Question 1

The overall objective in the audit of accounts payable is to determine whether accounts payable:

Accepted Answer

The objective of the audit of accounts payable is to ensure that it is fairly stated and properly disclosed. This includes verifying the accuracy of account balances, confirming the existence of liabilities, and ensuring that proper cutoff procedures have been followed. Overstated or understated balances would indicate a misstatement, which is not the objective of the audit. Accuracy is a component of fairness, but not the sole objective.

Question 2

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

Accepted Answer

A purchase requisition is a request by an authorised employee for goods or services.

Question 3

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

Accepted Answer

Perpetual inventory master files maintained by persons who do not have custody of or access to assets provide a record of the use of raw materials and sale of finished goods, which can be reviewed for obsolete or slow-moving items. They are also a record that can be used to pinpoint responsibility for custody when there are differences between physical counts and amounts shown on records. Additionally, they provide a record of items on hand, which is used to initiate production or acquisition of additional materials or goods.

Question 4

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:

Accepted Answer

A voucher is a document used to record and authorize the payment of liabilities, often including a package of documents related to acquisitions, such as invoices and purchase orders.

Question 5

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:

Accepted Answer

If the acquisition of merchandise and its attendant liability were not recorded, the company would have overstated its ending inventory and COGS (Cost of Goods Sold), which would lead to an overstatement of net income and owners' equity. However, the liability should have been recorded, which would mean that the liabilities are understated. Therefore, choice C is the best answer. The assets are not affected since the merchandise was included in the physical count, which means it is part of the ending inventory.

Question 6

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

Accepted Answer

The purchase cutoff procedures are important to review and test to ensure that the inventory balance at year-end includes all merchandise that the company actually owns. This involves reviewing purchases made near year-end and ensuring that they have been properly recorded in the inventory balance. Therefore, the (D) purchase cutoff procedures are the best choice.

Question 7

Inherent risk is often assessed as relatively high for inventory, because of the characteristic/s:

Accepted Answer

All the options (potential for obsolescence, multiple storage locations, and complex pricing) contribute to the inherent risk associated with inventory. Obsolescence can lead to write-offs and losses, multiple storage locations can increase the risk of theft, damage, or misplacement, and complex pricing can result in errors or manipulation. Therefore, all these characteristics make inventory inherently risky.

Question 8

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

Accepted Answer

Observation of physical inventory counts provides the auditor with the most direct and reliable evidence about the existence of inventories. It allows the auditor to physically verify the presence of inventory items and identify any discrepancies between physical counts and recorded quantities. Confirmation of inventories in a public warehouse may provide some assurance, but it may not necessarily confirm the existence of all inventories held by the company. Written inventory representations from management and auditor's recomputation of inventory extensions provide less reliable evidence and do not directly address the existence of the inventory.

Question 9

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?

Accepted Answer

Reviewing the list of accounts payable for unusual or non-vendor payables can help identify classification errors where non-trade liabilities might be incorrectly recorded as trade payables.

Question 10

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

Accepted Answer

All of the options listed are necessary controls in the accounts payable and information technology departments. Adequate documents and records, proper procedures for record-keeping, independent checks on performance, and limited access to assets are all important measures to prevent fraud and errors.

Question 11

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:

Accepted Answer

Writing the cheque number on the supporting documents provides a clear reference for future reconciliation and prevents the same document from being used again. The other options, such as moving the documents to an off-site facility or shredding them, may not provide sufficient documentation for record-keeping purposes. Transferring the documents to a bank vault can also be expensive and time-consuming. Writing the cheque number on the documents is a simple yet effective method of preventing fraud and ensuring accurate record-keeping.

Question 12

Cost accounting controls are divided into which broad categories?

Accepted Answer

Cost accounting controls are broadly categorized into physical controls over raw materials, work in progress, finished goods, and controls over related costs, as these encompass the entire production process and associated expenses.

Question 13

Which one of the following analytical procedures would be most helpful in alerting the auditor to the possibility of obsolete inventory?

Accepted Answer

Comparing the inventory turnover ratio with previous years' ratios would be most helpful in alerting the auditor to the possibility of obsolete inventory. A decrease in the inventory turnover ratio compared to previous years could indicate an increase in obsolete inventory. Option A, B, and D may not specifically indicate or address the possibility of obsolete inventory.

Question 14

When goods are received, adequate control requires examination for:

Accepted Answer

Adequate control requires examination for the condition, description, and quantity of goods received. This ensures that the received goods match the order placed and are in proper condition before they are accepted and placed into inventory.

Question 15

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:

Accepted Answer

An imprest payroll account is a separate bank account set up specifically to pay the agreed upon payroll amount. It is commonly used to ensure that the correct amount of payroll is paid out and to prevent any fraudulent activity. A cashiered account, a completed transaction account, and a voided cheque account are not common terms used in payroll processing.

Question 16

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

Accepted Answer

The acquisition and payment cycle involves a large number of time-consuming accounts and transactions, such as purchase orders, receiving reports, invoices, and payments. These transactions may also involve multiple parties, such as vendors, employees, and bank accounts, which can add complexity to the audit process. Therefore, it takes more time to audit this cycle compared to other cycles. While fraud and weak internal controls can also contribute to the complexity of the audit, the sheer volume of accounts affected is the primary reason for the longer audit time. Lawsuits against auditors are not directly related to the length of the audit process.

Question 17

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

Accepted Answer

To maintain proper separation of duties and avoid potential errors or fraud, individuals with authority to sign payroll cheques or approve direct bank transfers should not have access to timekeeping or the computer used for payroll preparation. Therefore, both option A and B should be avoided.

Question 18

Sample size in physical observation of inventory is:

Accepted Answer

Physical observation of inventory focuses on observing the client's procedures and the sample size cannot be specified in units. Therefore, options B, C, and D are incorrect.

Question 19

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:

Accepted Answer

If the acquisition is excluded from inventory, it means that the inventory balance at the end of the year is understated. This, in turn, means that cost of goods sold is overstated, and as a result, net earnings are understated.

Question 20

The document that indicates such things as the description and quantity of goods and services received, price including freight, cash discount terms and date of the billing is the:

Accepted Answer

The document that indicates the description and quantity of goods and services received, price including freight, cash discount terms, and date of the billing is the vendor's invoice. A purchase order outlines what goods or services are being purchased, a receiving report confirms that the goods or services have been received, and a purchase requisition is a request for purchasing goods or services.

Quiz 15: Audit of Transaction Cycles and Financial Statement Balances I