confirm that inventory as recorded on tags exists (existence)
D) to ensure that inventory is counted accurately (accuracy)

Question 46

Which document indicates the time an employee started and stopped working each day as well as the number of hours worked?

A) time ticket
B) payroll master file
C) rate authorisation form
D) job time card

Question 47

What is the most important factor related to the observation of inventory?

A) The counts are accurate.
B) Obsolete inventory has been identified.
C) The physical count is being taken in accordance with the client's instructions.
D) The inventory-takers are qualified.

Question 48

Controls which provide a means of ensuring that the physical counts are properly summarised, priced at the same amount as the unit records, correctly extended and totalled, and included in the general ledger at the proper amount are known as:

A) pricing internal controls.
B) inventory compilation controls.
C) count quantity internal controls.
D) standard cost controls.

Question 49

From which one of the following evidence-gathering audit procedures would an auditor obtain most assurance concerning the existence of inventories?

A) written inventory representations from management
B) confirmation of inventories in a public warehouse
C) observation of physical inventory counts
D) auditor's recomputation of inventory extensions

Question 50

How is the payroll and personnel cycle different from other cycles?

A) Transactions are more significant than related balance sheet accounts.
B) Internal controls for payroll are effective for most companies.
C) There is only one class of transactions.
D) all of the above

Question 51

Examining inventory descriptions on tags and comparing to actual inventory relates to which audit objective?

A) Inventory is counted accurately (accuracy).
B) Inventory is classified correctly (classification).
C) Existing inventory is counted and tagged (completeness).
D) Inventory as recorded on tags exists (existence).

Question 52

When labour is a significant part of inventory, verifying the proper accounting of these costs should be tested in the:

A) payroll and personnel cycle.
B) inventory and warehousing cycle.
C) cash cycle.
D) acquisitions and payments cycle.

Question 53

What effect does the improper account classification of payroll have when payroll is a significant portion of inventory?

A) increase asset valuations
B) decrease asset valuations
C) either A or B
D) not affect asset valuations

Question 54

The auditor must verify whether the physical counts were correctly summarised, the inventory quantities and prices were correctly extended, and the extended inventory was correctly footed.These tests are called:

A) cost tests.
B) mechanical tests.
C) price tests.
D) compilation tests.

Question 55

The costs used to value the physical inventory must be tested to determine whether the client has correctly followed an inventory method that is in accordance with accounting standards and is consistent with previous years.The audit procedures used to verify these costs are referred to as:

A) price tests.
B) cost tests.
C) compilation tests.
D) consistency tests.

Question 56

Which is the BEST audit procedure for the discovery of damaged merchandise?

A) Review the management's inventory representation letter for accuracy.
B) Be alert for items that are located in inappropriate places while observing the client's physical inventory count.
C) Test overall fairness of inventory values by comparing the company's turnover ratio with the industry average.
D) Compare the physical quantities of slow-moving items with corresponding quantities of the prior year.

Question 57

When a physical count of inventory is performed at an interim date, the auditor observes it at that time and tests the perpetuals for transactions:

A) from the date of the count to year-end.
B) throughout the year.
C) which are a representative sample of the period under audit.
D) from the date of the count to the end of the audit field work.

Question 58

Test results of the __________ cycle, in addition to the test results of inventory and warehousing, will affect the tests of details of balances for inventory.

A) sales and collection
B) acquisitions and payments
C) payroll and personnel
D) all of the above

Question 59

Which analytical procedure would be most helpful in alerting the auditor to the possibility of obsolete inventory? Compare

A) current year manufacturing costs with previous years' costs.
B) gross margin percentage with previous years' percentages.
C) inventory turnover ratio with previous years' ratios.
D) unit costs of inventory with previous years' costs.

Question 60

A formal review and reporting of obsolete, slow-moving, damaged, and overstated inventory items:

A) is an internal control designed to prevent the overstatement of inventory through the inclusion of obsolete inventory.
B) involves reviewing perpetual inventory master files for inventory turnover and holding discussions with engineering or production personnel.
C) should be done by a competent employee.
D) all of the above

Question 61

The auditor's transaction-related audit objective for acquisitions, to determine that recorded acquisitions are for goods and services received, relates to which accounting concept?

A) existence
B) completeness
C) accuracy
D) authorisation

Question 62

Which function should the purchasing department NOT be responsible for?

A) finding the lowest cost vendor
B) reviewing vendors' catalogue descriptions and prices for standardised items
C) authorising the acquisition of goods
D) designing the purchase order form

Question 63

From an audit point of view, which one of the following would NOT be an important internal control in the personnel cycle?

A) physical control over assets and records
B) reconciliation of total payroll expense in the general ledger with the payroll tax returns and the group certificates
C) adequate separation of duties
D) proper authorisation of changes in pay rates

Question 64

It usually takes more time to audit the acquisition and payment cycle than any other cycle because:

A) there is a greater likelihood of lawsuits against the auditor relating to these accounts.
B) internal controls in this area are usually weaker.
C) there is a greater possibility of fraud in these transactions.
D) of the large number of time-consuming accounts affected.

Question 65

Which one of the following is a test of controls?

A) Examine time records for indication of supervisor approval.
B) Prove the bank reconciliation.
C) Reconcile payments in the payroll journal with payments on the bank statement.
D) Review the payroll journal, general ledger, and payroll earnings records for large or unusual amounts.

Question 66

When labour is a material factor in inventory valuation, the auditor should place special emphasis on testing the internal controls concerning:

A) authorisation of wage rates.
B) completeness of recorded transactions.
C) fictitious employees.
D) proper classification of transactions.

Question 67

The internal control which requires that 'cheques are prenumbered and accounted for' satisfies which transaction-related audit objective for cash payments?

A) posting and summarisation
B) accuracy
C) existence
D) completeness

Question 68

The file for recording each payroll transaction for each employee and maintaining total employee wages paid for the year to date is the:

A) payroll journal.
B) summary payroll report.
C) payroll master file.
D) job time ticket.

Question 69

'Recorded payroll payments are for work actually performed by non-fictitious employees' is which transaction-related audit objective for payroll?

A) completeness
B) authorisation
C) existence
D) accuracy

Question 70

'Recorded payroll transactions are for the amount of time actually worked and at the proper pay rate; withholdings are properly calculated' relates to which transaction-related audit objective for payroll?

A) existence
B) authorisation
C) accuracy
D) completeness

Question 71

The total of the individual employee earnings in the payroll master file equals the total:

A) gross pay for the current week's payroll.
B) of the cheques drawn to employees for payroll.
C) gross payroll plus the total contributed by the employer for superannuation.
D) balance of gross payroll in general ledger accounts.

Question 72

After the payroll total has been agreed upon, often a separate bank account is set up to pay the amount.This account is referred to as:

A) a completed transaction account.
B) avoided cheque account.
C) a cashiered account.
D) an imprest payroll account.

Question 73

The most common type of fraud by employees in the payroll area is:

A) nonexistent employees.
B) fraudulent hours.
C) unauthorized bonuses.
D) A and B

Question 74

What is the auditor's main concern when examining payroll transactions?

A) posting of gross payroll amounts to incorrect salary expense accounts
B) excess withholding of amounts required to be withheld
C) misfootings of employee time records
D) overpayments and unauthorised payments

Question 75

Which one of the following circumstances would NOT cause an auditor to extend payroll procedures considerably?

A) Payroll significantly affects inventory valuation.
B) There is a possibility of material fraudulent payroll transactions.
C) There is a lack of independent third-party evidence, such as confirmations.
D) There is a deficient internal control structure.

Question 76

No individual with authority to sign payroll cheques or approve direct bank transfers should be permitted access to:

A) timekeeping.
B) the computer.
C) the preparation of payroll.
D) both A and B

Question 77

Which one of the following statements is NOT correct?

A) Internal controls vary from company to company; therefore, the auditor must identify the controls and deficiencies for each organisation.
B) The substantive tests of transactions will vary depending on the assessed control risk.
C) The tests of controls and substantive tests of transactions are combined where appropriate.
D) The auditor must perform tests of controls on all of the client's internal controls.

Question 78

The accounts payable department usually has responsibility for verifying the propriety of acquisitions by comparing the details on the:

A) vendor's invoice and the purchase requisition.
B) purchase requisition, purchase order, and receiving report.
C) vendor's invoice and the receiving report.
D) purchase order, receiving report, and vendor's invoice.

Question 79

Which one of the following would NOT justify an auditor's decision to spend very little time performing tests of transactions in the payroll and personnel cycle?

A) The new payroll bookkeeper has a much better educational background than the former one.
B) Payroll transactions are uniform and uncomplicated.
C) Employees will detect any underpayments.
D) Payroll transactions are extensively audited by government agencies.

Question 80

When processing and recording cash payments, it is important to have a method of cancelling the supporting documents to prevent their reuse as support for another cheque at a later time.A common method is to:

A) move the documents to a permanent off-site facility such as a warehouse.
B) transfer possession of the document to a bank vault such as a safety deposit box.
C) write the cheque number on the supporting documents.
D) shred the documents so they can't be reused.