Chapter 13 Audit of The Acquisition and Payment Cycle: Auditing, 14e (Arens)

Auditing, 14e (Arens)
Chapter 13 Audit of the Acquisition and Payment Cycle
13.1 Identify the accounts and the classes of transactions in the acquisition and payment cycle
1) The major balance sheet account in the acquisition and payment cycle is
A) accounts payable.
B) purchases.
C) merchandise inventory.
D) common stock.
Answer: A
Diff: 2 Type: MC Page Ref: 445
Learning Obj.: 13-1 Identify the accounts and the classes of transactions in the acquisition and payment
cycle
2) Which business functions are part of the acquisition and payment cycle?
Answer: Business functions that are part of the acquisition and payment cycle are:
1) Processing purchase orders.
2) Receiving goods and services.
3) Recognizing the liability in the books and records.
4) Processing and recording cash disbursements.
Diff: 2 Type: ES Page Ref: 446
Learning Obj.: 13-1 Identify the accounts and the classes of transactions in the acquisition and payment
cycle
13.2 Describe the major business functions, documents, and records in the acquisition and payment cycle
1) Which of the following areas are tested as part of the audit of the acquisition and payment cycle?
A) payment for raw materials, receipt of raw materials, shipment of goods to customers
B) processing of sales orders, production of goods for clients, and subsequent invoicing
C) processing vendor invoices, vendor master file changes, shipment of goods to customers
D) processing purchase orders, processing cash disbursements, receiving goods and services
Answer: D
Diff: 2 Type: MC Page Ref: 446-458
Learning Obj.: 13-2 Describe the major business functions, documents, and records in the acquisition and
payment cycle
2) A document identifying the description, vendor, quantity, and related information for goods and
services the company intends to purchase is the
A) purchases catalogue.
B) purchase requisition.
C) receiving report.
D) purchase order.
Answer: D
payment cycle
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3) The purchase order, usually in writing, is a legal document that is
A) a non-binding agreement between client and vendor.
B) an offer to buy.
C) not enforceable if it is not in writing.
D) an acceptance of a vendor's catalogue offer to sell.
Answer: B
payment cycle
4) When accounts payable and purchasing systems are highly automated, more detail is included in the
transaction files. This deeper level of detail is illustrated by including
A) economic order quantities for each item that is held in inventory, including delivery times.
B) quantities, prices, and item descriptions from each line of the vendor invoice.
C) sequentially numbered purchase requisitions and purchase orders (with matching numbers).
D) receiving report numbers that match the numbers on the vendor invoices for improved tracking.
Answer: B
payment cycle
5) The proper recognition of accounts payable liabilities are crucial to ensure fair statement of the ending
accounts payable balance. What documents are required to adequately support accounts payable?
A) receiving reports and bill of lading documents that indicate dates shipped
B) bill of lading documents matched to the internal purchase requisition
C) purchase requisition (authorized) matched with the purchase order to the vendor
D) vendor invoices matched to receiving reports and authorized purchase documents
Answer: D
payment cycle
6) The point at which most companies first recognize the acquisition and related liability on their records
is when the
A) purchase requisition is completed.
B) purchase order is completed.
C) receiving report is completed.
D) vendor's invoice is paid.
Answer: C
payment cycle
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7) What documentary evidence is appropriate in attempting to determine if recorded purchase
transactions are valid and prices on the vendors' invoices are correct?
A) purchase requisitions and accounts payable entries
B) purchase requisitions and purchases orders
C) receiving report and purchase orders
D) purchase orders and bid quotes
Answer: C
payment cycle
8) To determine whether accounts payable are complete, an auditor performs a test to verify that all
merchandise received is recorded. Which of the following is the population for this test?
A) supplier invoices
B) purchase orders
C) receiving reports
D) customer invoices
Answer: C
payment cycle
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9) A) Describe each of the four business functions that comprise the acquisition and payment cycle.
B) Describe the key documents used in processing purchase orders for the acquisitions and payment
cycle.
C) Discuss the key documents and records used in recognizing the liability function in the acquisitions
and payment cycle.
Answer:
A) 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
cheque for payment of the acquisition and recording of the cash disbursement in the cash disbursements
journal.
B) The key documents and files used in processing purchase orders in the acquisitions and payment cycle
are:
• Purchase requisition. This is a request by an authorized employee to the purchasing department to
place an order for inventory and other items used by an entity.
• Purchase order. This is prepared by the purchasing department indicating the description, quantity,
and related information for goods and services that the company intends to purchase.
C) The key documents and records used in the recognizing the liability function in the acquisitions and
payment cycle are:
• Vendor's invoice. This document, sent by the vendor, indicates the description and quantity of goods
and services received, price including freight, cash discount terms, and date of the billing.
Debit Memo. This document is used to indicate a reduction in the amount owed to a vendor because of
returned goods or an allowance granted.
Voucher. Is commonly used by organizations to establish a formal means of recording and controlling
acquisitions, primarily by enabling each acquisition transaction to be sequentially numbered.
Acquisitions Transaction File. This is a computer-generated file that includes all
acquisition transactions processed by the accounting system for a period, such as a
day, week, or month. It includes information for each transaction, such as vendor name, date, amount,
account classification or classifications, and description and quantity of goods and services purchased.
Acquisitions Journal or Listing. The acquisitions journal or listing, often referred to as
the purchases journal, is generated from the acquisitions transaction file and typically
includes the vendor name, date, amount, and account classification or classifications
for each transaction, such as repair and maintenance, inventory, or utilities.
Accounts Payable Master File. An accounts payable master file records acquisitions,
cash disbursements, and acquisition returns and allowances transactions for each vendor.
The master file is updated from the acquisition, returns and allowances, and cash
disbursement computer transaction files.
Accounts Payable Trial Balance. An accounts payable trial balance listing includes
the amount owed to each vendor or for each invoice or voucher at a point in time. It
is prepared directly from the accounts payable master file.
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Vendor's Statement. A vendor's statement is a document prepared monthly by the
vendor and indicates the beginning balance, acquisitions, returns and allowances,
payments to the vendor, and ending balance.
Diff: 2 Type: ES Page Ref: 446-448
payment cycle
13.3 Identify significant risks, and assess risk of material misstatement for the acquisition and payment
cycle
1) The most common fraud in the acquisitions area is for the perpetrator to
A) alter the cheque payment file before it is printed so that the payee name is changed.
B) issue payments to fictitious vendors and deposit the cheques to a fictitious account.
C) change the optical characters at the bottom of a cheque to alter the account to be credited.
D) issue duplicate payments for invoices and then pocket the second cheque.
Answer: B
Learning Obj.: 13-3 Identify significant risks, and assess risk of material misstatement for the acquisition
and payment cycle
2) Many companies have inventory that is easy to steal and is readily marketable. Which of the following
controls helps to prevent theft and misuse of inventory?
A) physical control of inventory from time of receipt until use
B) proper access controls over the inventory master and transaction files
C) dual signatures required on all purchase orders over $10 000
D) purchase requisitions are to be approved by the production manager
Answer: A
and payment cycle
3) One of the ways to prevent the use of fictitious vendors to steal company funds is to
A) have adequate network access controls to prevent unauthorized access to transaction files.
B) ensure that accounts payable programs are available only in source code.
C) establish controls to establish only approved vendors.
D) reconcile the accounts payable trial balance to the general ledger.
Answer: C
and payment cycle
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4) One of the ways to prevent the use of fictitious vendors to steal company funds is by
A) having adequate network access controls to prevent unauthorized access to transaction files.
B) ensuring that accounts payable programs are available only in source code.
C) having software automatically check for duplicate invoice numbers before payment.
D) having authorized personnel carefully scrutinize documentation supporting payments.
Answer: D
and payment cycle
5) One form of accounts payable fraud occurs when the accounts payable clerk or another employee
steals a cheque made payable to a legitimate vendor. The purchaser's information is then resubmitted for
payment and the second cheque sent to the vendor. How could such a theft be prevented?
A) Cancel supporting documents to prevent their being re-used.
B) Make sure that all payments are supported by valid documents.
C) Reconcile the transaction files to the accounts payable master file.
D) Have receiving reports authorized independently.
Answer: A
and payment cycle
6) To protect against theft of physical assets (such as computer equipment), the company should
A) assign computers to specific individuals at the company
B) assign computers to specific areas within the company
C) use strong access controls (such as login passwords) to prevent access
D) have equipment engraved or otherwise permanently labelled and a subsidiary ledger maintained
Answer: D
and payment cycle
7) Which of the following situations would indicate increased inherent risk in the accounts payable and
acquisition cycle?
A) good quality internal controls for cash handling
B) the use of packaged software for accounting (including accounts payable)
C) the use of clear, standard terms when negotiating vendor discounts
D) significant related party transactions
Answer: D
and payment cycle
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8) What are the significant risks relating to accounts payable and accrued liabilities?
Answer: Significant risks relating to accounts payable and accrued liabilities are:
1) The client's bank covenants or performance incentives are tied to accounts payable and/or related
accounts (e.g., current ratio and/or net income).
2) The client is facing ongoing liquidity problems or going concern doubts that may pressure
management to understate payables in order to maintain a higher working capital.
3) The client has complex arrangements with vendors (such as chargebacks and
allowances): this affects many assertions.
4) The client has integrated supply chain management: this affects many assertions.
5) A high volume of transactions affects many assertions.
6) The client has numerous related-party transactions: this affects occurrence and valuation assertions.
and payment cycle
9) What are the risks of error or fraud in the acquisition and payment cycle?
Answer: The risks of error or fraud in the acquisition and payment cycle are:
1) Amounts posted to accounts payable are for goods in transit where shipping terms indicate that the
risks and rewards of ownership have not yet passed to the entity.
2) Provisions are understated because a provision has not been recorded.
3) Payments are posted to the wrong vendor account.
4) Incorrect rates used to amortize plant, property, and equipment.
and payment cycle
10) What are the factors that increase inherent risks for the accounts within the acquisition and payment
cycle?
Answer: Factors that increase inherent risks for the accounts within the acquisition and payment cycle.
are:
1) Provisions require considerable judgment: this affects valuation and completeness;
2) A high volume of disposals and additions to property, plant and equipment affects classification and
valuation assertions; and
3) There is considerable judgment regarding whether a cost should be capitalized or expensed, which
affects the classification assertion.
and payment cycle
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13.4 Understand key controls, and assess planned control risk for the acquisition and payment cycle
1) To ensure that goods and services acquired are for authorized company purposes, and to help acquire
only needed items
A) receiving reports should be independently signed and reconciled to the purchase order.
B) proper authorization for acquisitions and changes to the master file should take place.
C) purchase requisitions should be approved and matched to purchase orders.
D) account allocations of vendor invoices should be carefully checked.
Answer: B
Learning Obj.: 13-4 Understand key controls, and assess planned control risk for the acquisition and
payment cycle
2) When automatic purchase orders are generated, to help make sure that goods are ordered for products
that the company still needs, the company should
A) have all purchase orders approved by the purchasing manager.
B) have vendors automatically replenish the shelves.
C) ensure that re-order points are monitored.
D) have receiving reports matched to the purchase order amounts.
Answer: C
payment cycle
3) Segregation of duties has an important role in providing for good quality internal controls. Which of
the following segregation of duties improve controls over the inventory and distribution cycle?
A) The purchasing department should not be responsible for updating the economic order quantity.
B) The accounting staff should not be responsible for the data entry of vendor invoice detail.
C) The inventory transaction processing systems should not be accessible to the receiving department.
D) The purchasing department should not be responsible for authorizing the acquisition of or receiving
the goods.
Answer: D
payment cycle
4) An important control in the accounts payable and information systems departments is to require that
those personnel who record acquisitions do not have access to
A) lists of vendors' names and addresses.
B) cash, marketable securities, and other assets.
C) vendors' price lists.
D) the accounts payable master file.
Answer: B
payment cycle
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5) Before a new vendor is added into the vendor master file (or the purchasing master file), the company
should
A) conduct a credit check on the new vendor.
B) have the vendor detail matched against the invoice detail.
C) ask the purchasing manager to verify the authenticity of the vendor.
D) have the accounting department enter the necessary detail about the vendor.
Answer: A
payment cycle
6) After the vendor master file data has been entered, to best improve internal controls the
A) vendor master file data should be matched to the accounts payable files.
B) transaction file detail should be matched to the vendor master file.
C) data entry should be independently verified.
D) accounting department should file the new vendor authorization form sequentially.
Answer: C
payment cycle
7) ZyCo has recently converted to a new online accounts payable system. To test that only authorized
vendors have been converted to the vendor master file (occurrence), the auditor would
A) conduct cutoff tests for receiving reports and vendor invoices.
B) on a test basis, agree vendor file details for each vendor from the new (online) system to the old (batch)
system.
C) on a test basis, agree vendor file details for each vendor from the old (batch) system to the new (online)
system.
D) conduct tests of programs to verify that programs in the new systems are functioning as designed.
Answer: B
payment cycle
8) ZyCo has recently converted to a new online accounts payable system. To test that all vendor balances
have been converted to the vendor master file (completeness), the auditor would
A) conduct cutoff tests for receiving reports and vendor invoices.
B) on a test basis, agree vendor file details for each vendor from the new (online) system to the old (batch)
system.
C) on a test basis, agree vendor file details for each vendor from the old (batch) system to the new (online)
system.
D) conduct tests of programs to verify that programs in the new systems are functioning as designed.
Answer: C
payment cycle
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9) When processing and recording cash disbursements, it is important to have a method of cancelling the
supporting documents to prevent their reuse as support for another cheque at a later time. A common
method is to
A) shred the documents so they can't be reused.
B) transfer possession of the documents to a bank vault such as a safety deposit box.
C) move the documents to a permanent off-site facility such as a warehouse.
D) write the cheque number and payment date on the supporting documents.
Answer: D
payment cycle
10) Since the audit of accounts payable generally takes a considerable amount of audit time, effective and
properly tested internal controls can significantly reduce audit costs by reducing
A) tests of controls.
B) confirmations.
C) tests of details of balances.
D) analytical procedures.
Answer: C
payment cycle
11) What are the important controls relating to cash disbursements?

Answer: The important controls relating to cash disbursements are:
1) The signing of cheques (or authorization of payment release) by an individual with proper authority;
2) Separation of responsibilities for approving the payments and performing the accounts payable
function;
3) Careful examination of the supporting documents by the cheque signer at the time the cheque is
signed; and
4) Use of a password (preferably two different passwords by two people) before electronic payments are
released.
payment cycle
13.5 Use professional judgment to develop an audit approach (strategy) for the acquisition and payment
cycle
1) What are the two factors that the audit strategy depends on for the acquisition and payment cycle?
Answer: 1) Significant risks.
2) Extent to which the auditor relies on internal controls.
payment cycle
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13.6 Design and perform tests of control for the acquisition and payment cycle
1) An auditor 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 invoice only.
B) prenumbering of disbursement vouchers.
C) use of a limit or reasonableness test.
D) prenumbering of receiving reports.
Answer: A
Learning Obj.: 13-6 Design and perform tests of control for the acquisition and payment cycle
2) Because of the importance of tests of controls for acquisitions and cash disbursements, it is common in
this audit area to use
A) attributes sampling.
B) variables sampling.
C) probability-proportional-to-size sampling.
D) block sampling.
Answer: A
3) Because many of the types of errors and irregularities that may be found in the acquisition and
payment cycle represent a misstatement of earnings and are of significant concern to the auditor, the
tolerable exception rate selected by the auditor for attribute testing of this cycle will be
A) low.
B) high.
C) average.
D) 15% or less.
Answer: A
4) 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) recorded acquisitions are for goods and services received.
B) existing acquisitions are recorded.
C) acquisitions are correctly valued.
D) acquisitions are correctly classified.
Answer: A
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5) The internal control that requires "approval of acquisitions at the proper level" satisfies the objective of
A) occurrence.
B) completeness.
C) accuracy.
D) posting and summarization.
Answer: A
6) The internal control that requires "new vendors and changes to vendor file be approved" satisfies the
objective of
A) occurrence.
B) completeness.
C) accuracy.
Answer: A
7) The internal control objective to determine that "existing acquisition transactions are recorded"
describes the objective of
A) occurrence.
B) classification.
C) completeness.
D) accuracy.
Answer: C
8) The internal control that requires receiving reports to be prenumbered and accounted for satisfies the
objective of
A) occurrence.
B) classification.
C) completeness.
D) accuracy.
Answer: C
9) The internal control that requires an "independent verification of calculations and amounts" satisfies
the objective of
A) occurrence.
B) completeness.
C) accuracy.
Answer: C
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10) The control test that requires "the auditor to compare recorded transactions in the acquisitions journal
with the vendor's invoice, receiving report, and other supporting documentation" satisfies the objective of
A) occurrence.
B) classification.
C) completeness.
D) accuracy.
Answer: D
11) The test of transactions that requires the recomputing of cash discounts satisfies the objective of
A) occurrence.
B) completeness.
C) accuracy.
Answer: C
12) Which of the following controls help to ensure that the receipt of raw materials for inventory is
recorded in the correct period?
A) Vendor details are automatically retrieved from the vendor master file.
B) Receiving staff write down the date goods are received on the bill of lading.
C) Accounting staff record the date that goods are received in the accounting systems.
D) The transaction date entered must be the same as the system date.
Answer: D
13) The statement that items on the accounts payable register must be supported by a completed voucher
package containing a services purchase order and evidence the service was provided is a specific example
of which control objective?
A) accuracy
B) completeness
C) validity
D) presentation and disclosure
Answer: C
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14) The control objective associated with selecting a sample of receiving reports and tracing them to the
perpetual inventory records is
A) accuracy.
B) validity.
C) completeness.
D) classification.
Answer: C
15) In assessing control risk for purchases, an auditor vouches a sample of entries in the accounts payable
trial balance to the supporting documents. Which account assertion would this test of controls most likely
support?
A) completeness
B) valuation and allocation
C) existence and occurrence
D) presentation and disclosure
Answer: C
16) The statement that all purchase orders must be supported by properly approved purchase
requisitions is a specific example of which general objective?
A) completeness
B) valuation
C) authorization
D) classification
Answer: C
17) An auditor wants to perform tests of controls on a client's cash disbursement procedures. If the
control procedures leave no audit trail or documentary evidence, the auditor is most likely to test the
procedures by
A) confirmation and observation.
B) confirmation and analytical procedures.
C) observation and inquiry.
D) inquiry and analytical procedures.
Answer: C
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18) State each of the five specific transaction-related audit objectives for acquisitions and, for each
objective, describe one common test of transactions.
Answer: The five specific transaction-related audit objectives for acquisitions, along with one common
control test of transactions, are:
• Recorded acquisitions are for goods and services received, consistent with the best interests of the client
(occurrence). Inspect underlying documents for reasonableness and authenticity.
• Existing acquisition transactions are recorded (completeness). Trace from a file of receiving reports to
the acquisitions journal.
• Recorded acquisition transactions are correct (accuracy). Recompute the clerical accuracy on the
vendor's invoice, including discounts and freight.
• Acquisition transactions are recorded on the correct dates (cutoff). Compare dates of receiving reports
and vendors' invoices with dates in the acquisitions journal.
• Acquisition transactions are properly classified (classification). Compare classification with chart of
accounts by reference to vendors' invoices.
19) What are the common key controls relating to acquisitions?

Answer: The common key controls for acquisitions are:
• Existence of purchase requisition, purchase order, receiving report, and vendor's invoice attached to the
voucher.
• Approval of acquisitions at the proper level.
• Cancellation of documents to prevent their reuse.
• Independent verification of vendors' invoices, receiving reports, purchase orders, and purchase
requisitions.
• New vendors and changes to vendor file approved.
• Vendor master file independently examined periodically.
• Purchase orders are prenumbered and accounted for.
• Receiving reports are prenumbered and accounted for.
• Batch totals are compared with computer summary reports.
• Approval of acquisitions for prices and discounts.
• Independent verification of calculations and amounts.
• Comparison of accounts payable master file or trial balance totals with general ledger balance.
• Procedures require that transactions be recorded as soon as possible after the goods and services have
been received.
• Transaction date must be system date (today's date) or a reasonable date.
• Adequate chart of accounts.
• Automatic updates of and posting to general ledger accounts.
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13.7 Design and perform substantive analytical procedures for accounts payable and accrued liabilities
1) The test of details of balances procedure to "inspect the accounts payable trial balance and master file
for related parties, notes, or other interest-bearing liabilities" satisfies the objective of
A) existence.
B) completeness.
C) classification.
D) detail tie-in.
Answer: C
Learning Obj.: 13-7 Design and perform substantive analytical procedures for accounts payable and
accrued liabilities
2) Comparing expenses to prior years is an effective analytical procedure for accounts payable because
expenses from year to year are
A) relatively stable.
B) erratic.
C) variable.
D) dynamic.
Answer: A
accrued liabilities
3) The analytical procedure that requires the auditor to "inspect the list of accounts payable for unusual or
non-vendor payables" would have the best chance of discovering which possible error?
A) misstatement of accounts payable and expenses
B) classification error for non-trade liabilities
C) unrecorded accounts or misstatements
D) invalid accounts or misstatements
Answer: B
accrued liabilities
4) The main focus taken by the auditor in verifying liability balances is on the discovery of
A) liabilities posted to the wrong account.
B) overstated liabilities.
C) understated or omitted liabilities.
D) overstated or extraneous liabilities.
Answer: C
accrued liabilities
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13.8 Design and perform substantive tests of details for accounts payable and accrued liabilities
1) In determining that the accounts payable cutoff is correct, it is essential that the cutoff tests be
coordinated with the
A) confirmation of accounts payable.
B) tests on long-term liabilities.
C) observation of inventory.
D) cash count.
Answer: C
Learning Obj.: 13-8 Design and perform substantive tests of details for accounts payable and accrued
liabilities
2) The purpose of the audit procedure to "examine underlying documentation for subsequent cash
disbursements" is to
A) uncover liabilities on the balance sheet that should not have been recorded until a subsequent period.
B) find the documentation relating to a cash disbursement.
C) uncover payments made in a subsequent accounting period that represent liabilities at the balance
sheet date.
D) uncover cash disbursements recorded in a subsequent accounting period that should be recorded in
that period.
Answer: C
liabilities
3) The purpose of the audit procedure to "trace receiving reports issued before year-end to related
vendors' invoices" is to determine that all
A) merchandise received is included in accounts payable.
B) merchandise received is included in inventory.
C) merchandise was received.
D) invoices have been paid.
Answer: A
liabilities
4) An inventory acquisition is received late in the afternoon of December 31 after the physical inventory is
completed. If the acquisition is included in accounts payable and purchases, but excluded from
inventory, the result
A) is an understatement of net earnings.
B) is an overstatement of net earnings.
C) does not affect earnings.
D) is indeterminable from the information given.
Answer: A
liabilities
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5) When an acquisition is on an FOB (freight on board) origin basis, the inventory and related accounts
payable must be recorded in the current period if the goods were
A) received prior to the balance sheet date.
B) shipped prior to the balance sheet date.
C) both shipped and received prior to the balance sheet date.
D) paid for.
Answer: B
liabilities
6) State six specific balance-related audit objectives for accounts payable and for each objective describe
one common test of details of balances.
Answer: Five specific balance-related audit objectives for accounts payable and common tests of details
of balances are:
1. Accounts payable in the accounts payable trial balance, general ledger account, and financial
statements exist (existence): Trace from accounts payable list to vendors' invoices and statements.
Confirm accounts payable, emphasizing large and unusual amounts.
2. Existing accounts payable are in the accounts payable listing (completeness): Perform out-of-period
liability tests. The company has an obligation to pay the liabilities included in accounts payable (rights
and obligations). Inspect vendors' statements and confirm accounts payable.
3. Accounts payable in the accounts payable list agree with related master file and the total is correctly
added and agrees with that of the general ledger and financial statements (completeness and allocation):
Foot the accounts payable list. Trace the total to the general ledger and the financial statements. Trace
individual vendor invoices to transaction file for names and amounts. Enquire with management for any
additional accounts payable.
4. Accounts payable in the accounts payable trial balance and financial statements are properly classified
(classification): Inspect the accounts payable trial balance and master file for related parties, notes, or
other interest-bearing liabilities, long-term payables, and debit balances.
5. Discuss the nature and classification of accounts payable with management and compare audit
findings with disclosures in the financial statements.
6. Transactions in the acquisition and payment cycle are recorded in the proper period (allocation).
Perform out-of-period liability tests. Perform detailed tests as a part of physical observation of inventory.
Test for inventory in transit.
liabilities
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7) Describe the audit procedures typically used to test for out-of-period liabilities (also referred to as the
search for unrecorded accounts payable).
Answer: The audit procedures typically used to test for out-of-period liabilities are:
• Inspect underlying documentation for subsequent cash disbursements.
• Inspect underlying documentation for bills not paid several weeks after the year-end.
• Trace receiving reports issued before year-end to related vendors' invoices.
• Trace vendors' statements that show a balance due to the accounts payable trial balance.
• Send confirmations to vendors with which the client does business, including zero balance
confirmations.
liabilities
13.9 Determine the reliability of audit evidence for accounts payable
1) Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary
because
A) this is a duplication of cutoff tests.
B) accounts payable balances at the balance sheet date may not be paid before the audit is completed.
C) correspondence with the audit client's lawyer will reveal all legal action by vendors for nonpayment.
D) there is likely to be other reliable external evidence available to support the balances.
Answer: D
Learning Obj.: 13-9 Determine the reliability of audit evidence for accounts payable
2) Of these two documents - vendor invoice or vendor statements - which document is better to:
a) verify the correct balance in accounts payable?
b) test the acquisitions in tests of control?
Answer: a) To verify the correct balance in accounts payable - The vendor's statement is superior for
verifying accounts payable because it includes the ending balance. The auditor could compare existing
vendors' invoices with the client's list and still not uncover missing ones, which is the primary concern in
accounts payable.
b) To test the acquisitions in tests of control - The vendor's invoice is superior for verifying transactions
because the auditor is verifying individual transactions and the invoice shows the details of the
acquisitions.
Learning Obj.: 13-9 Determine the reliability of audit evidence for accounts payable
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13.10 Design and perform substantive tests (substantive analytical review and tests of details) for
related-party transactions and selected accounts related to the acquisition and payment cycle
1) Estimated unpaid obligations for services or benefits that have been received prior to the balance sheet
date are classified as
A) accounts payable.
B) accrued liabilities.
C) miscellaneous assets.
D) unearned revenues.
Answer: B
Learning Obj.: 13-10 Design and perform substantive tests (substantive analytical review and tests of
details) for related-party transactions and selected accounts related to the acquisition and payment cycle
2) When verifying current-year additions to manufacturing equipment, the two major objectives for this
part of the audit are
A) accuracy and classification.
B) detail tie-in and cutoff.
C) disclosure and completeness.
D) rights and existence.
Answer: A
3) The tests of details of balances procedure for manufacturing equipment that requires the auditor to
examine vendors' invoices of closely related accounts (such as repairs and maintenance) to uncover items
that should be manufacturing equipment would satisfy the audit objective of
A) detail tie-in.
B) existence.
C) classification.
D) accuracy.
Answer: C
4) A set of records for each piece of equipment that includes descriptive information, date of acquisition,
original cost, current year amortization, and accumulated amortization is the
A) capital asset master file.
B) file of purchase requisitions.
C) amortization schedule.
D) acquisitions journal.
Answer: A
5) The starting point for the verification of current-year acquisitions of manufacturing equipment is
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normally
A) the manufacturing equipment account in the general ledger.
B) the acquisitions journal.
C) the purchase requisitions file.
D) a client schedule of all acquisitions recorded during the year.
Answer: D
6) Ordinarily, it is unnecessary to test the valuation of capital assets recorded in prior periods because
A) it will not affect the current valuations.
B) they were verified in previous audits.
C) the related amortization calculations for the current period are more important.
D) the emphasis of the audit is on the income statement items, not the balance sheet items.
Answer: B
7) It is normal for the auditor to verify large and unusual transactions for the entire year as well as a
representative sample of typical additions. The size of the sample for substantive testing depends on the
auditor's
A) sampling selection methodology used.
B) assessed control risk and assessed inherent risks.
C) understanding of the nature of internal controls.
D) availability of client resources to pull supporting documentation.
Answer: B
8) A normal audit procedure is to analyze the current year's repairs and maintenance accounts to provide
evidence in support of the audit proposition that
A) expenditures for capital assets have been recorded in the proper period.
B) capital expenditures have been properly authorized.
C) non-capitalizable expenditures have been properly expensed.
D) expenditures for capital assets have been capitalized.
Answer: D
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9) The most important objectives for amortization expense are valuation and
A) accuracy.
B) classification.
C) cutoff.
D) understandability.
Answer: A
10) State each of the six specific balance-related audit objectives for manufacturing equipment additions
and describe one common test of details of balances for each objective.
Answer:
1. Current-year acquisitions as listed exist (existence). Physically examine assets.
2. Existing acquisitions are recorded (completeness). Examine vendors' invoices of closely related
accounts such as repairs and maintenance to uncover items that should be manufacturing equipment.
3. Current-year acquisitions as listed are accurate (accuracy). Examine vendors' invoices.
4. Current-year acquisitions as listed are properly classified (classification). Examine rent and lease
expense for capital leases.
5. Current-year acquisitions are recorded in the proper period (cutoff). Review transactions near the
balance sheet date for proper period.
6. The client has rights to current-year acquisitions (rights). Examine vendors' invoices.
11) Discuss the key internal controls related to the disposal of manufacturing equipment.
Answer: The most important internal control over the disposal of manufacturing equipment is the
existence of a formal method to inform management of the sale, trade-in, abandonment, or theft of
recorded machinery and equipment. Another important control to protect assets from unauthorized
disposal is a provision for authorization for the sale or other disposal of manufacturing equipment.
Finally, there should be adequate internal verification of recorded disposals to make sure that assets are
correctly removed from the accounting records.
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12) Discuss the audit tests the auditor would use to audit capital assets acquired in prior years.
Answer: The auditor would normally only check that the opening balance agrees to the ending balance
of the prior year's audit for each fixed asset account. For the closing balance, two tests of accuracy
(allocation) would need to be completed:
• Reconcile opening to closing balance. Opening balance plus additions minus disposals should agree to
the ending balance.
• Agree subsidiary totals to closing balance: Add the capital asset master file and agree the total to the
ending balance.
Additional tests of ending balances are the following:

•Valuation objective: Assets may need to be written down if their net realizable value has dropped due to
changing technology or the presence of non-operating equipment. The auditor will need to be aware of
the client's business environment, look at the cost of recent additions, and the replacement cost of
comparable equipment. Non-operating equipment disclosures would need to be reviewed for
completeness and understandability. Assets recorded at market value would require documentation,
such as an independent appraisal to document the value used. The auditor would need to evaluate the
competence and quality of the appraisal, and if there is uncertainty regarding the quality of the appraisal,
may need to have another independent appraisal conducted.
• Completeness of disclosure: Fixed assets are often used as collateral for loans or may be purchased
using debt. The auditor would read the legal agreements that pertain to this debt to assess adequacy and
thoroughness of disclosure in the financial statements.
• Accuracy and understandability of disclosure: Details of fixed assets need to be adequately and clearly
shown in the financial statements, distinguishing between owned and leased assets, and identifying
commitments for payments under leases and debt.
13) Describe the two objectives that are most important in auditing accumulated amortization. Explain
why these objectives are important.
Answer: Two objectives are usually emphasized in the audit of accumulated amortization (the ending
balance):
• Accumulated amortization as stated in the asset master file agrees with the general ledger. This
objective can be satisfied by test footing the accumulated amortization on the asset master file and tracing
the total to the general ledger.
• Accumulated amortization in the master file is properly valued.
In some cases, the life of manufacturing equipment may be significantly reduced because of such changes
as reductions in customer demands for products, unexpected physical deterioration, or a modification in
operations. Because of these possibilities and if the decline in asset value is permanent, it may be
appropriate to write the asset down to net realizable value, which could result in a change to the
accumulated amortization.
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Chapter 13 Audit of The Acquisition and Payment Cycle: Auditing, 14e (Arens)

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Chapter 13 Audit of The Acquisition and Payment Cycle: Auditing, 14e (Arens)

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Auditing, 14e (Arens)

Chapter 13 Audit of the Acquisition and Payment Cycle

11) What are the important controls relating to cash disbursements?

19) What are the common key controls relating to acquisitions?

13.9 Determine the reliability of audit evidence for accounts payable

Additional tests of ending balances are the following:

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