Question 1

Since there are a large number of accounts involved in the acquisition and payment cycle,there is the potential for classification misstatements,some of which are likely to affect income.

Accepted Answer

Due to the large number of accounts involved in the acquisition and payment cycle, there is potential for misclassification, which could impact income.

Question 2

Auditors are especially concerned about the ________ and ________ balance-related audit objectives because of the potential for understatements in the account balance.
A) completeness, cutoff
B) completeness, accuracy
C) classification, realizable value
D) classification, cutoff

Accepted Answer

Completeness and cutoff are crucial for auditors because they ensure all transactions are recorded in the correct accounting period and that the account balances include all relevant transactions, minimizing the risk of understatements.

Question 3

The audit procedure "Test clerical accuracy by footing the journals and tracing postings to general ledger and to accounts payable and inventory master files" is used to test the posting and summarization objective for acquisitions.

Accepted Answer

The audit procedure "Test clerical accuracy by footing the journals and tracing postings to general ledger and to accounts payable and inventory master files" is indeed used to test the posting and summarization objective for acquisitions.

Question 4

________ is a balance-related audit objective that is not applicable to liabilities.
A) Existence
B) Accuracy
C) Detail tie-in
D) Realizable value

Accepted Answer

Realizable value is a balance-related audit objective that is not applicable to liabilities. This objective pertains specifically to assets and refers to ensuring that they are recorded at their net recoverable value or realizable value, which takes into account any estimated costs of disposal or sale.

Question 5

Auditors need to distinguish between accounts payable and accrued liabilities in designing the appropriate control and substantive tests.A liability is properly accounted for as an account payable if:
A) the amount is known and owed as of the balance sheet date.
B) the amount can be estimated and is owed at the balance sheet date.
C) the amount is known at the balance sheet date and owed by the end of the next fiscal year.
D) the amount is estimated and owed within 90 days of the balance sheet date.

Accepted Answer

Accounts payable are amounts that are owed to vendors or suppliers for goods or services received and are recorded when they are both known and owed as of the balance sheet date. Accrued liabilities, on the other hand, are liabilities that are recognized when an expense has been incurred but has not yet been paid, and the amount can be estimated. Therefore, choice A is the best option as it accurately describes the criteria for recognizing an account payable. Choices B, C, and D describe liabilities that may be recognized as accrued liabilities but are not necessarily accounts payable.

Question 6

Failure to record the acquisition of goods and services received overstates both accounts payable and net income.

Accepted Answer

Failure to record the acquisition of goods and services received understates both accounts payable and expenses, leading to an overstatement of net income.

Question 7

Describe the methodology for designing tests of details of balances for accounts payable.

Accepted Answer

The answer of Describe the methodology for designing tests of...

Question 8

The audit procedure "Examine canceled check for authorized signature,proper endorsement,and cancellation by the bank" is used to test the occurrence objective for cash disbursements.

Accepted Answer

This audit procedure involves examining the canceled check to ensure that it has been properly authorized, endorsed, and canceled by the bank. This helps to confirm that a cash disbursement actually occurred, thereby testing the occurrence objective for cash disbursements.

Question 9

You are the in-charge auditor and are designing audit procedures for accounts payable.Which of the following management assertions would you normally be most concerned about?
A) Occurrence
B) Accuracy
C) Completeness
D) Existence

Accepted Answer

Completeness is the management assertion that is most concerning in auditing accounts payable because it ensures that all valid expenses and obligations have been recorded in the financial statements. This assertion ensures that there are no unrecorded liabilities, which can distort the financial statements.

Question 10

The controls over acquisitions included in the perpetual inventory records are normally tested as a part of the test of controls and substantive tests of transactions for the sales and collection cycle.

Accepted Answer

The controls over acquisitions would be tested as a part of the test of controls and substantive tests of transactions for the purchases and payments cycle, not the sales and collection cycle.

Question 11

Because of the importance of tests of controls and substantive tests of transactions for acquisitions and cash disbursements,attributes sampling is commonly used when testing the acquisitions and cash disbursements cycle.

Accepted Answer

Attributes sampling is commonly used when testing the acquisitions and cash disbursements cycle because of the importance of tests of controls and substantive tests of transactions in these areas.

Question 12

A substantive test of transactions commonly used to test the completeness objective for acquisitions is "Trace from a file of receiving reports to the acquisitions journal."

Accepted Answer

This test involves tracing from a document (receiving reports) to the acquisitions journal, which would ensure that all acquisitions are recorded in the journal and therefore test the completeness objective.

Question 13

Explain why auditors should compare current year expense totals with prior year expense totals as an analytical procedure for accounts payable.

Accepted Answer

The answer of Explain why auditors should compare current year...

Question 14

At what point do most companies recognize liabilities in the acquisition and payment cycle when the goods are shipped FOB destination?
A) When the purchase order is issued
B) When the vendor acknowledges receipt of the order
C) When the goods or services are received
D) When the vendor invoice is received

Accepted Answer

In FOB destination, the title of the goods transfers from the seller to the buyer upon delivery of the goods, hence the liability for the goods does not pass to the buyer until they are received. Therefore, most companies recognize liabilities in the acquisition and payment cycle when the goods or services are received.

Question 15

Cutoff procedures for inventory purchased should be designed by companies to assure the company that:
A) inventory owned by the company has been received.
B) inventory included in the year end inventory count has been paid.
C) inventory received before year end was recorded before year end.
D) inventory was correctly valued at year end.

Accepted Answer

Cutoff procedures for inventory purchased are designed to ensure that inventory received before year end was recorded before year end. This is important for accurate financial reporting and proper valuation of inventory. The other options, such as confirming ownership or payment, are important but are not directly related to cutoff procedures.

Question 16

The overall objective in the audit of accounts payable is to determine whether accounts payable:
A) is fairly stated and properly disclosed.
B) is overstated.
C) is understated.
D) is accurately stated.

Accepted Answer

The overall objective in the audit of accounts payable, like any other financial statement account, is to determine whether it is fairly stated and properly disclosed in accordance with the applicable financial reporting framework. The other options (B, C, and D) suggest specific misstatements in accounts payable, but the objective is broader than that and includes all potential misstatements.

Question 17

Auditors are normally more concerned about violations of the completeness objective for acquisitions than about violations of the occurrence objective for acquisitions.

Accepted Answer

Auditors are more concerned about whether all acquisitions have been recorded than about whether all recorded acquisitions actually occurred. This is because if some acquisitions are not recorded, the financial statements will be incomplete and may not accurately represent the company's financial position.

Question 18

The auditor's ultimate substantive tests depend on the relative effectiveness of internal controls related to accounts payable.

Accepted Answer

The effectiveness of internal controls related to accounts payable has a direct impact on the auditor's ultimate substantive tests. Strong internal controls can allow the auditor to rely on them and perform less substantial testing, while weak controls may require more comprehensive testing to obtain sufficient audit evidence.

Question 19

When determining the methodology for designing tests of details of balances for accounts payable:
A) supply-chain management activities has led to numerous changes in the design of systems used to initiate and record acquisition and payment activities.
B) it is relatively inexpensive to audit accounts payable.
C) performance materiality for accounts payable is set relatively low.
D) inherent risk is often set at low.

Accepted Answer

As supply chain management activities have led to numerous changes in the design of systems used to initiate and record acquisition and payment activities, it is important to carefully consider the methodology used to design tests of details of balances for accounts payable. This may involve testing the effectiveness of controls related to the acquisition and payment processes, examining vendor contracts, and performing other procedures to ensure that accounts payable are fairly stated.

Question 20

It is common in the acquisition and payment cycle for transactions to require significant judgment.

Accepted Answer

The acquisition and payment cycle involves various types of transactions such as purchase orders, receiving reports, vendor invoices, and payments. Each of these transactions may require judgments such as deciding on the appropriate vendor to choose, determining if the goods were received in acceptable condition, verifying the accuracy of the invoice, and ensuring timely payment. Therefore, it is common for transactions in the acquisition and payment cycle to require significant judgment.

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

Since there are a large number of accounts involved in the acquisition and payment cycle,there is the potential for classification misstatements,some of which are likely to affect income.

Auditors are especially concerned about the and balance-related audit objectives because of the potential for understatements in the account balance.

The audit procedure "Test clerical accuracy by footing the journals and tracing postings to general ledger and to accounts payable and inventory master files" is used to test the posting and summarization objective for acquisitions.

________ is a balance-related audit objective that is not applicable to liabilities.

Auditors need to distinguish between accounts payable and accrued liabilities in designing the appropriate control and substantive tests.A liability is properly accounted for as an account payable if:

Failure to record the acquisition of goods and services received overstates both accounts payable and net income.

Describe the methodology for designing tests of details of balances for accounts payable.

The audit procedure "Examine canceled check for authorized signature,proper endorsement,and cancellation by the bank" is used to test the occurrence objective for cash disbursements.

You are the in-charge auditor and are designing audit procedures for accounts payable.Which of the following management assertions would you normally be most concerned about?

The controls over acquisitions included in the perpetual inventory records are normally tested as a part of the test of controls and substantive tests of transactions for the sales and collection cycle.

Because of the importance of tests of controls and substantive tests of transactions for acquisitions and cash disbursements,attributes sampling is commonly used when testing the acquisitions and cash disbursements cycle.

A substantive test of transactions commonly used to test the completeness objective for acquisitions is "Trace from a file of receiving reports to the acquisitions journal."

Explain why auditors should compare current year expense totals with prior year expense totals as an analytical procedure for accounts payable.

At what point do most companies recognize liabilities in the acquisition and payment cycle when the goods are shipped FOB destination?

Cutoff procedures for inventory purchased should be designed by companies to assure the company that:

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

Auditors are normally more concerned about violations of the completeness objective for acquisitions than about violations of the occurrence objective for acquisitions.

The auditor's ultimate substantive tests depend on the relative effectiveness of internal controls related to accounts payable.

When determining the methodology for designing tests of details of balances for accounts payable:

It is common in the acquisition and payment cycle for transactions to require significant judgment.