Test bank with answers for auditing and assurance services 14e by alvin a arens and randal j elder chapter 18

Answer: C Terms: Overall objective of audit of acquisition and payment cycle Diff: Easy Objective: LO 18-1 AACSB: Reflective thinking skills 2 During your audit of Williams Company y

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Auditing and Assurance Services, 14e (Arens)

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

Learning Objective 18-1

1) The overall objective in the audit of the acquisition and payment cycle is:

A) to ensure the reliability of the affected accounts

B) to ensure the accuracy of the affected accounts

C) to evaluate whether the affected accounts are fairly stated in accordance with accounting standards D) to evaluate whether fraudulent payments were made

Answer: C

Terms: Overall objective of audit of acquisition and payment cycle

Diff: Easy

Objective: LO 18-1

AACSB: Reflective thinking skills

2) During your audit of Williams Company you are trying to determine whether all accounts payable were recorded in the proper period Which assertion are you gathering evidence for?

3) The acquisition and payment cycle consists of one class of transactions

4) The cash account is not part of the acquisitions and payment cycle

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5) The acquisition and payment cycle is highly controlled and not well-structured in most companies A) True

1) What typically initiates the acquisitions and payment cycle?

A) issuance of a purchase requisition or request for purchase of goods/services

B) issuance of payment to vendor

C) approval of a new vendor

2) What typically ends the acquisitions and payment cycle?

A) issuance of a purchase requisition or request for purchase of goods/services

B) issuance of a payment to a vendor

C) approval of a new vendor

3) Which of the following accounts is not included in the acquisitions class of transactions?

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4) A document indicating a reduction in the amount owed to a vendor because of returned goods is: A) a debit memo

5) A document used by organizations to establish a formal means of recording and controlling

acquisitions which usually contains a package of documents about the acquisition is the:

6) The computer-generated file which records acquisitions, disbursements and allowances for each vendor is the:

A) Accounts payable master file

B) Cash disbursements file

C) Acquisitions transaction file

D) Purchase approval file

Answer: A

Terms: Computer-generated file which records acquisitions, disbursements and allowances for vendor

Diff: Easy

Objective: LO 18-2

7) Which of the following business functions is not considered to be part of the acquisitions class of

transactions?

A) Processing purchase orders

B) Recognizing liabilities

C) Receiving goods and services

D) Processing cash disbursements

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8) Smaller privately held companies may not maintain an accounts payable master file by vendor These companies pay on the basis of:

A) vendors' monthly statements

B) individual vendors' invoices

C) the accounts payable account in the general ledger

9) After a purchase requisition is approved, a must be initiated to purchase the goods or services

10) A document generally received from the vendor which indicates a reduction in the amount owed due

to the company granting an allowance is:

11) Absent disputed amounts and minor timing differences, the vendor's statements should reconcile to the:

A) acquisition journal

B) accounts payable master file

C) cash disbursements amount for purchases

D) vouchers payable amount for vendors

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12) Describe for each function below their role in the acquisition and payment cycle:

subsequent adjustments to vendor invoices

Accounts Payable: record all appropriate vendor invoices, cash disbursements, and adjustments to balances owed

Terms: Role in acquisition and payment cycle

Diff: Moderate

Objective: LO 18-2

13) Discuss each of the four business functions that comprise the acquisition and payment cycle

Answer: The four business functions that comprise the acquisition and payment cycle are:

• Processing purchase orders This function involves the preparation of a purchase requisition and a

purchase order to acquire goods and services

• Receiving goods and services When goods are received, a receiving report is prepared that indicates the

description of goods, the quantity received, the date received, and other relevant data

• Recognizing the liability In most companies, the liability for acquisitions is recognized when the goods

and services are received; in other companies, it is deferred until the vendor's invoice is received

• Processing and recording cash disbursements This function involves the signing and mailing of the check

for payment of the acquisition and recording of the cash disbursement in the cash disbursements journal

Terms: Business functions of the acquisition and payment cycle

Diff: Moderate

Objective: LO 18-2

14) Describe purchase requisitions and purchase orders What is a key difference between the two

documents?

Answer: Purchase requisitions represent requests for goods and services by an authorized employee Requisitions may originate from any authorized company employee such as a storeroom supervisor or manufacturing manager Purchase orders are documents that identify the description, quantity, and other related information for goods or services that the company is purchasing Unlike requisitions, purchase orders are directed to specific vendors

Terms: Purchase requisitions and purchase orders

Diff: Moderate

Objective: LO 18-2

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15) Match seven of the terms for documents and records (a-m) used in the acquisitions and cash

disbursement cycle with the descriptions provided below (1-7):

i Accounts payable master file

j Accounts payable trial balance

k Vendor's statement

l Check

m Cash disbursements journal

1 A document indicating a reduction in the amount owed to a vendor because of returned goods or an allowance granted

2 A document that specifies the details of an acquisition transaction and amount of money owed to the vendor for an acquisition

3 A document prepared by the purchasing department indicating the description, quantity, and related information for goods and services that the company intends to purchase

4 A listing of the amount owed to each vendor at a point in time

5 A document used to establish a formal means of recording and controlling acquisitions; it includes a cover sheet and a package of relevant documents

6 A document used to request goods and services by an authorized employee

7 The listing or report that includes all cash payments for a given period

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goods and services from an authorized individual

17) A vendor invoice is normally prepared at the time tangible goods are received and indicates the description of goods, the quantity received, the date received, and other relevant data

18) A document received from the vendor indicating such things as the description and quantity of goods and services received, price including freight, cash discount terms, and date of billing is called the

19) An acquisitions transaction file is a computer generated file that includes all information entered into the system regarding acquisition transactions

20) Receiving reports are normally only used to document the receipt of goods and are not used to document the receipt of services

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1) You have been assigned to the accounts payable transaction cycle as part of your auditing

responsibilities You have decided to vouch a sample of entries in the accounts payable master file to supporting documents Which assertion is this test of controls most likely to support?

2) An auditor is gathering evidence on the completeness assertion To do so she performs a test to verify that all goods received by the company have been recorded properly The document population for this test would consist of all:

3) The accounts payable accounting clerk erroneously recorded the same purchase twice Which of the following internal control tests would most likely act as a detective control?

A) recalculating the purchases journal

B) tracing from the purchases journal to the general ledger

C) vouching from the general ledger to the purchases journal

D) reconciling the vendor's statements to the accounts payable subsidiary ledger

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4) An auditor has been assigned to perform tests of controls for a client's cash disbursement system Client files are kept electronically with no paper audit trail In this case the auditor would need to rely on which of the following audit procedures?

A) Analytical procedures and Inquiry

B) Confirmations and Inquiry

C) Observation and Inquiry

D) Reperformance and Inquiry

Answer: C

Terms: Tests of controls for cash disbursement system; Audit procedures

Diff: Moderate

Objective: LO 18-3

5) A written purchase order is a contractual document that is:

A) an offer to buy

B) not enforceable if it is not in writing

C) a binding agreement between purchaser and vendor

D) an acceptance of a vendor's catalog offer to sell

Answer: A

Terms: Written purchase order is a legal contractual document

Diff: Moderate

Objective: LO 18-3

6) Which one of the following duties should not be assigned the purchases department?

A) finding the lowest cost vendor

B) reviewing vendors' catalog descriptions and prices for standardized items

C) designing the purchase order form

D) authorizing the acquisition of goods

Answer: D

Terms: Duties not to be assigned to the purchases department

Diff: Moderate

Objective: LO 18-3

7) The accounts payable department usually has responsibility for approving acquisitions for payment by comparing the details on the:

A) vendor's invoice and the receiving report

B) vendor's invoice and the purchase requisition

C) purchase order, receiving report, and vendor's invoice

D) purchase requisition, purchase order, and receiving report

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8) A substantive test for accounts payable that would be used to provide evidence regarding the

occurrence assertion would be to:

A) agree a sample of vouchers to authorized purchase orders

B) recalculate the accuracy of the vouchers and the authorized purchase orders

C) trace vouchers to the client's purchases journal

D) vouch a sample of vouchers from the cash disbursements register to accounts payable

Answer: C

Terms: Substantive test of accounts payable to provide evidence regarding occurrence assertion

Diff: Moderate

Objective: LO 18-3

9) A company's internal control procedures over the acquisition cycle should prevent the preparation of a voucher for goods that have not yet been received Which of the following is the best procedure to assure vouchers are not prepared for goods not received?

A) purchase order and vendor invoice are matched to the receiving report

B) compare goods received with goods ordered

C) perform sample test counts of items when received

D) compare the requisition for goods with the purchase order

Answer: D

Terms: Best internal control procedure over acquisition cycle

Diff: Moderate

Objective: LO 18-3

10) Which of the following is not a key control in the acquisition and payment cycle?

11) Proper authorization for acquisition is useful for management as an internal control procedure, because it:

A) ensures that goods/services are used efficiently by company employees

B) ensures that goods/services were purchased from approved vendors

C) ensures that goods/services were purchased according to company policy

D) ensures that goods/services were purchased at the lowest possible price

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12) When a client uses perpetual inventory records, the tests of details of balances for inventory can be significantly reduced if the auditor believes the records are accurate The controls over the acquisitions included in the records are normally tested as a part of the:

A) tests of controls

B) tests of controls and tests of transactions

C) tests of details of balances

D) analytical procedures and tests of controls

Answer: B

Terms: Tests of details of balances for inventory

Diff: Moderate

Objective: LO 18-3

13) The auditor's internal control objective to determine that "recorded acquisitions are for goods and services received" satisfies the audit objective of:

14) Failure to record the acquisition of goods is a violation of which audit objective?

15) The internal control that requires that "checks are prenumbered and accounted for" satisfies the objective of:

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16) Because of the importance of tests of controls and substantive tests of transactions for acquisitions and cash disbursements, it is common in this audit area to use:

17) Which of the following tests of controls is least useful in assessing the transaction-related audit objective related to occurrence?

A) Examine documents in voucher package for occurrence

B) Examine supporting documents for indication of approval

C) Account for sequence of vouchers

D) Attempt to input transactions with valid and invalid vendors

Answer: C

Terms: Tests of controls for transaction-related audit objectives related to occurrence

Diff: Moderate

Objective: LO 18-3

18) You are performing the audit of Jenkins and Company Your tests of controls and tests of transactions for accounts payable demonstrate that the controls are operating effectively This would normally allow you to:

A) eliminate the need for substantive testing of balances for accounts payable

B) reduce the need for substantive testing of balances for accounts payable

C) reduce control tests in other transactions cycles

D) increase the need for substantive testing of balances for accounts payable

Answer: B

Terms: Tests of controls and tests of transactions demonstrate controls are operating effectively

Diff: Moderate

Objective: LO 18-3

19) An auditor is using audit sampling to test transactions in the acquisition and payment cycle She would normally set the tolerable exception rate at what level?

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20) Which of the following is the most effective control procedure to detect vouchers that were prepared for the payment of goods that were not received?

A) Count goods upon receipt in storeroom

B) Match purchase order, receiving report, and vendor's invoice for each voucher in accounts payable department

C) Compare goods received with goods requisitioned in receiving department

D) Verify vouchers for accuracy and approval in internal audit department

Answer: B

Terms: Most effective control procedure to detect vouchers that were prepared, and payment for goods not received Diff: Moderate

Objective: LO 18-3

21) Which of the following should sign checks under conditions of effective internal control?

A) Treasurer

B) Purchasing agent

C) Accounts payable clerk

D) Person preparing the checks

Answer: A

Terms: Effective internal controls; Responsible for signing checks

Diff: Moderate

Objective: LO 18-3

22) In an examination of vendor statements or vendor confirmations when doing substantive tests of balances the auditor needs to perform the following:

A) reconciliation with the accounts payable master file

B) reconciliation with vendor invoices

C) reconciliation with purchase orders

D) reconciliation with receiving reports

Answer: A

Terms: Substantive tests of balances with vendor statements or vendor confirmations

Diff: Moderate

Objective: LO 18-3

23) Internal controls that are likely to prevent the client from including as a business expense those transactions that primarily benefit management or other employees rather than the entity being audited satisfy the control objective that:

A) acquisitions are correctly valued

B) existing acquisitions are recorded

C) acquisitions are correctly classified

D) recorded acquisitions are for goods and services received

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24) A company failed to record an acquisition of merchandise and its related liability, but the

merchandise was included in ending inventory The effect on the financial statements was to:

A) understate both assets and liabilities

B) understate net income and owners' equity

C) understate assets and owners' equity

D) understate liabilities, and overstate both net income and owners' equity

AACSB: Analytic skills

25) The test of transactions which requires one to "reconcile recorded cash disbursements with the cash disbursements on the bank statement" satisfies the objective of:

26) For effective internal control purposes, the vouchers payable department generally should:

A) obliterate the quantity ordered on the receiving department copy of the purchase order

B) stamp, perforate, or otherwise cancel supporting documentation after payment is mailed

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 authorized

27) An auditor performs a test to determine whether all merchandise for which the client was billed was received The population for this test consists of all:

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28) Matching the supplier's invoice, the purchase order, and the receiving report prior to preparing the voucher would normally be the responsibility of the:

A) warehouse receiving function

29) A CPA 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) attachment of the receiving report to the disbursement report

B) prenumbering of disbursement vouchers

C) use of a limit or reasonableness test

D) prenumbering of receiving reports

Answer: A

Terms: Control procedure that prevents duplicate payment on invoice

Diff: Challenging

Objective: LO 18-3

30) With respect to a small company's system of purchasing supplies, an auditor's primary concern should be to obtain satisfaction that supplies ordered and paid for have been:

A) requested by and approved by authorized individuals who have no incompatible duties

B) used in the course of business and solely for business purposes during the year under audit

C) received, counted, and checked to quantities and amounts on purchase orders and invoices

D) properly recorded as assets and systematically amortized over the estimated useful life of the supplies Answer: C

Terms: Auditor's primary concern in system of purchasing supplies for supplies ordered and paid for

Diff: Challenging

Objective: LO 18-3

AACSB: Analytic skills

31) Authorization for accepting goods in the receiving department should be based on:

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