Chapter 18

April 21, 2019 | Author: Nuts420 | Category: Accounts Payable, Debits And Credits, Audit, Balance Sheet, Mergers And Acquisitions
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 Auditing and Assurance Services, 15e (Arens) Chapter 18 Audit of the Acquisition Acquisition and Payment Cycle: Te Tests sts of Controls, Substantie Tests Te sts of Tr Transactions, ansactions, and Accounts Payable

Learning Objective 18-1 1) The overall objective in the audit of the acquisition and payment cycle is: ) To ensure the reliability of the affected accounts! ") To ensure the accuracy of the affected accounts! #) To evaluate $hether the affected accounts are fairly presented in accordance $ith accounting standards! %) To evaluate $hether fraudulent payments $ere made! ns$er: # &) 'hich of the follo$ing accounts is not part of the acquisition and payment cycle( ) repaid e*penses ") ccounts payable #) +ales returns and allo$ances %) roperty, plant, and equipment ns$er: # Learning Objective 18-& 1) 'hat typically initiates the acquisitions and payment cycle( ) ssuance of a purchase requisition or request for purchase of goods.services ") ssuance of payment to vendor  #) pproval of a ne$ vendor  %) urchase requisition ns$er:  &) 'hat typically ends the acquisitions and payment cycle( ) ssuance of a purchase requisition or request for purchase of goods.services ") ssuance of a payment on accounts payable #) pproval of a ne$ vendor  %) urchase requisition ns$er: " /) 'hich of the follo$ing accounts is not included in the acquisitions class of transactions( ) nventory ") repaid e*penses #) urchase discounts %) ccounts payable ns$er: #

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0)  document indicating a reduction in the amount o$ed to a vendor vendo r because of returned goods is: )  debit memo! ")  credit memo! #)  receiving report! %)  contractual adjustment form! ns$er:  )  document used by organi2ations to establish a formal means of recording and controlling acquisitions $hich usually contains a pac3age o f documents about the acquisition is the: ) 4oucher! ") urchase order! #) 5eceiving report! %) urchase requisition! ns$er:  6) The computer-generated file $hich records acquisitions, disbursements and allo$ances for each vendor is the: ) ccounts payable master file! ") #ash disbursements file! #) cquisitions transaction file! %) urchase approval file! ns$er:  7) 'hich of the follo$ing business functions is not considered to be part of the acquisitions class of transactions( ) rocessing purchase orders ") 5ecogni2ing liabilities #) 5eceiving goods and services %) rocessing cash disbursements ns$er: % 8) +maller privately held companies may not maintain an accounts payable master file by vendor! These companies pay on the basis of: ) 4endors monthly statements! ") ndividual vendors invoices! #) The accounts payable account in the general ledger! %) %unning letters! ns$er: " 9) fter fter a purchase requisition is approved, a  must be initiated to purchase the goods or services! ) urchase order  ") 4endor order  #) #all order  %) 4endor invoice ns$er:  &

1;)  document generally received from the vendor $hich indicates a reduction in the amount o$ed due to the company granting an allo$ance is a: ) 4endor invoice! ") %ebit memo! #) #redit adjustment form! %) #redit memo! ns$er: " 11) bsent disputed amounts and minor timing differences, the vendors statements should reconcile to the: ) cquisition journal! ") ccounts payable master file! #) #ash disbursements amount for purchases! %) 4ouchers payable amount for vendors! ns$er: " 1&) List the four business functions in the acquisition and pa yment cycle! ns$er: 1! rocessing purchase orders &! 5eceiving goods and services /! 5ecogni2ing the liability 0! rocessing and recording cash disbursements 1/) %iscuss each of the four business functions that comprise the acquisition and payment cycle! ns$er: 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. 'hen 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! n most companies, the liability for acquisitions is recogni2ed $hen the goods and services are received! <  Processing and recording cash disbursements! This function involves the signing and mailing of the chec3 for payment of the acquisition and recording of the cash disbursement in the cash disbursements journal!

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10) %escribe purchase requisitions and purchase orders! 'hat is a 3ey difference bet$een the t$o documents( Ans!er: urchase requisitions represent requests for goods and services by an authori2ed employee! 5equisitions may originate from any authori2ed company employee such as a storeroom supervisor or manufacturing manager! urchase orders are documents that identify the description, quantity, and other related information for goods or services that the company is  purchasing! =nli3e requisitions, purchase orders are directed to specific vendors! 1) >atch seven of the terms for documents and records ?a-m) used in the acquisitions and cash disbursement cycle $ith the descriptions provided belo$ ?1-7): a! urchase requisition  b! urchase order  c! 5eceiving report d! cquisitions journal e! +ummary acquisitions report f! 4endors invoice g! %ebit memo h! 4oucher  i! ccounts payable master file  j! ccounts payable trial balance 3! 4endors statement l! #hec3   m! #ash disbursements journal   1!  document indicating a reduction in the amount o$ed to a vendor because of returned goods or an allo$ance granted!   &!  document that specifies the details of an acquisition transaction and amount of money o$ed to the vendor for an acquisition!   /!  document prepared by the purchasing department indicating the description, quantity, and related information for goods and services that the company intends to purchase!   0!  listing of the amount o$ed to each vendor at a point in time!   !  document used to establish a formal means of recording and controlling [email protected] it includes a cover sheet and a pac3age of relevant documents!   6!  document used to request goods and services by an authori2ed employee!   7! The listing or report that includes all cash payments for a given period! ns$er: 1! A &! B /! " 0! C ! D 6!  7! > 0



Learning Objective 18-/ 1) Eou have been assigned to the accounts payable transaction cycle as part of your auditing responsibilities! Eou have decided to vouch a sample of entries in the accounts payable master file to supporting documents! 'hich assertion is this test of controls most li3ely to support( ) ccuracy ") #lassification #) #ompleteness %) Occurrence ns$er: % &) n 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 $ould consist of all: ) 4endor invoices! ") urchase orders! #) 5eceiving reports! %) #ash disbursements for accounts payables! ns$er: # /) 'hich of the follo$ing is not an accurate statement regarding the acquisition and payment cycle( ) The personnel in the receiving department should be independent of the storeroom personnel! ") Aoods received should be physically controlled from the time of their receipt until their use or  disposal! #) ccounting records should transfer responsibility for the goods each time they are moved! %) The accounting department should be responsible for receiving goods and preparing the receiving report! ns$er: % 0) 'hen revie$ing the controls and procedures in the acquisition and payment cycle: ) #ompanies cannot record the liability for the a cquisition until the invoice is received from the vendor! ") The purchasing department has the responsibility for verifying for appropriateness of the acquisition! #) ersonnel $ho record the acquisitions should not have access to cash or other assets! %) The accounts payable department should acco unt for all receiving reports to assure that the occurrence objective is satisfied! ns$er: # )  $ritten purchase order is a contractual document that is: ) n offer to buy goods or services! ") Fot enforceable if it is not in $riting! #)  binding agreement bet$een purchaser and vendor! %) n acceptance of a vendors catalog offer to sell! ns$er: 

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6) 'hich one of the follo$ing duties should not be assigned the purchases department( ) Binding the lo$est cost vendor  ") 5evie$ing vendors catalog descriptions and prices for standardi2ed items #) %esigning the purchase order form %) uthori2ing the acquisition of goods ns$er: % 7) The accounts payable department usually has responsibility for approving acquisitions for  payment by comparing the details on the: ) vendors invoice and the receiving report! ") vendors invoice and the purchase requisition! #) purchase order, receiving report, and vendors invoice! %) urchase requisition, purchase order, and receiving report! ns$er: # 8)  substantive tests of transactions for acquisitions that $ould be used to provide evidence regarding the occurrence assertion $ould be to: ) #ompare the classification $ith the chart of accounts by referring to vendors invoices! ") 5ecompute the clerical accuracy on the vendors invoice! #) 5evie$ the acquisitions journal for large or unusual amounts! %) Trace from a file of receiving reports to the acquisition journal! ns$er: # 9) 'hen testing the controls for the completeness transaction-related audit objectives: ) Bailure to record the acquisition of goods o r services $ill generally understate net income! ") Bailure to record the acquisition of goods or services has no impact on the balance sheet! #) t is generally easy for the auditor to determine $hether unrecorded transactions e*ist! %) The audit time for accounts payable can be reduced if the client has effective internal controls and the auditor properly tests those controls! ns$er: % 1;) 'hich of the follo$ing is not a 3ey control in the acquisition and payment cycle( ) uthori2ation of purchases ") uthori2ation of credit #) Timely recording and independent revie$ of transactions %) uthori2ation of payments ns$er: " 11)  3ey internal control over the acquisition cycle is to ensure that the company requires recording transactions as soon as possible after the goods and services have been received! This satisfies the transaction-related audit objective of: ) ccuracy! ") #ompleteness! #) Timing! %) Occurrence! ns$er: #

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1&) 'hen 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: ) Tests of controls for acquisitions! ") Tests of controls and substantive tests of transactions for acquisitions! #) Tests of details of balances for acquisitions! %) nalytical procedures and tests of controls for acquisitions! ns$er: " 1/) The auditors internal control objective to determine that Grecorded acquisitions are for goods and services receivedG satisfies the audit objective of: ) ccuracy! ") Occurrence! #) uthori2ation! %) #ompleteness! ns$er: " 10) Bailure to record the acquisition of goods is a violation of $hich audit objective( ) ccuracy ") Occurrence #) uthori2ation %) #ompleteness ns$er: % 1) The internal control that requires that Gchec3s are prenumbered and accounted forG satisfies the objective of: ) ccuracy! ") H*istence! #) #ompleteness! %) osting and summari2ation! ns$er: # 16) "ecause of the importance of tests of controls and substantive tests of transactions for acquisitions and cash disbursements, it is common in this audit area to use: ) "loc3 sampling! ") 4ariables sampling! #) attributes sampling! %) robability proportional to si2e sampling! ns$er: # 17) 'hich of the follo$ing tests of controls is least useful in assessing the transaction-related audit objective related to occurrence( ) H*amine documents in voucher pac3age for occurrence! ") H*amine supporting documents for indication of approval! #) ccount for sequence of vouchers! %) ttempt to input transactions $ith valid and invalid vendors! ns$er: # 8

18) Eou are performing the audit of Cen3ins and #ompany! Eour tests of controls and tests of transactions for accounts payable demonstrate that the controls are operating effectively! This $ould normally allo$ you to: ) Hliminate the need for substantive testing of balances for acco unts payable! ") 5educe the need for substantive testing of balances for accounts payable! #) 5educe control tests in other transactions cycles! %) ncrease the need for substantive testing of balances for accounts payable! ns$er: " 19) n auditor is using audit sampling to test transactions in the acquisition and payment cycle! +he $ould normally set the tolerable e*ception rate at $hat level( ) Lo$ ") >edium #) Digh %) ndeterminate ns$er:  &;) 'hich of the follo$ing is the most effective control procedure to detect vouchers that $ere  prepared for the payment of goods that $ere not received( ) #ount goods upon receipt in storeroom! ") >atch purchase order, receiving report, and vendors invoice for each voucher in accounts  payable department! #) #ompare goods received $ith goods requisitioned in receiving department! %) 4erify vouchers for accuracy and approval in internal audit department! ns$er: " &1) 'hich of the follo$ing should sign chec3s un der conditions of effective internal control( ) Treasurer  ") urchasing agent #) ccounts payable cler3  %) erson preparing the chec3s ns$er:  &&) nternal controls that are li3ely to prevent the client from including as a business e*pense those transactions that primarily benefit management or other employees rather than the entity  being audited satisfy the control objective that: ) cquisitions are correctly valued! ") H*isting acquisitions are recorded! #) cquisitions are correctly classified! %) 5ecorded acquisitions are for goods and services received! ns$er: %

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&/) The test of transactions $hich requires one to Greconcile recorded cash disbursements $ith the cash disbursements on the ban3 statementG satisfies the objective of: ) occurrence! ") #ompleteness! #) ccuracy! %) osting and summari2ation! ns$er: " &0) Bor effective internal control purposes, the vouchers payable department generally should: ) pprove the purchase order! ") Dave the authority to sign the chec3s! #) Hstablish the agreement of the vendors invoice $ith the receiving report and purchase order! %) +upervise the preparation of the receiving report! ns$er: # &) n auditor performs a test to determine $hether all merchandise for $hich the client $as  billed $as received! The population for this test consists of all: ) >erchandise received! ") 4endors invoices! #) #anceled chec3s! %) 5eceiving reports! ns$er: " &6) >atching the suppliers invoice, the purchase order, and the receiving report prior to  preparing the voucher $ould normally be the responsibility of the: ) 'arehouse receiving function! ") urchasing function! #) Aeneral accounting function! %) Treasury function! ns$er: # &7)  # learns that his client has paid a vendor t$ice for the same shipment, once based upon the original invoice and once based upon the monthly statement!  control procedure that should have prevented this duplicate payment is: ) ttachment of the receiving report to the disbursement report! ") renumbering of disbursement vouchers! #) =se of a limit or reasonableness test! %) renumbering of receiving reports! ns$er: 

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&8) 'ith 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: ) 5equested by and approved by the same individual! ") =sed in the course of business and solely for business purposes during the year under aud it! #) 5eceived, counted, and chec3ed to quantities and amounts on purchase orders and invoices! %) roperly recorded as assets and systematically amorti2ed over the estimated useful life of the supplies! ns$er: # &9) uthori2ation for accepting goods in the receiving department should be based on the: ) 4endor invoice! ") 5equisition request! #) urchase order from the purchasing department! %) 4endor statement! ns$er: # /;) 'hat are the three most important controls over cash disbursements( Ans!er: < +igning of chec3 by an individual $ith proper authority! < +eparation of responsibilities for signing chec3s and performing the accounts payable function! < #areful e*amination of supporting documents by the chec3 signer at the time the chec3 is signed! /1) %iscuss the 3ey internal controls that should be present in the processing purchase orders function in the acquisitions and payment cycle! Ans!er: roper authori2ation for acquisitions ensures that the goods and services acquired are for authori2ed company purposes, and it avoids the acquisition of e*cessive or unnecessary items! >ost companies require different levels of authori2ation for different types of acquisitions or dollar amounts!  purchasing department that is independent of the authori2ation or receiving functions is often established by companies to ensure an adequate quantity of goods and services at a minimum price! urchase orders should be prenumbered to permit easier accounting for all outstanding purchase orders and should be designed to minimi2e the li3elihood of unintentional omissions on the form $hen goods are ordered! /&) %iscuss the 3ey internal controls that should be present in the receiving goods and services function in the acquisitions and payment cycle! Ans!er: Bor good internal control over the receiving goods and services function, most companies require that the receiving department initiate a receiving report as evidence of the receipt and e*amination of the goods! One copy of the report is sent to the storeroom and another  to the accounts payable department for their information needs! To prevent theft, it is important that the goods be physically controlled from the time of their receipt until their disposal! The  personnel in the receiving department should be independent of the storeroom personnel and the accounting department! n addition, the accounting records should transfer responsibility for the goods as they are transferred from receiving to storage an d from storage to manufacturing!

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//) Do$ do auditors determine the e*tent of testing of internal controls in the acquisition and  payment cycle( Ans!er: 'hen auditors intend to rely on controls to support a preliminary control ris3 belo$ ma*imum, the auditor performs tests of controls to obtain evidence that controls are operating effectively! s the operating effectiveness of controls improves and is supported by additional tests of controls, the auditor is able to reduce substantive tests! f the company is an accelerated filer public company, then the auditor must document and test controls sufficiently to issue an opinion on internal control over financial reporting! /0) Listed belo$ are some management assertions made for the acquisition and payment cycle! Bor each one give an e*ample of ho$ the auditor by using the documents normally found in the  process can apply an auditing procedure to test the assertion! #ompleteness • Timing • ccuracy • Ans!er: ?may vary based on student response) #ompleteness: • o Trace from a file of receiving reports to the acquisitions journal or Trace from a file of vendors invoices to the acquisition journal •

Timing: o #ompare dates of receiving reports and vendors invoices $ith dates in the acquisitions journal!



Accuracy: #ompare recorded transactions in the acquisitions journal $ith the vendors o invoice, receiving report, and other supporting documentation or 5ecompute the clerical accuracy on the vendors invoice, including discounts and freight

Learning Objective 18-0 1) uditors need to distinguish bet$een accounts payable and accrued liabilities in designing the appropriate control and substantive tests!  liability is properly accounted for as an account  payable if: ) The amount is 3no$n and o$ed as of the balance sheet date! ") The amount can be estimated and is o$ed at the balance sheet date! #) The amount is 3no$n at the balance sheet date and o$ed by the end of the ne*t fiscal year! %) The amount is estimated and o$ed $ithin 9; days of the balance sheet date! ns$er:  &) 'hen determining the methodology for designing tests of details of balances for accounts payable: ) supply-chain management activities has led to numerous changes in the design of systems used to initiate and record acquisition and payment activities! ") t is relatively ine*pensive to audit accounts payable! #) erformance materiality for accounts payable is set relatively lo$! %) nherent ris3 is often set at lo$! 1&

ns$er:  /) uditors are especially concerned about the  and  balance-related audit objectives because of the potential for understatements in the account balance! ) #ompleteness, cutoff  ") #ompleteness, accuracy #) #lassification, reali2able value %) #lassification, cutoff  ns$er:  0) %escribe the methodology for designing tests of details of b alances for accounts payable! ns$er: The methodology for designing tests of accounts payable consists of: 1! dentify client and business ris3s affecting accounts payable! &! +et performance materiality and assess inherent ris3 for accounts payable! /! ssess control ris3 for the acquisition and payment cycle! 0! %esign and perform tests of controls and substantive tests of transactions for the acquisition and payment cycle! ! %esign and perform analytical procedures for accounts payable! 6! %esign tests of details of accounts payable balance to satisfy balance-related audit objectives! Learning Objective 18- 1) The overall objective in the audit of accounts payable is to determine $hether accounts  payable: ) s fairly stated and properly disclosed! ") s overstated! #) s understated! %) s accurately stated! ns$er:  &)  is a balance-related audit objective that is not applicable to liabilities! ) H*istence ") ccuracy #) %etail tie-in %) 5eali2able value ns$er: % /) H*plain $hy auditors should compare current year e*pense totals $ith prior year e*pense totals as an analytical procedure for accounts payable! Ans!er: uditors should compare current year e*pense totals $ith prior years to uncover misstatements in accounts payable as $ell as in the e*pense accounts! "ecause of double-entry accounting, a misstatement of an e*pense account usually also results in an equal misstatement of accounts payable! Therefore, comparing current e*pen ses such as rent, utilities, and other regularly scheduled bills $ith prior years is an effective procedure for analy2ing accounts  payable $hen e*penses from year to year are e*pected to be relatively stable!

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Learning Objective 18-6 1) t $hat point do most companies recogni2e liabilities in the acquisition and payment cycle $hen the goods are shipped BO" destination( ) 'hen the purchase order is issued ") 'hen the vendor ac3no$ledges receipt of the order  #) 'hen the goods or services are received %) 'hen the vendor invoice is received ns$er: # &) #utoff procedures for inventory purchased should be designed by companies to assure the company that: ) nventory o$ned by the company has been received! ") nventory included in the yearend inventory count has been paid! #) nventory received before year end $as recorded before year end! %) nventory $as correctly valued at year e nd! ns$er: # /) Eou are the in-charge auditor and are designing audit procedures for accounts payable! 'hich of the follo$ing management assertions $ould you normally be most concerned about( ) Occurrence ") ccuracy #) #ompleteness %) H*istence ns$er: # 0) The main focus ta3en by the auditor in verifying liability balances is on the discovery o f: ! understated liabilities! ! omitted liabilities! )  only ")  only #) "oth  and  %) Feither  nor  ns$er: # ) "y tracing receiving reports issued at and before year-end to vendors invoices and ma3ing sure they are included in accounts payable, the auditor is testing for: ) theft of merchandise by employees! ") unrecorded obligations! #) lapping! %) 3iting! ns$er: "

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6) The e*tent of a search for unrecorded liabilities largely depends on: ) >ateriality and inherent ris3! ") >ateriality and control ris3! #) >ateriality only! %) nherent ris3 only! ns$er: " 7)  document revie$ of $hich of the follo$ing is most li3ely to yield evidence of any unrecorded liabilities( ) %ebit memos ") 4endor memos #) =npaid accounts payable %) +ales invoices out of sequence ns$er: # 8) 'hen the clients physical inventory occurs before the last day of the year, it is still necessary to perform an accounts payable cutoff at the time of the count! n addition, the auditor must verify $hether all acquisitions ta3ing place bet$een the count and the end of the year $ere added to: ) The physical inventory! ") ccounts payable! #) ccounts payable and cost of goods sold! %) The physical inventory and accounts payable! ns$er: % 9) eprah #ompany pays its accounts payable 0 days after receipt of the goods or services! n this case $hich audit procedure should be used to detect any unrecorded liabilities( ) H*amine cash disbursements for several $ee3s after the balance sheet date! ") 5econcile purchase orders to requisition orders! #) 5econcile purchase orders to receiving reports! %) 5econcile purchase orders to vendor invoices! ns$er:  1;) #utoff information for inventory acquisitions should be obtained during: ) The interim period prior to year-end! ") The interim period immediately follo$ing year-end! #) The physical observation of inventory! %) Hither the interim period prior to or immediately follo$ing year-end! ns$er: # 11) The auditor has decided to use accounts payables confirmations $hen testing substantive testing for balances! 'hich t$o management assertions is she testing( ) H*istence and completeness ") H*istence and occurrence #) H*istence only %) #ompleteness only 1

ns$er:  1&) n searching for unrecorded liabilities the purpose of the audit procedure to Ge*amine underlying documentation for subsequent cash disbursementsG is to: ) =ncover liabilities on the balance sheet $hich should not have been recorded until a subsequent period! ") Bind the documentation relating to a cash disbursement! #) =ncover payments made in a subsequent accounting period for liabilities that e*isted at the  balance sheet date! %) =ncover cash disbursements recorded in a subsequent accounting period $hich should be recorded in this period! ns$er: # 1/) To test for cutoff errors $hich overstate liabilities, the auditor should trace, to vendors invoices, the receiving reports issued: ) fter year-end! ") "efore year-end! #) The last day of the fiscal year! %) "oth before and after year-end! ns$er:  10) n determining that the accounts payable cutoff is correct, it is essential that the cutoff tests  be coordinated $ith the: ) #onfirmation of payables! ") Tests of long-term liabilities! #) Observation of inventory! %) #ash count! ns$er: #

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1) n inventory acquisition is received late in the afternoon of %ecember /1 after the physical inventory is completed! f the acquisition is included in accounts payable and purchases, but e*cluded from inventory, the result: ) s an understatement of net earnings! ") is an overstatement of net earnings! #) is an overstatement of $or3ing capital! %) is an overstatement of o$ners equity! ns$er:  16) 'hen an acquisition is on an BO" origin basis, the inventory and related accounts payable must be recorded in the current period if the goods $ere: ) 5eceived prior to the balance sheet date! ") +hipped on or before the balance sheet date! #) "oth shipped and received prior to the balance sheet date! %) aid for in advance! ns$er: " 17) 'hen assets are being verified, auditors focus much of their attention on ma3ing sure that the accounts are not overstated! lternatively, auditors focus their efforts on understatement $hen auditing liabilities! 'hat is the primary reason for this difference in focus( ) uditors legal liability ") A #) A+ requirements %) ll of the above ns$er: 

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18)  company recorded an acquisition of merchandise and its related liability, but failed to include the merchandise in ending inventory! The effect on the financial statements $as to: ) =nderstate liabilities! ") =nderstate net income! #) Overstate net income! %) Dave no impact on the financial statements since the errors cancel each other out! ns$er: " 19) uditors e*amine supporting documentation for cash disbursements subsequent to the  balance sheet date in order to determine $hether the cash disbursement $as for a current period liability! %escribe at least t$o audit procedures the auditor $ou ld perform to provide evidence that the cash disbursement $as made for a current period liability! Ans!er: 1! Trace vendor invoice to accounts payable subsidiary ledger and to the trial balance &! Trace receiving report to vendor invoice and to accounts payable subsidiary ledger  /! H*amine vendor invoices for inclusion in the proper period 0! H*amine cash disbursements for several $ee3s after the companys year end &;) %escribe the audit procedures typically used to test for out-of-period liabilities ?also referred to as the search for unrecorded accounts payable)! Ans!er: The audit procedures typically used to test for out-of-period liabilities are: < H*amine underlying documentation for subsequent cash disbursement! < H*amine underlying documentation for bills not paid several $ee3s after the year-end! < Trace receiving reports issued before year-end to related vendors invoices! < Trace vendors statements that sho$ a balance due to the accounts payable trial balance! < +end confirmations to vendors $ith $hich the client does business, including 2ero balance confirmations!

Learning Objective 18-7 1) The documents typically used to reconcile the balance on the accounts payable list $ith the confirmation or vendors statements include all of the follo$ing e"cept for: ) 5eceiving reports! ") vendors invoices! #) +ales invoices! %) #ancelled chec3s! ns$er: # Terms: ccount payable reconciliation %iff: >oderate Objective: LO 18-7 #+": 5eflective thin3ing s3ills

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&) 'hich of the follo$ing is most reliable for verifying the correct balance o f accounts payable( ) 4endors invoices ") 4endors statements #) #onfirmations %) "ills of lading ns$er: # /) 4endors statements and vendors invoices are both relatively reliable evidence because they: ) #ome directly to the auditor $ithout being in clients possession! ") Originate from a third party! #) 4alidate the effectiveness of the control system! %) re compared to and reconciled $ith sales invoices! ns$er: " 0) The auditor is performing tests of transactions for individual accounts payable transactions $ith vendors! 'hich document provides more reliable information about individual transactions $ith vendors( ) 5eceiving report ") 4endors invoices #) 4endors statements %) urchase orders ns$er: " ) uditor confirmation of accounts payable balances at the balance sheet date may not need to  be performed by the auditor because: ) This is a duplication of cutoff tests! ") There is li3ely to be other reliable e*ternal evidence available to support the balances! #) ccounts payable balances at the balance sheet date may not be paid before the audit is completed! %) #orrespondence $ith the audit clients attorney $ill reveal all legal action by vendors for nonpayment! ns$er: " 6) =nder $hich of the follo$ing circumstances $ould it be advisable for the auditor to confirm accounts payable $ith creditors( ) nternal accounting control over accounts payable is adequate, and there is sufficient evidence on hand to minimi2e the ris3 of a material misstatement! ") #onfirmation response is e*pected to be favorable, and accounts payable balances are of immaterial amounts! #) #reditor statements are not available and internal control over payables is unsatisfactory! %) The majority of accounts payable balances are $ith associated companies! ns$er: #

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7) The auditor is performing substantive tests of balances for accounts payable! 'hat documentation $ould provide the best evidence for the ending balance( ) 4endors invoices ") 4endors statements #) 5eceiving reports %) urchase orders ns$er: " 8) The auditor gets highly reliable evidence a bout individual transactions by e*amining: ) 4endors invoices! ") 4endors statements! #) #onfirmations of accounts payable balances! %) %etailed inventory counting instructions! ns$er:  9) 'hich of the follo$ing documents is best for verifying the correct balance in accounts  payable( ) "ills of lading ") #onfirmations #) 4endors invoices %) 4endors statements ns$er: % 1;) 'hen auditors e*amine vendors statements or receive confirmations, there must be a reconciliation of the statement or confirmation $ith the: ) ccounts payable list! ") 4endors invoices! #) urchase orders! %) 5eceiving reports! ns$er:  11) Eou are performing an audit of Da$3 #ompany! n evaluating the accounts payable balance you are concerned $ith the completeness assertion! 'hich of the follo$ing audit procedures best satisfy your concern( ) +end confirmations to only vendors $ith large balances! ") +end confirmations to vendors $ith large, active, 2ero b alance accounts and a representative sample of all others! #) +end confirmations to vendors chosen from sample stratified by the dollar balance! %) +end confirmations to all vendors! ns$er: "

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1&) %iscuss the circumstances in $hich it is desirable to send confirmation requests to the clients vendors! Ans!er: t is desirable to send confirmation requests to the clients vendors $hen the clients internal controls are $ea3, $hen vendors statements are not available, or $hen the auditor questions the clients integrity!

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