Chapter (2)

Audit of the Acquisition and Payment Cycle

Objective (1): Identify the accounts and the classes of transactions in the acquisition and
payment cycle.
The objective in the audit of the acquisition and payment cycle is to evaluate
whether the accounts affected by the acquisitions of goods and services and the cash
disbursements for those acquisitions are fairly presented in accordance with
accounting standards (U.S GAAP – IFRS).
 There are three classes of transactions included in the cycle:
1. Acquisitions of goods and services
2. Cash disbursements
3. Purchase returns and allowances and purchase discounts
 A list of accounts are involved in the purchasing cycle, Examples are listed
below:

 Comparison of revenues and expenditure cycle activities :

- These close linkage between the buyers expenditure cycle activities and revenues
cycle actives have important implication for the design of both parts accounting
information system designing test of control, test of transaction and test of balance

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 Questions Part (On Objective #1)
1) Multiple Choice Questions (MCQs) and True or False.
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
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?
A) Occurrence
B) Completeness
C) Cutoff
D) Rights and Obligations
Answer: C
3) The acquisition and payment cycle consists of one class of transactions.
A) True
B) False
Answer: B
4) The cash account is not part of the acquisitions and payment cycle.
A) True
B) False
Answer: B
5) The acquisition and payment cycle is highly controlled and not well-structured in most
companies.
A) True
B) False
Answer: B
Objective (2): Describe the business functions and the related documents and records in the
acquisition and payment cycle.
- The acquisition and payment cycle involves the decisions and processes necessary for
obtaining the goods and services for operating a business. The cycle typically begins with
the initiation of a purchase requisition by an authorized employee who needs the goods or
services, and it ends with payment on accounts payable.
- The third column of the following Table (p. 3) lists four business functions that occur
in every business in recording the three classes of transactions in the acquisition and
payment cycle.

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 Next, we examine in more detail each of the four business functions, paying
particular attention to the typical documents and records used.
1) Processing purchasing orders:
A) Purchase Requisition B) Purchase Order
Is used to request goods and services by an Is a document used to order goods and
authorized employee. This may take the form services from vendors. It includes the
of a request for such acquisitions as materials description, quantity, and related information
by production staff or the storeroom for goods and services the company intends
supervisor, outside repairs by office or plant to purchase and is often used to indicate
personnel, or insurance by the vice president authorization of the acquisition. Companies
in charge of property and equipment. often submit purchase orders electronically to
Companies often rely on prespecified reorder vendors who have made arrangements for
points used by the computer to initiate electronic data interchange (EDI). Unlike
inventory purchase requisitions requisitions, purchase orders are directed to
automatically. specific vendors.
2) Receiving goods and services:
- The receipt by the company of goods or services from the vendor is a critical point in the
cycle because it is when most companies first recognize the acquisition and related liability
on their records.
- When goods are received, adequate control requires examination for description, quantity,
timely arrival, and condition.
- A receiving report is a paper or electronic document prepared at the time goods are
received.
3) Recognize the liability:
The initial recording of liabilities affect the financial statement and the actual cash disbursement
therefore companies must take care to include all acquisition transaction that occurred and at the
correct amounts. Common documents and records include:
Vendor’s Invoice Debit Memo
Is a document received from the vendor and Is also a document received from the vendor
shows the amount owed for an acquisition. It and indicates a reduction in the amount owed
indicates the description and quantity of to a vendor because of returned goods or an
goods and services received, price (including allowance granted. It often takes the same
freight), cash discount terms, date of the form as a vendor’s invoice, but it supports
billing, and total amount. The vendor’s reductions in accounts payable rather than
invoice is important because it indicates the increases.
amount recorded in the acquisition
transaction file.
Voucher Acquisitions Transaction File
Is commonly used by organizations to This is a computer generated file that
establish a formal means of recording and includes all acquisition transactions processed
controlling acquisitions, primarily by by the accounting system for a period, such

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enabling each acquisition transaction to be as a day, week, or month. It contains all
sequentially numbered. Vouchers include a information entered into the system and
cover sheet or folder for containing includes information for each transaction,
documents and a package of relevant such as vendor name, date, amount, account
documents such as the purchase order, copy classification or classifications, and
of the packing slip, receiving report, and description and quantity of goods and
vendor’s invoice. After payment, a copy of services purchased. The file can also include
the check or electronic funds transfer is added purchase returns and allowances or there can
to the voucher package. be a separate file for those transactions.
Acquisitions Journal or Listing Accounts Payable Master File
Referred to as the purchases journal, is Records acquisitions, cash disbursements, and
generated from the acquisitions transaction acquisition returns and allowances transactions
file and typically includes the vendor name, for each vendor. The master file is updated from
date, amount, and account classification the acquisition, returns and allowances, and cash
or classifications for each transaction, such as disbursement computer transaction files. The
total of the individual account balances in the
repair and maintenance, inventory, or
master file equals the total balance of accounts
utilities. It also identifies whether the
payable in the general ledger. A printout of the
acquisition was for cash or accounts payable. accounts payable master file shows, by vendor,
The journal or listing can cover any time the beginning balance in accounts payable, each
period, typically a month. acquisition, acquisition return and allowance,
cash disbursement, and the ending balance. Many
companies do not maintain an accounts payable
master file by vendor. These companies pay on
the basis of individual vendor’s invoices.
Therefore, the total of unpaid vendors’ invoices
in the master file equals total accounts payable.
Accounts Payable Trial Balance Vendor’s Statement
Listing includes the amount owed to each Is a document prepared monthly by the
vendor or for each invoice or voucher at a vendor and indicates the beginning balance,
point in time. It is prepared directly from the acquisitions, returns and allowances,
accounts payable master file. payments to the vendor, and ending balance.
These balances and activities are the vendor’s
representations of the transactions for the
period, not the client’s. Except for disputed
amounts and timing differences, the client’s
accounts payable master file should be the
same as the vendor’s statement.

4) Processing and recording cash disbursement:

Check Cash Disbursements Transaction File
This document is commonly used to pay for This is a computer generated file that
the acquisition when payment is due. Most includes all cash disbursements transactions
companies use computer prepared checks processed by the accounting system for a

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 based on information included in the period, such as a day, week, or month. It
acquisition transactions file at the time goods includes the same type of information
and services are received. Checks are discussed for the acquisitions transaction file.
typically prepared in a multi-copy format,
with the original going to the payee, one copy
filed with the vendor’s invoice and other
supporting documents, and another filed
numerically. In most cases, individual checks
are recorded in a cash disbursements
transaction file
After a check includes the signature of an
authorized person, it is an asset. Therefore,
signed checks should be mailed by the signer
or a person under the signer’s control. When
cashed by the vendor and cleared by the
client’s bank, it is called a cancelled check.
At that point it is no longer an asset, but now
is a document.
Cash Disbursements Journal or Listing
This is a listing or report generated from the cash disbursements transaction file that includes
all transactions for any time period. The same transactions, including all relevant information,
are included in the accounts payable master file and general ledger
Questions Part (On Objective #2)
1. Multiple Choice Questions (MCQs) and True or False.
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
D) purchase requisition
Answer: A
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
D) purchase requisition
Answer: B
3) Which of the following accounts is not included in the acquisitions class of transactions?
A) Inventory
B) Prepaid expenses
C) Purchase discounts
D) Accounts payable
Answer: C
4) A document indicating a reduction in the amount owed to a vendor because of returned goods
is:

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A) a debit memo.
B) a credit memo.
C) a receiving report.
D) a contractual adjustment form.
Answer: A
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:
A) voucher.
B) purchase order.
C) receiving report.
D) purchase requisition.
Answer: A
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
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
Answer: D
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.
D) dunning letters.
Answer: B
9) After a purchase requisition is approved, a ________ must be initiated to purchase the goods
or
services.
A) purchase order
B) vendor order
C) call order
D) vendor invoice
Answer: A
10) A document generally received from the vendor which indicates a reduction in the amount
owed due to the company granting an allowance is:
A) vendor invoice.
B) debit memo.

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C) credit adjustment form.
D) credit memo.
Answer: B
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.
Answer: B
12) The acquisition and payment cycle typically begins with the initiation of purchase requisition
for goods and services from an authorized individual.
A) True
B) False
Answer: A
13) Avendor 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.
A) True
B) False
Answer: B
14) 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 voucher.
A) True
B) False
Answer: B
15) An acquisitions transaction file is a computer generated file that includes all information
entered into the system regarding acquisition transactions.
A) True
B) False
Answer: A
16) Receiving reports are normally only used to document the receipt of goods and are not used
to document the receipt of services.
A) True
B) False
Answer: A

2. Essay
- Discuss each of the four business functions that comprise the acquisition and payment cycle.
- Describe purchase requisitions and purchase orders. What is a key difference between the two
documents?
3. 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):

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Objective (3): Understand internal control, and design and perform tests of controls and
substantive tests of transactions for the acquisition and payment cycle.
- The most timeconsuming accounts to verify by substantive tests of details of balances are
accounts receivable, inventory, fixed assets, accounts payable, and expense accounts.
 Tests of controls and substantive tests of transactions for the acquisition and
payment cycle are divided into two broad areas:
1. Tests of acquisitions, which concern three of the four business functions discussed
earlier in this chapter: processing purchase orders, receiving goods and services, and
recognizing the liability
2. Tests of payments, which concern the fourth function, processing, and recording cash
disbursements
Methodology for Designing Controls and Substantive Tests
 Understand Internal Control:
- The auditor gains an understanding of internal control for the acquisition and payment cycle
as part of performing risk assessment procedures by studying the client’s flowcharts,
reviewing internal control questionnaires, and performing walkthrough tests for acquisition
and cash disbursement transactions

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 Assess Planned Control Risk
- What are the key control functions for acquisition and payment cycle? The key internal
controls for each of the business functions described earlier in this chapter are examined.
These are authorization of purchases, separation of the custody of the received goods
from other functions, timely recording and independent review of transactions, and
authorization of payments to vendors.
1. Authorization of Purchases
- Proper authorization for acquisitions ensures that the goods and services acquired are for
authorized company purposes, and it avoids the acquisition of excessive or unnecessary
items.
- Most companies require different levels of authorization for different types of acquisitions or
dollar amounts. For example, acquisitions of fixed assets in excess of a specified dollar limit
require approval by the board of directors.
- After the purchase requisition for an acquisition has been approved, a purchase
order to acquire the goods or services must be initiated. A purchase order is issued to a
vendor for a specified item at a certain price to be delivered at or by a designated
time. The purchase order, issued either in written or electronic form, is generally
viewed as a legal document, and represents an offer to buy the goods or services.
- Companies commonly establish purchasing departments to ensure an adequate
quality of goods and services at a minimum price. For effective internal control, the
purchasing department should be separate from those who authorize the acquisition
or receive the goods.
- All purchase orders should be pre-numbered to permit easier accounting for all outstanding
purchases orders and should be designed to minimize the likelihood of unintentional
omissions on the form when goods are ordered.
2. Separation of Asset Custody from Other Functions
- Most companies have the receiving department initiate a receiving report as evidence of the
receipt and examination of goods.
- One copy is normally sent to the raw materials storeroom and another to the accounts
payable department for their information needs.
- To prevent theft and misuse, the goods should be physically controlled from the time of their
receipt until their use or disposal.
- The personnel in the receiving department should be independent of the storeroom
personnel and the accounting department.
- Finally, the accounting records should transfer responsibility for the goods each time they
are moved, from receiving to storage, from storage to manufacturing, etc
3. Timely Recording and Independent Review of Transactions
- In some companies, the recording of the liability for acquisitions is made on the basis of the
receipt of goods and services. In others, recording is deferred until the vendor’s invoice is
received.
- In either case, the accounts payable department typically has responsibility for verifying the
appropriateness of acquisitions. This is done by comparing the details on the purchase order,

9
 the receiving report, and the vendor’s invoice to determine that the descriptions, prices,
quantities, terms, and freight on the vendor’s invoice are correct.
- Typically, the accounts payable department also verifies extensions, footings, and account
distributions. In some cases, computer software matches documents and
verifies invoice accuracy automatically. The accounts payable department should also
account for all receiving reports to assure that the completeness objective is satisfied.
- An important control in the accounts payable and information technology departments is
the requirement that personnel who record acquisitions do not have access
to cash, marketable securities, and other assets. Adequate documents and records,
proper procedures for record keeping, and independent checks on performance are
also necessary controls in the accounts payable function.
4. Authorization of Payments: The most important controls over cash disbursements
include: What are the three important controls over cash disbursements? “Essay Question”
- The signing of checks by an individual with proper authority.
- Separation of responsibilities for signing checks and performing the accounts
payable function.
- Careful examination of supporting documents by the check signer at the time the
check is signed

 The checks should be pre-numbered to make it easier to account for all checks and
printed on special paper that makes it difficult to alter the payee or amount.
 Companies should take care to provide physical control over blank, voided, and signed
checks.
 Determine Extent of Testing of Controls
- After auditors identify key internal controls and deficiencies, they assess control
risk. When auditors intend to rely on controls to support a preliminary control risk
assessment below maximum, the auditor performs tests of controls to obtain evidence
that controls are operating effectively.
- As the operating effectiveness of controls improves and is supported by additional tests of
controls, the auditor is able to reduce substantive testing. Of course, if the client is an
accelerated filer public company, the auditor must document and test controls sufficiently to
issue an opinion on internal control over financial reporting.

 Design Tests of Controls and Substantive Tests of Transactions for Acquisitions

- The following table summarizes key internal controls, common tests of controls, and
common substantive tests of transactions for each transaction related audit objective. We
assume the existence of a separate acquisitions journal or listing for recording all
acquisitions.

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 Four of the six transaction related audit objectives for acquisitions deserve special
attention and are therefore examined more closely. The correctness of many asset,
liability, and expense accounts depends on the correct recording of transactions in
the acquisitions journal, especially related to these four objectives.
1-Recorded Acquisitions Are for Goods and Services Received, Consistent with the Best
Interests of the Client (Occurrence)
- If the auditor is satisfied that the controls are adequate for this objective, tests for improper
transactions and recorded transactions that did not occur can be greatly reduced.

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- Adequate controls prevent the unintentional recording of acquisitions that did not occur,
especially recording duplicate acquisitions. Adequate controls are also likely to prevent the
client from including as a business expense or asset fraudulent transactions or those that
primarily benefit management or other employees rather than the entity being audited.
- In some instances, improper transactions are obvious, such as the acquisition of unauthorized
personal items by employees. In other instances, the appropriateness of a transaction is more
difficult to evaluate, such as the payment of officers’ memberships to country clubs or
expense paid vacations to foreign countries for management and their families.
- If the controls over improper transactions or transactions that did not occur are inadequate,
more extensive examination of supporting documentation is necessary.
2. Existing Acquisitions Are Recorded (Completeness)
Failure to record the acquisition of goods and services received understates accounts payable
and may result in an overstatement of net income and owners’ equity. Therefore, auditors
consider this an essential objective for acquisitions. It may be difficult in some audits to
perform tests of details of balances to determine whether unrecorded transactions exist, so the
auditor must rely on controls and substantive tests of transactions for this purpose. In addition,
because the audit of accounts payable usually takes considerable time, effective internal
controls, properly tested, can significantly reduce audit costs.
3. Acquisitions Are Accurately Recorded (Accuracy)
The extent of tests of details of many balance sheet and expense accounts depends on the
auditor’s evaluation of the effectiveness of the internal controls over the accuracy of recorded
acquisition transactions. For example, if the auditor believes that the fixed asset transactions are
correctly recorded in the acquisitions journal, it is acceptable to vouch fewer current period
acquisitions during tests of details of balances than if the controls are inadequate. When a client
uses perpetual inventory records, tests of details of inventory can also be significantly reduced
if the auditor believes the perpetual records are accurate. The controls over acquisitions
included in the perpetual records are normally tested as a part of the tests of controls and
substantive tests of transactions for acquisitions.
4. Acquisitions Are Correctly Classified (Classification)
- Tests of details of certain individual accounts can be reduced if the auditor believes that
internal controls are adequate to provide reasonable assurance of correct classification in the
acquisitions journal.
- Although all accounts are affected to some degree by effective controls over classification,
the two areas most affected are current period acquisitions of fixed assets, and all expense
accounts, such as repairs and maintenance, utilities, and advertising.
- It is relatively time-consuming for auditors to perform documentation tests
of current period fixed asset acquisitions and expense accounts for accuracy and
classification. Therefore, time-savings can be significant when controls are effective.
Questions Part (On Objective #3)
1. Multiple Choice Questions (MCQs) and True or False.

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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?
A) Accuracy
B) Classification
C) Completeness
D) Occurrence
Answer: D
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:
A) Vendor Invoices
B) Purchase Orders
C) Receiving Reports
D) Cash Disbursements for Accounts Payables
Answer: C
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
Answer: D
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
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
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
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.

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D) purchase requisition, purchase order, and receiving report.
Answer: C
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
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
10) Which of the following is not a key control in the acquisition and payment cycle?
A) Authorization of purchases
B) Authorization of credit
C) Timely recording and independent review of transactions
D) Authorization of payments
Answer: B
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.
Answer: C
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
13) The auditor's internal control objective to determine that "recorded acquisitions are for
goods and
services received" satisfies the audit objective of:
A) accuracy.
B) occurrence.
C) authorization.
D) completeness.
Answer: B
14) Failure to record the acquisition of goods is a violation of which audit objective?
A) Accuracy
B) Occurrence

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C) Authorization
D) Completeness
Answer: D
15) The internal control that requires that "checks are prenumbered and accounted for" satisfies
the objective of:
A) accuracy.
B) existence.
C) completeness.
D) posting and summarization.
Answer: C
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:
A) block sampling.
B) variables sampling.
C) attributes sampling.
D) probability proportional to size sampling.
Answer: C
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
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
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?
A) low
B) medium
C) high
D) indeterminate
Answer: A
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
21) Which of the following should sign checks under conditions of effective internal control?
A) Treasurer

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B) Purchasing agent
C) Accounts payable clerk
D) Person preparing the checks
Answer: A
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
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.
Answer: D
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.
Answer: D
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:
A) occurrence.
B) completeness.
C) accuracy.
D) posting and summarization.
Answer: B
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
employee.
Answer: C
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:
A) merchandise received.
B) vendors' invoices.
C) canceled checks.
D) receiving reports.
Answer: B
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:

16
A) warehouse receiving function.
B) purchasing function.
C) general accounting function.
D) treasury function.
Answer: C
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
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
31) Authorization for accepting goods in the receiving department should be based on:
A) Vendor Invoice.
B) Requisition Request.
C) Purchase order from the purchasing department.
D) Vendor Statement.
Answer: C
32) 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.
A) True
B) False
Answer: A
33) Failure to record the acquisition of goods directly affects the balance in Accounts payable and
may result in an understatement of ending inventory.
A) True
B) False
Answer: A
34) If tests of controls and substantive tests of transactions related to perpetual inventory records
reveal controls over perpetual are effective, the auditor is justified in reducing the extent of tests
of details of inventory.
A) True
B) False
Answer: A
35) 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) True

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B) False
Answer: A
36) 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."
A) True
B) False
Answer: A
37) 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.
A) True
B) False
Answer: A
38) Auditors are normally more concerned about violations of the completeness objective for
acquisitions than about violations of the occurrence objective for acquisitions.
A) True
B) False
Answer: A
39) 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.
A) True
B) False
Answer: A
40) The internal control "Vouchers are pre-numbered and accounted for" relates most closely to
the occurrence objective for acquisitions.
A) True
B) False
Answer: B
41) 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.
A) True
B) False
Answer: A

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