Question 1

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 could be unrecorded liabilities. This helps ensure that all liabilities and corresponding expenses are properly recorded in the appropriate period. Choice A is incorrect because it refers to liabilities that should not have been recorded until a subsequent period, which is not the focus of this procedure. Choice B is incorrect because the documentation for a cash disbursement may not necessarily relate to a liability. Choice D is incorrect because it refers to cash disbursements recorded in a subsequent period, but the purpose of the procedure is to uncover payments made in a subsequent period.

Question 2

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 3

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, the auditor must perform an accounts payable cutoff at the time of the count. Additionally, the auditor must verify that all acquisitions between the count and the end of the year 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 4

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

Examining cash disbursements for several weeks after the balance sheet date helps in identifying any payments made for liabilities that were not recorded as of the balance sheet date, thus detecting unrecorded liabilities.

Question 5

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, not accounts payable.

Question 6

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 7

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' legal liability is a primary reason for focusing on overstatement of assets and understatement of liabilities, as these misstatements can lead to misleading financial statements and potential legal consequences for auditors.

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

Tracing receiving reports to vendors' invoices helps the auditor ensure that all liabilities for goods received at year-end are recorded in the accounts payable, thus testing for unrecorded obligations. This procedure is not related to theft of merchandise, lapping, or kiting.

Question 9

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 10

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 11

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 12

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 13

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 represent liabilities that have not been recorded in the accounting system. Debit memos and vendor memos might indicate that a liability exists, but it might have already been recorded. Sales invoices out of sequence are not directly related to unrecorded liabilities.

Question 14

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 15

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 and responsibility for the goods as soon as they are shipped by the seller. Therefore, when an acquisition is on an FOB origin basis, 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. This is because the buyer has already taken ownership and responsibility for the goods, even if they have not yet physically received them.

Question 16

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 17

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

Accepted Answer

The auditor is more concerned about the possibility of understatements in accounts payable because it could mean that there are unrecognized liabilities or expenses, which can have a significant impact on the financial statements. Overstatements, on the other hand, may result from duplicate payments or errors in recording transactions, which can be easier to detect and correct.

Question 18

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

Accounts payable confirmations test both the existence of liabilities (to ensure recorded payables are real) and completeness (to ensure all liabilities are recorded).

Question 19

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 20

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

The answer of Vendors' statements and vendors' invoices are both...

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

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

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:

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?

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

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

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?

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:

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

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.

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:

Cutoff information for inventory acquisitions should be obtained during:

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

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

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:

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:

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

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

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

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