Chapter 11 – Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and
Payment Cycle
1. The acquisition and payment cycle includes processes for identifying products or services to be acquired,
purchasing goods and services, receiving the goods, approving payments, and paying for goods and services
received.
a.
True
b.
False
True
1
AUDT.JOHN.16.140 – Introduction
United States – AK – AICPA BB-Critical thinking
2. The major accounts in the acquisition and payment cycle are inventory, cost of goods sold, accounts payable,
and other expense accounts.
a.
True
b.
False
True
1
AUDT.JOHN.16.141 – Payment and Acquisition Cycle
3. An indication of potential inventory fraud is that inventory levels are growing faster than sales.
a.
True
b.
False
True
1
AUDT.JOHN.16.142 – Fraud
United States – AK – AICPA BB-Critical thinking
4. The acquisition process begins with a purchase of goods or services.
a.
True
b.
False
False
1
AUDT.JOHN.16.141 – Payment and Acquisition Cycle
United States – AK – AICPA BB-Critical thinking
5. Supply chain management has helped many companies improve the efficiency of operations.
a.
True
b.
False
Chapter 11 – Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and
Payment Cycle
True
1
AUDT.JOHN.16.143 – Supply Chain
6. Management may intentionally misstate inventory balances by overvaluing items that are obsolete.
a.
True
b.
False
True
1
AUDT.JOHN.16.142 – Fraud
7. Most organizations use a perpetual inventory system to manage inventory.
a.
True
b.
False
True
1
AUDT.JOHN.16.144 – Analytics
United States – AK – AICPA BB-Critical thinking
8. Inventory turnover is often calculated by the auditor for proper disclosure in client financial statements.
a.
True
b.
False
False
1
AUDT.JOHN.16.144 – Analytics
United States – AK – AICPA BB-Critical thinking
9. A networked software system linking a company’s information system to vendors whose offerings and prices
have been preapproved by appropriate management is called an automated purchasing system.
a.
True
b.
False
True
1
10. A major control benefit of a centralized purchasing department is the segregation of the authorization
function from the custody and recording functions.
a.
True
b.
False
True
1
AUDT.JOHN.16.145 – Processes and Controls
11. A purchase order identifies the quantity and description of products that have been received.
a.
True
b.
False
False
1
AUDT.JOHN.16.145 – Processes and Controls
12. For proper control, the receiving department should receive a copy of the purchase order that has the
quantities blanked out.
a.
True
b.
False
True
1
AUDT.JOHN.16.145 – Processes and Controls
13. A new vendor should be added to an authorized vendor database by an individual in the purchasing
department.
a.
True
b.
False
False
United States – AK – AICPA BB-Critical thinking
Acquisition and Payments Cycle
14. The auditor’s primary concern with accounts payable is that of existence.
a.
True
b.
False
False
1
AUDT.JOHN.16.146 – Testing Accounts Payable
United States – AK – AICPA BB-Critical thinking
15. Reconciliation of vendor statements to recorded payables provides assurance related to the completeness
assertion.
a.
True
b.
False
True
1
AUDT.JOHN.16.146 – Testing Accounts Payable
United States – AK – AICPA BB-Critical thinking
16. Approval of items for payment usually involves a three-way match among the vendor invoice, the purchase
order, and the receiving report.
a.
True
b.
False
True
1
AUDT.JOHN.16.145 – Processes and Controls
United States – AK – AICPA BB-Critical thinking
17. The purchasing department should make sure that only authorized goods are received, the goods meet order
specifications, an accurate count of the goods received is taken, and that accountability is established to assure
that all receipts are recorded.
a.
True
b.
False
False
United States – AK – AICPA BB-Critical thinking
Identify and Assess Control Risks in the Acquisition and Payment Cycle
18. In an audit where there is a heightened risk of fraud related to inventory, the auditor may want to observe all
inventory locations simultaneously.
a.
True
b.
False
True
1
AUDT.JOHN.16.146 – Testing Accounts Payable
United States – AK – AICPA BB-Critical thinking
19. The use of analytical review procedures applied to related expense accounts would not be used to determine
if accounts payable were understated.
a.
True
b.
False
False
1
AUDT.JOHN.16.146 – Testing Accounts Payable
United States – AK – AICPA BB-Critical thinking
20. Analytical review of related expense accounts when auditing accounts payable would be used when control
risk is assessed as low.
a.
True
b.
False
True
1
AUDT.JOHN.16.146 – Testing Accounts Payable
United States – AK – AICPA BB-Critical thinking
21. Testing cash disbursements subsequent to the year under audit allows the auditor to determine certain
payables that may not have been recorded previously.
a.
True
b.
False
True
1
United States – AK – AICPA BB-Critical thinking
22. When auditing accounts payable, the auditor would most likely review a sample of cash disbursements
throughout the year end to determine whether disbursements for goods and services are applicable to the
subsequent year.
a.
True
b.
False
False
1
AUDT.JOHN.16.146 – Testing Accounts Payable
United States – AK – AICPA BB-Critical thinking
23. The auditor tests significant repairs and maintenance expenses to ensure that an item that should be
capitalized has not been expensed.
a.
True
b.
False
True
1
AUDT.JOHN.16.146 – Testing Accounts Payable
24. The lower of cost or market assumption is not important to valuation of inventory.
a.
True
b.
False
False
1
AUDT.JOHN.16.147 – Inventory Procedures
United States – AK – AICPA BB-Critical thinking
25. Proper internal control over the inventory account would require that inventory items should be reviewed
for obsolescence and proper accounting treatment.
a.
True
b.
False
True
1
AUDT.JOHN.16.148 – Inventory Controls
United States – AK – AICPA BB-Critical thinking
26. Many frauds are committed by overstating inventory accounts.
a.
True
Chapter 11 – Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and
Payment Cycle
b.
False
True
1
27. Inventory may become obsolete because of technological advances even though there are no signs of
physical wear.
a.
True
b.
False
True
1
AUDT.JOHN.16.149 – Inventory Complexity
United States – AK – AICPA BB-Critical thinking
28. Sources of information regarding a client’s inventory obsolescence can be partially noted during the
inventory observation.
a.
True
b.
False
True
1
AUDT.JOHN.16.147 – Inventory Procedures
United States – AK – AICPA BB-Critical thinking
29. The auditor is required by generally accepted accounting principles (GAAP) to observe the taking of
physical inventory.
a.
True
b.
False
False
1
AUDT.JOHN.16.147 – Inventory Procedures
United States – AK – AICPA BB-Critical thinking
30. One reason the inventory observation is performed is for the purpose of determining the accuracy of client
counting procedures.
a.
True
b.
False
True
31. Test counts are performed by the auditor to give the impression of control and they are not used for
substantive testing.
a.
True
b.
False
False
1
AUDT.JOHN.16.147 – Inventory Procedures
United States – AK – AICPA BB-Critical thinking
32. It is likely in the acquisition and payment cycle that audit evidence from substantive analytical procedures
alone will be sufficient enough for the auditor.
a.
True
b.
False
False
1
AUDT.JOHN.16.147 – Inventory Procedures
United States – AK – AICPA BB-Critical thinking
33. During the counting process of inventory, the client arranges not to ship or receive goods or segregates all
goods received during the process to be labeled and counted as “after inventory.”
a.
True
b.
False
True
1
AUDT.JOHN.16.148 – Inventory Controls
United States – AK – AICPA BB-Critical thinking
34. Legal expenses are reviewed by auditors for possible litigation and related FAS 5 treatment.
a.
True
b.
False
1
AUDT.JOHN.16.11-08 – LO: 11-08
United States – BUSPORG: Analytic
Obtaining Substantive Evidence in the Acquisition and Payment Cycle
35. A walkthrough is typically not a useful means of obtaining information about controls in the acquisition and
payment cycle.
a.
True
b.
False
False
1
AUDT.JOHN.16.11-04 – LO: 11-04
United States – BUSPORG: Analytic
Identify and Assess Control Risks in the Acquisition and Payment Cycle
36. The cash account is not part of the acquisitions and payment cycle.
a.
True
b.
False
False
1
United States – AK – AICPA BB-Critical thinking
37. The auditor may test a manufacturing client’s cost system to substantiate the valuation of inventory.
a.
True
b.
False
True
1
AUDT.JOHN.16.148 – Inventory Controls
38. Valuation is the most complex assertion related to inventory.
a.
True
b.
False
True
1
AUDT.JOHN.16.146 – Testing Accounts Payable
United States – AK – AICPA BB-Critical thinking
39. Generally accepted auditing standards (GAAS) require the auditor to observe the taking of the physical
inventory at year-end.
a.
True
b.
False
True
1
AUDT.JOHN.16.147 – Inventory Procedures
United States – AK – AICPA BB-Critical thinking
40. The acquisition cycle begins with the receipt of goods and services and ends with their payment as reflected
in cash disbursements.
a.
True
b.
False
False
1
AUDT.JOHN.16.145 – Processes and Controls
United States – AK – AICPA BB-Critical thinking
41. Prenumbered receiving documents establish the completeness of the population and are useful in
determining that all goods are recorded in the correct period.
a.
True
b.
False
True
1
AUDT.JOHN.16.145 – Processes and Controls
United States – AK – AICPA BB-Critical thinking
42. In computerized purchase operations the computer matches three documents, the purchase order, the
receiving report, and the monthly statement, and if the three match within a prespecified tolerable limit, the
invoice is approved for payment.
a.
True
b.
False
False
1
AUDT.JOHN.16.145 – Processes and Controls
United States – AK – AICPA BB-Critical thinking
43. The tracing of a sample of receiving reports through the recording process tests the completeness assertion.
Chapter 11 – Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and
Payment Cycle
a.
True
b.
False
True
AUDT.JOHN.16.145 – Processes and Controls
United States – AK – AICPA BB-Critical thinking
44. Substantive tests of accounts payable and related expense accounts for valuation usually involve simply
verifying the mathematical accuracy of the accounts, and agreeing them to general ledger and supporting
documentation.
a.
True
b.
False
True
1
AUDT.JOHN.16.150 – Testing of Expense Accounts
United States – AK – AICPA BB-Critical thinking
45. In observing the client’s inventory at year-end the auditor makes test counts that are later traced into the
client’s inventory compilation.
a.
True
b.
False
True
1
AUDT.JOHN.16.151 – Test of Inventory
United States – AK – AICPA BB-Critical thinking
46. Stable relationships are expected between specific accounts (for example, cost of goods sold and sales) that
can be investigated for unusual discrepancies.
a.
True
b.
False
True
1
AUDT.JOHN.16.152 – Testing of Expenses
United States – AK – AICPA BB-Critical thinking
47. The acquisition and payment process consists of each of the following phases except which of the
following?
a.
Receipts of goods and services.
Chapter 11 – Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and
Payment Cycle
b.
Approval of items for payment.
c.
Application of cash receipts.
d.
Authorized request for goods and services.
1
AUDT.JOHN.16.145 – Processes and Controls
United States – AK – AICPA BB-Critical thinking
48. Which of the following accounts is NOT a major account in the acquisition and payment cycle?
a.
Inventory.
b.
Cost of goods sold.
c.
Accounts payable.
d.
All of the above are major accounts.
d
1
AUDT.JOHN.16.141 – Payment and Acquisition Cycle
49. Which of the following is not a rationale for purchasing to be a separate function?
a.
Purchasing promotes efficiency and effectiveness.
b.
Purchasing eliminates potential favoritism.
c.
Purchasing reduces the opportunity for fraud.
d.
Purchasing decentralizes control.
d
1
AUDT.JOHN.16.11-04 – LO: 11-04
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Identify and Assess Control Risks in the Acquisition and Payment Cycle
50. When a purchasing agent benefits personally by accepting payment from a vendor, the purchasing agent is
guilty of which of the following?
a.
Performing kiting.
b.
Committing embezzlement.
c.
Receiving kickbacks.
d.
Stealing company assets.
51. Reduction of the risk of understated payables can be accomplished by focusing on which assertion?
a.
Existence.
b.
Rights.
c.
Presentation and disclosure.
d.
Completeness.
d
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AUDT.JOHN.16.146 – Testing Accounts Payable
52. Which of the following is not a management assertion relevant to inventory?
a.
Existence or occurrence.
b.
Completeness.
c.
Rights and obligations.
d.
Reporting.
d
1
AUDT.JOHN.16.145 – Processes and Controls
United States – AK – AICPA BB-Critical thinking
53. Which of the following is NOT an example of fraud in the acquisition and payment cycle?
a.
Theft of inventory by employees.
b.
Inventory shrinkage.
c.
Large manual adjustments to inventory accounts.
d.
Excess inventory because of a production slowdown.
d
1
AUDT.JOHN.16.142 – Fraud
United States – AK – AICPA BB-Critical thinking
54. The internal control that requires that “checks are pre-numbered and accounted for” satisfies which
assertion?
a.
Accuracy.
b.
Existence.
AUDT.JOHN.16.145 – Processes and Controls
United States – AK – AICPA BB-Critical thinking
Chapter 11 – Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and
Payment Cycle
c.
Completeness.
d.
Posting and summarization.
AUDT.JOHN.16.145 – Processes and Controls
United States – AK – AICPA BB-Critical thinking
55. Which of the following would meet the need for additional control procedures when using computer-
generated purchase orders?
a.
Establishment of a maximum quantity limits that can be ordered within a given time period.
b.
Automated acceptance for high dollar levels.
c.
Purchase order copies sent by purchasing to receiving.
d.
Accounts payable department entering new vendors into the system.
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AUDT.JOHN.16.145 – Processes and Controls
56. Which of the following signals a potential fraud that may occur for the overstatement of inventory accounts?
a.
Reserves for contingencies are reducing rapidly.
b.
Inventory amounts are growing faster than sales.
c.
Repairs and maintenance accounts have significant credit entries.
d.
The purchase of manufacturing equipment is occurring at a rapid rate.
b
1
AUDT.JOHN.16.142 – Fraud
United States – AK – AICPA BB-Critical thinking
57. Accounting for inventories is a major consideration for many companies because of its significance to
which of the following financial statements?
a.
Balance sheet.
b.
Income statement.
c.
Statement of Cash Flow
d.
Both A and B.
d
58. What is the primary reason for management’s ability to easily overvalue inventory without rapid detection
by auditors?
a.
The limited volume of transactions in the inventory accounts.
b.
The auditor’s assessment of inventory as a low-risk area.
c.
Complexity in the valuation of inventory.
d.
Consideration by the auditor of non-financial indicators of inventory fraud.
AUDT.JOHN.16.142 – Fraud
59. Which of the following is an example of the type of analytics that an auditor would use for inventory?
a.
Number of day’s sales in receivables compared to industry averages.
b.
Inventory turnover for the previous five years.
c.
Days outstanding in accounts payable.
d.
Salaries of marketing personnel as a percent of total inventory.
AUDT.JOHN.16.11-05 – LO: 11-05
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Preliminary Analytical Procedures in the Acquisition and Payment Cycle
60. Which relationship might suggest a heightened risk of fraud in the acquisition and payment cycle?
a.
Unexpected increases in the number of suppliers.
b.
A reduction in raw material costs.
c.
Maturing capital assets with no plan for replacement.
d.
Sales expenses growing in proportion to sales revenue.
AUDT.JOHN.16.11-05 – LO: 11-05
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking