Question 1

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 represent amounts owed to vendors or suppliers for goods or services already received, and the amount and due date of these liabilities are known and determinable at the balance sheet date. Accrued liabilities, on the other hand, represent expenses or obligations that have been incurred but not yet paid, and the amount and timing of the payment may not be known with certainty at the balance sheet date. Therefore, choice A is the best answer as it accurately reflects the criteria for classifying a liability as an account payable.

Question 2

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 of testing clerical accuracy by footing the journals and tracing postings to the general ledger and accounts payable and inventory master files is indeed used to test the posting and summarization objective for acquisitions.

Question 3

If tests of controls and substantive tests of transactions related to perpetual inventory records reveal controls over perpetuals are effective, the auditor is justified in reducing the extent of tests of details of inventory.

Accepted Answer

If tests of controls and substantive tests of transactions related to perpetual inventory records demonstrate that the controls over perpetually updated inventory records are reliable, the auditor might reduce the scope of testing further by relying on those strong internal controls. As a result, less amount of testing is required to achieve the same level of assurance, which saves time and resources for the auditor.

Question 4

The internal control "Vouchers are prenumbered and accounted for" relates most closely to the occurrence objective for acquisitions.

Accepted Answer

The control "Vouchers are prenumbered and accounted for" relates to the completeness objective, ensuring all transactions are recorded.

Question 5

One type of audit procedure the auditor uses to test accounts payable is a substantive analytical procedure. Describe why the auditor uses substantive analytical procedures for accounts payable and provide an example.

Accepted Answer

The answer of One type of audit procedure the auditor...

Question 6

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 substantive test ensures that all items received have been recorded in the acquisitions journal, thereby testing the completeness objective.

Question 7

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) Accurancy
C) Completeness
D) Existence

Accepted Answer

The completeness assertion is of greater concern when auditing accounts payable as it ensures that all the liabilities have been recorded in the entity's books and nothing has been omitted which may lead to an assertion that the balance sheet is misstated. It implies that all the valid transactions have been recorded in the entity's financial statements.

Question 8

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

Accepted Answer

The completeness objective requires that all acquisition transactions are recorded and disclosed, while the occurrence objective requires that all recorded acquisition transactions actually occurred. Auditors are more concerned about the completeness objective because unrecorded acquisition transactions could lead to material misstatements in financial statements.

Question 9

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 in testing the acquisitions and cash disbursements cycle, as it allows auditors to gather evidence and assess the effectiveness of internal controls for these transactions. Testing controls and transactions in this cycle is important because it helps to ensure that the entity is properly recording and processing its financial transactions, which can impact the accuracy of financial statements.

Question 10

Companies would normally recognize an account payable when the goods are received by the company.

Accepted Answer

An account payable is recognized when a company receives goods or services from a supplier and agrees to pay for them at a later date. Therefore, the recognition of an account payable is directly related to the receipt of goods or services.

Question 11

At what point do most companies recognize liabilities in the acquisition and payment cycle when the goods are shipped FOB Destination?
A) the issuance of a purchase order
B) receipt of acknowledgement of order by vendor
C) receipt of goods or services
D) the receipt of a vendor invoice

Accepted Answer

Most companies recognize liabilities in the acquisition and payment cycle when they receive the goods or services, as this is when the obligation to pay is established, especially for goods shipped FOB Destination.

Question 12

The use of statistical sampling is less common for the audit of accounts payable than for accounts receivable because it is more difficult to define the population and determine the population size in accounts payable.

Accepted Answer

Accounts payable can include a variety of different types of transactions, such as invoices, bills, and payments, which can make it difficult to define a clear population and determine the total population size. Additionally, accounts payable may involve a larger number of small transactions in comparison to accounts receivable, which may make it more challenging to design an effective sampling plan.

Question 13

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 is to determine whether accounts payable is fairly stated and properly disclosed. The auditor's objective is not to determine whether accounts payable is overstated, understated, or accurately stated, but rather to ensure that it is presented fairly and in accordance with accounting standards. Therefore, the best choice is A.

Question 14

Discuss the key internal controls that should be present in the "recognizing the liability" function in the acquisitions and payment cycle.

Accepted Answer

The answer of Discuss the key internal controls that should...

Question 15

When auditing the acquisitions and cash disbursements cycle, it is usually more efficient for the auditor to reduce the extent of tests of controls and rely primarily on substantive tests of transactions and on tests of details of balances, provided the auditor has determined control risk low.

Accepted Answer

If the auditor has determined control risk as low, it indicates that the internal controls are effective, and hence it would be appropriate for the auditor to reduce the extent of tests of controls and rely primarily on substantive tests of transactions and on tests of details of balances. This approach is more efficient and effective in detecting material misstatement in the acquisitions and cash disbursements cycle.

Question 16

Failure to record the acquisition of goods directly affects the balance in Accounts payable and may result in an understatement of ending inventory.

Accepted Answer

If the acquisition of goods is not recorded, it means that the amount owed to suppliers (Accounts Payable) is not reflected in the financial statements. This could result in an understatement of ending inventory as the cost of those goods is not included in the inventory account. Therefore, an understatement of ending inventory would result in an overstatement of cost of goods sold and a lower reported net income.

Question 17

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 is recorded in the appropriate accounting period. This helps ensure accurate financial reporting and proper valuation of inventory. Option A relates to the receipt of inventory, but doesn't address the timing of the recording. Option B is relevant to accounts payable, but not inventory. Option D relates to valuation, but doesn't address the timing of the recording.

Question 18

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 checks if the cash disbursement actually occurred and if it was properly authorized, endorsed, and canceled by the bank.

Question 19

Listed below are some management assertions made for the acquisition and payment cycle. For each one give an example of how the auditor by using the documents normally found in the process can apply an auditing procedure to test the assertion.
Completeness
Timing
Accuracy

Accepted Answer

The answer of Listed below are some management assertions made...

Question 20

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...

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

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: