TEST BANK principles of auditing and othechapter 14 accounts payable and other liabilities

Chapter 14 - Accounts Payable and Other Liabilities Chapter 14 Accounts Payable and Other Liabilities True / False Questions Overstatement of financial results can involve failure to record a transaction True False Confirmation of accounts payable is a required generally accepted auditing procedure True False The primary objective of the auditors' examination of accounts payable is to determine whether payments are made on a timely basis True False Auditors generally consider the evidence regarding accounts payable in the client's possession as more reliable than that for accounts receivable True False Information regarding the proper cutoff of accounts payable is generally obtained in conjunction with the audit of inventories True False Accounts payable from an officer should be classified separately from other accounts payable True False 14-1 Chapter 14 - Accounts Payable and Other Liabilities It is more important to maintain effective internal control over accounts payable as it is to maintain effective internal control over accounts receivable True False For effective internal control over accounts payable, the purchasing department should approve invoices for payment True False Accounts payable generally present the auditors with difficult valuation problems True False 10 The confirmation of existing accounts payable does not prove the completeness of recorded accounts payable True False Multiple Choice Questions 11 Assume that the auditors are concerned about disbursement transactions that have been recorded for improper amounts Which procedure(s) would possibly identify these transactions? A Option A B Option B C Option C D Option D 14-2 Chapter 14 - Accounts Payable and Other Liabilities 12 Which of the following best describes a voucher prepared under good internal control? A A document prepared by Stores that indicates amount to be purchased B A document prepared by Receiving that indicates the quantity received and approves payment C A document prepared by Accounts Payable authorizing a cash disbursement D A document received by Purchasing, from a supplier, indicating quantity of goods purchased and amount due 13 An auditor wishes to perform tests of controls on a client's cash disbursements relating to accounts payable If the control procedures leave no audit trail of documentary evidence, the auditor most likely will test the procedures by: A Confirmation and observation B Observation and inquiry C Analytical procedures and confirmation D Inquiry and analytical procedures 14 Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed? A Scan the sales journal for sequential and unusual entries B Examine shipping documents for matching sales invoices C Compare the accounts receivable ledger to daily sales summaries D Inspect unused sales invoices for consecutive pre-numbering 15 Which of the following audit procedures is best for identifying unrecorded trade accounts payable? A Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payable applies to the prior period B Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports C Examining unusual relationships between monthly accounts payable balances and recorded cash payments D Reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date 14-3 Chapter 14 - Accounts Payable and Other Liabilities 16 An entity's internal control requires for every check request that there be an approved voucher, supported by a prenumbered purchase order, and a prenumbered receiving report To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select for testing from the population of: A Purchase orders B Canceled checks C Receiving reports D Approved vouchers 17 A client recorded a payable for a large purchase twice Which of the following controls would be most likely to detect this error in a timely and efficient manner? A Footing the purchases journal B Reconciling vendors' monthly statements with subsidiary payable ledger accounts C Tracing totals from the purchases journal to the ledger accounts D Sending written quarterly confirmations to all vendors 18 When an auditor finds a debit to accounts payable, which of the following accounts is most likely to be credited? A Accounts Receivable B Accrued liabilities C Cash D Cost of goods sold 19 Which of the following is an example of an accrued liability? A Accounts payable B Notes payable C Prepaid Insurance D Product warranty liability 20 A likely analytical procedure to test the accuracy of purchase discounts would be to compute the ratio of cash discounts earned to A Accounts payable B Notes payable C Purchases D Sales discounts 14-4 Chapter 14 - Accounts Payable and Other Liabilities 21 Auditors may choose not to confirm accounts payable because: A Confirmation obtains evidence identical to that obtained by cutoff tests B Other reliable external evidence to support the balances is likely to be available C A reading of the corporate minutes reveals that confirmation is unnecessary D The balances due will have changed between the year-end and the date of confirmation 22 The assertion most directly addressed when performing the search for unrecorded liabilities is: A Completeness B Existence C Presentation D Rights 23 Which of the following manipulations would understate accounts payable on the financial statements? A Overstatement of purchases B Closing the cash disbursements journal prior to year-end C Leaving the cash receipts journal open after year-end D Overstating purchase returns 24 Which statement is correct with respect to accounts payable confirmations? A The negative form is used in most circumstances B Accounts with new suppliers are always confirmed C They are a required auditing procedure D They are more frequently used in situations in which some vendors don't send monthly statements 25 The confirmation of accounts payable is most closely associated with: A Assertion risk B Detection risk C Inherent risk D Relative risk 14-5 Chapter 14 - Accounts Payable and Other Liabilities 26 Which of the following audit procedures is aimed most directly at testing the completeness assertion for accounts payable: A Footing the list of accounts payable B Examining underlying documentation for cash disbursements in the period after year-end C Tracing shipping reports issued on or before year-end to related customer purchase orders and invoices D Tracing shipping reports after year-end to related customer purchase orders and invoices 27 Which of the following best describes the auditors' approach to the audit of accrued liabilities? A Test computations B Confirmation C Observation D A low planned assessed level of control risk 28 Which of the following statements is correct regarding accounts payable and the auditor's procedures? A Because it is generally more difficult to discover a transaction that has not been recorded than to discover one that has been recorded incorrectly, the audit objective of completeness drives many of the substantive procedures applied to these balances B A judgment whether an unrecorded payable should be recorded before the financial statements are prepared depends entirely upon the source of the payable C The confirmation of accounts payable selected from the year-end trial balance of such accounts is most effective in discovering unrecorded liabilities D Unrecorded payables are often discovered through examining vouchers payable entered into the voucher register prior to the balance sheet date 29 Which of the following assertions is of principle concern to the auditors in the examination of accounts payable? A Existence B Completeness C Valuation D Authorization 14-6 Chapter 14 - Accounts Payable and Other Liabilities 30 Which of the following best describes the specific accounts payable that are selected for confirmation? A Accounts with large balances B Accounts with zero balances C Accounts with a large amount of activity regardless of their balance D Accounts for which vendor statements are available 31 Most of the audit work on accounts payable is typically performed: A Before the balance sheet date B At the balance sheet date in conjunction with inventory cutoff tests C After the balance sheet date D Simultaneously with the audit of accrued liabilities 32 When the auditors discover an understatement of liabilities, they would most likely also expect to find an: A Understatement of assets B Understatement of owners' equity C Overstatement of expenses D Understatement of revenues 33 Which of the following procedures for detecting unrecorded transactions at the client's December 31 year-end is least likely to result in discovery of an unrecorded year-end account payable? A Examination of invoices received after year-end B Examination of vouchers payable entered in the January voucher register C Examination of January receiving reports prepared for goods shipped FOB destination in December to the client D Confirmation of year-end accounts payable 34 For good internal control, a copy of a receiving report should be sent to all of the following departments except: A Accounts payable B Purchasing C Stores D Shipping 14-7 Chapter 14 - Accounts Payable and Other Liabilities 35 Auditors should be aware that a voucher system may result in which of the following at year-end: A Understatement of liabilities B Overstatement of assets C Understatement of owners' equity D Overstatement of expenses 36 Accrued liabilities generally differ from accounts payable in that accrued liabilities: A Accumulate over time B Are usually confirmed at year-end C Depend upon the existence of a transaction for original recording of the account D Are never included in cost of goods sold 37 The form typically used to confirm accounts payable: A Does not require a response from the vendor B Confirms the balance recorded by the client at year-end C Requires the vendor to indicate the amount of the payable D Is the same as the form used to confirm accounts receivable 38 Which of the following is a control procedure that is usually applied to accounts payable? A Periodic confirmation of accounts payable B Mailing statements to vendors detailing their account C Periodic aging of accounts payable D Reconciliation of vendor statements with accounts payable 39 Which of the following is the best control procedure to prevent the payment of an invoice twice? A Review of supporting documentation by the person signing the check B Requiring dual signatures on checks C Use of a check protector D Reconciliation of vendor statements to accounts payable 14-8 Chapter 14 - Accounts Payable and Other Liabilities 40 The auditors' search for unrecorded liabilities is completed: A During an interim period B At the balance sheet date C Subsequent to the balance sheet date D At any time during the examination 41 When the auditors select a sample of items from the vouchers payable register for the last month of the period under audit and trace these items to underlying documents, the auditors are gathering evidence primarily in support of the assertion that: A Recorded obligations were paid B Incurred obligations were recorded in the correct period C Recorded obligations occurred prior to year-end D Cash disbursements were recorded as incurred obligation 42 Internal control over accounts payable is improved when: A Purchase orders show approved prices B Informal bids are obtained C Annual trial balance of accounts payable subsidiary ledgers is required D Payment is made upon approval of the purchasing agent 43 With properly designed internal control, the same employee should not be permitted to: A Sign checks and cancel supporting documents B Receive merchandise and prepare a receiving report C Prepare disbursement vouchers and sign checks D Initiate a request to order merchandise and approve merchandise received 44 Unrecorded liabilities are most likely to be found during the review of which of the following documents? A Unpaid bills B Shipping records C Bills of lading D Unmatched sales invoices 14-9 Chapter 14 - Accounts Payable and Other Liabilities 45 Which of the following procedures is least likely to be completed before the balance sheet date? A Observation of inventory B Review of internal control over cash disbursements C Search for unrecorded liabilities D Confirmation of receivables 46 Which of the following audit procedures is least likely to detect an unrecorded liability? A Analysis and recomputation of interest expense B Analysis and recomputation of depreciation expense C Mailing of a cash confirmation form D Reading of the minutes of meetings of the board of directors 47 The auditor will most likely perform extensive tests for possible understatement of: A Revenues B Assets C Liabilities D Capital Essay Questions 48 The auditors may decide to confirm accounts payable on an audit engagement a Describe two reasons why the confirmation of accounts payable is not a generally accepted auditing procedure b Describe the audit circumstances in which the auditors are likely to decide to confirm accounts payable c Describe the types of accounts payable the auditors are likely to select for confirmation 14-10 Chapter 14 - Accounts Payable and Other Liabilities 49 A major concern of the auditors is obtaining evidence about the completeness of recorded accounts payable a Describe the reason that the auditors are concerned with the completeness of accounts payable b Describe three ways in which the auditors establish the completeness of accounts payable 14-11 Chapter 14 - Accounts Payable and Other Liabilities Chapter 14 Accounts Payable and Other Liabilities Answer Key True / False Questions Overstatement of financial results can involve failure to record a transaction TRUE Difficulty: Medium Confirmation of accounts payable is a required generally accepted auditing procedure FALSE Difficulty: Medium The primary objective of the auditors' examination of accounts payable is to determine whether payments are made on a timely basis FALSE Difficulty: Easy Auditors generally consider the evidence regarding accounts payable in the client's possession as more reliable than that for accounts receivable TRUE Difficulty: Medium Information regarding the proper cutoff of accounts payable is generally obtained in conjunction with the audit of inventories TRUE Difficulty: Medium 14-12 Chapter 14 - Accounts Payable and Other Liabilities Accounts payable from an officer should be classified separately from other accounts payable TRUE Difficulty: Easy It is more important to maintain effective internal control over accounts payable as it is to maintain effective internal control over accounts receivable FALSE Difficulty: Medium For effective internal control over accounts payable, the purchasing department should approve invoices for payment FALSE Difficulty: Medium Accounts payable generally present the auditors with difficult valuation problems FALSE Difficulty: Easy 10 The confirmation of existing accounts payable does not prove the completeness of recorded accounts payable TRUE Difficulty: Medium 14-13 Chapter 14 - Accounts Payable and Other Liabilities Multiple Choice Questions 11 Assume that the auditors are concerned about disbursement transactions that have been recorded for improper amounts Which procedure(s) would possibly identify these transactions? A Option A B Option B C Option C D Option D Difficulty: Hard 12 Which of the following best describes a voucher prepared under good internal control? A A document prepared by Stores that indicates amount to be purchased B A document prepared by Receiving that indicates the quantity received and approves payment C A document prepared by Accounts Payable authorizing a cash disbursement D A document received by Purchasing, from a supplier, indicating quantity of goods purchased and amount due Difficulty: Medium 13 An auditor wishes to perform tests of controls on a client's cash disbursements relating to accounts payable If the control procedures leave no audit trail of documentary evidence, the auditor most likely will test the procedures by: A Confirmation and observation B Observation and inquiry C Analytical procedures and confirmation D Inquiry and analytical procedures Difficulty: Medium 14-14 Chapter 14 - Accounts Payable and Other Liabilities 14 Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed? A Scan the sales journal for sequential and unusual entries B Examine shipping documents for matching sales invoices C Compare the accounts receivable ledger to daily sales summaries D Inspect unused sales invoices for consecutive pre-numbering Difficulty: Hard 15 Which of the following audit procedures is best for identifying unrecorded trade accounts payable? A Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payable applies to the prior period B Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports C Examining unusual relationships between monthly accounts payable balances and recorded cash payments D Reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date Difficulty: Hard 16 An entity's internal control requires for every check request that there be an approved voucher, supported by a prenumbered purchase order, and a prenumbered receiving report To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select for testing from the population of: A Purchase orders B Canceled checks C Receiving reports D Approved vouchers Difficulty: Hard Source: AICPA 14-15 Chapter 14 - Accounts Payable and Other Liabilities 17 A client recorded a payable for a large purchase twice Which of the following controls would be most likely to detect this error in a timely and efficient manner? A Footing the purchases journal B Reconciling vendors' monthly statements with subsidiary payable ledger accounts C Tracing totals from the purchases journal to the ledger accounts D Sending written quarterly confirmations to all vendors Difficulty: Medium Source: AICPA 18 When an auditor finds a debit to accounts payable, which of the following accounts is most likely to be credited? A Accounts Receivable B Accrued liabilities C Cash D Cost of goods sold Difficulty: Easy 19 Which of the following is an example of an accrued liability? A Accounts payable B Notes payable C Prepaid Insurance D Product warranty liability Difficulty: Medium 20 A likely analytical procedure to test the accuracy of purchase discounts would be to compute the ratio of cash discounts earned to A Accounts payable B Notes payable C Purchases D Sales discounts Difficulty: Easy 14-16 Chapter 14 - Accounts Payable and Other Liabilities 21 Auditors may choose not to confirm accounts payable because: A Confirmation obtains evidence identical to that obtained by cutoff tests B Other reliable external evidence to support the balances is likely to be available C A reading of the corporate minutes reveals that confirmation is unnecessary D The balances due will have changed between the year-end and the date of confirmation Difficulty: Hard 22 The assertion most directly addressed when performing the search for unrecorded liabilities is: A Completeness B Existence C Presentation D Rights Difficulty: Medium 23 Which of the following manipulations would understate accounts payable on the financial statements? A Overstatement of purchases B Closing the cash disbursements journal prior to year-end C Leaving the cash receipts journal open after year-end D Overstating purchase returns Difficulty: Medium 24 Which statement is correct with respect to accounts payable confirmations? A The negative form is used in most circumstances B Accounts with new suppliers are always confirmed C They are a required auditing procedure D They are more frequently used in situations in which some vendors don't send monthly statements Difficulty: Medium 14-17 Chapter 14 - Accounts Payable and Other Liabilities 25 The confirmation of accounts payable is most closely associated with: A Assertion risk B Detection risk C Inherent risk D Relative risk Difficulty: Medium 26 Which of the following audit procedures is aimed most directly at testing the completeness assertion for accounts payable: A Footing the list of accounts payable B Examining underlying documentation for cash disbursements in the period after year-end C Tracing shipping reports issued on or before year-end to related customer purchase orders and invoices D Tracing shipping reports after year-end to related customer purchase orders and invoices Difficulty: Hard 27 Which of the following best describes the auditors' approach to the audit of accrued liabilities? A Test computations B Confirmation C Observation D A low planned assessed level of control risk Difficulty: Medium 14-18 Chapter 14 - Accounts Payable and Other Liabilities 28 Which of the following statements is correct regarding accounts payable and the auditor's procedures? A Because it is generally more difficult to discover a transaction that has not been recorded than to discover one that has been recorded incorrectly, the audit objective of completeness drives many of the substantive procedures applied to these balances B A judgment whether an unrecorded payable should be recorded before the financial statements are prepared depends entirely upon the source of the payable C The confirmation of accounts payable selected from the year-end trial balance of such accounts is most effective in discovering unrecorded liabilities D Unrecorded payables are often discovered through examining vouchers payable entered into the voucher register prior to the balance sheet date Difficulty: Medium 29 Which of the following assertions is of principle concern to the auditors in the examination of accounts payable? A Existence B Completeness C Valuation D Authorization Difficulty: Medium 30 Which of the following best describes the specific accounts payable that are selected for confirmation? A Accounts with large balances B Accounts with zero balances C Accounts with a large amount of activity regardless of their balance D Accounts for which vendor statements are available Difficulty: Medium 14-19 Chapter 14 - Accounts Payable and Other Liabilities 31 Most of the audit work on accounts payable is typically performed: A Before the balance sheet date B At the balance sheet date in conjunction with inventory cutoff tests C After the balance sheet date D Simultaneously with the audit of accrued liabilities Difficulty: Medium 32 When the auditors discover an understatement of liabilities, they would most likely also expect to find an: A Understatement of assets B Understatement of owners' equity C Overstatement of expenses D Understatement of revenues Difficulty: Medium 33 Which of the following procedures for detecting unrecorded transactions at the client's December 31 year-end is least likely to result in discovery of an unrecorded year-end account payable? A Examination of invoices received after year-end B Examination of vouchers payable entered in the January voucher register C Examination of January receiving reports prepared for goods shipped FOB destination in December to the client D Confirmation of year-end accounts payable Difficulty: Hard 34 For good internal control, a copy of a receiving report should be sent to all of the following departments except: A Accounts payable B Purchasing C Stores D Shipping Difficulty: Hard 14-20 Chapter 14 - Accounts Payable and Other Liabilities 35 Auditors should be aware that a voucher system may result in which of the following at year-end: A Understatement of liabilities B Overstatement of assets C Understatement of owners' equity D Overstatement of expenses Difficulty: Medium 36 Accrued liabilities generally differ from accounts payable in that accrued liabilities: A Accumulate over time B Are usually confirmed at year-end C Depend upon the existence of a transaction for original recording of the account D Are never included in cost of goods sold Difficulty: Medium 37 The form typically used to confirm accounts payable: A Does not require a response from the vendor B Confirms the balance recorded by the client at year-end C Requires the vendor to indicate the amount of the payable D Is the same as the form used to confirm accounts receivable Difficulty: Medium 38 Which of the following is a control procedure that is usually applied to accounts payable? A Periodic confirmation of accounts payable B Mailing statements to vendors detailing their account C Periodic aging of accounts payable D Reconciliation of vendor statements with accounts payable Difficulty: Medium 14-21 Chapter 14 - Accounts Payable and Other Liabilities 39 Which of the following is the best control procedure to prevent the payment of an invoice twice? A Review of supporting documentation by the person signing the check B Requiring dual signatures on checks C Use of a check protector D Reconciliation of vendor statements to accounts payable Difficulty: Medium 40 The auditors' search for unrecorded liabilities is completed: A During an interim period B At the balance sheet date C Subsequent to the balance sheet date D At any time during the examination Difficulty: Easy 41 When the auditors select a sample of items from the vouchers payable register for the last month of the period under audit and trace these items to underlying documents, the auditors are gathering evidence primarily in support of the assertion that: A Recorded obligations were paid B Incurred obligations were recorded in the correct period C Recorded obligations occurred prior to year-end D Cash disbursements were recorded as incurred obligation Difficulty: Medium Source: AICPA 42 Internal control over accounts payable is improved when: A Purchase orders show approved prices B Informal bids are obtained C Annual trial balance of accounts payable subsidiary ledgers is required D Payment is made upon approval of the purchasing agent Difficulty: Medium Source: AICPA 14-22 Chapter 14 - Accounts Payable and Other Liabilities 43 With properly designed internal control, the same employee should not be permitted to: A Sign checks and cancel supporting documents B Receive merchandise and prepare a receiving report C Prepare disbursement vouchers and sign checks D Initiate a request to order merchandise and approve merchandise received Difficulty: Medium Source: AICPA 44 Unrecorded liabilities are most likely to be found during the review of which of the following documents? A Unpaid bills B Shipping records C Bills of lading D Unmatched sales invoices Difficulty: Easy Source: AICPA 45 Which of the following procedures is least likely to be completed before the balance sheet date? A Observation of inventory B Review of internal control over cash disbursements C Search for unrecorded liabilities D Confirmation of receivables Difficulty: Medium Source: AICPA 46 Which of the following audit procedures is least likely to detect an unrecorded liability? A Analysis and recomputation of interest expense B Analysis and recomputation of depreciation expense C Mailing of a cash confirmation form D Reading of the minutes of meetings of the board of directors Difficulty: Medium Source: AICPA 14-23 Chapter 14 - Accounts Payable and Other Liabilities 47 The auditor will most likely perform extensive tests for possible understatement of: A Revenues B Assets C Liabilities D Capital Difficulty: Easy Source: AICPA Essay Questions 48 The auditors may decide to confirm accounts payable on an audit engagement a Describe two reasons why the confirmation of accounts payable is not a generally accepted auditing procedure b Describe the audit circumstances in which the auditors are likely to decide to confirm accounts payable c Describe the types of accounts payable the auditors are likely to select for confirmation a Confirmation of accounts payable is not a generally accepted auditing procedure because: The auditors' primary objective with respect to accounts payable is establishing completeness, and confirmation is primarily a test of existence, and There is a large amount of reliable evidence in the client's possession supporting the amount of accounts payable, such as vendors' statements b The auditors are likely to decide to confirm accounts payable when the extent of the evidence available in the client's possession is not sufficient c The auditors select accounts that are more likely to be in error, such as accounts with a high degree of activity Accounts with zero balances may also be selected Difficulty: Medium 14-24 Chapter 14 - Accounts Payable and Other Liabilities 49 A major concern of the auditors is obtaining evidence about the completeness of recorded accounts payable a Describe the reason that the auditors are concerned with the completeness of accounts payable b Describe three ways in which the auditors establish the completeness of accounts payable a The auditors are concerned about completeness of accounts payable because the company's financial strength is exaggerated by an understatement of liabilities b Procedures used to establish the completeness of recorded accounts payable include (only three required):  Confirmation of accounts payable  Reconciliation of liabilities with vendor statements  Comparison of cash payments subsequent to the balance sheet date with the accounts payable trial balance  Investigation of unmatched invoices and unbilled receiving reports  Investigation of invoices received subsequent to the balance sheet date Difficulty: Medium 14-25 ... completeness of accounts payable 14- 11 Chapter 14 - Accounts Payable and Other Liabilities Chapter 14 Accounts Payable and Other Liabilities Answer Key True / False Questions Overstatement of financial... audit of inventories TRUE Difficulty: Medium 14- 12 Chapter 14 - Accounts Payable and Other Liabilities Accounts payable from an officer should be classified separately from other accounts payable. .. examination of accounts payable? A Existence B Completeness C Valuation D Authorization 14- 6 Chapter 14 - Accounts Payable and Other Liabilities 30 Which of the following best describes the specific accounts