Chapter 11 – Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and
Payment Cycle
61. During your audit of Brown Company you are trying to determine whether all accounts payable were
recorded. Which assertion are you gathering evidence for?
a.
Occurrence.
b.
Presentation and Disclosure..
c.
Completeness.
d.
Valuation or allocation.
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62. Which of the following procedures would the auditor perform in testing the completeness assertion for
accounts payable?
a.
Examine a sample of cash disbursements made after year end to determine whether the
disbursements were for goods applicable to the previous year.
b.
Reconcile vendor’s statements with the accounts receivable trial balance.
c.
Examine production equipment for useful lives.
d.
Gather purchase orders immediately previous to and subsequent to year-end.
63. Why should the client’s legal expenses be examined?
a.
To compare with previously released attorney’s letters.
b.
To determine the types of fraud occurring in the organization.
c.
To ensure proper recording of vendor payables.
d.
To determine if there is any litigation pending or threatened.
64. Which assertion has the greatest emphasis when auditing accounts payable?
a.
Existence.
b.
Completeness.
c.
Presentation.
d.
Disclosure.
Chapter 11 – Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and
Payment Cycle
65. An auditor may best test commissions expense for salespeople when control risk is low by performing
which of the following procedures?
a.
Analytical procedures.
b.
Tagging and tracing.
c.
Alternative procedures.
d.
Subsequent proof of cash.
66. An internal control benefit of centralized purchasing in an organization includes which of the following?
a.
Separation of authorization from the custody and recording function.
b.
An increase in the number of vendors used.
c.
Increased compensation of agents through side agreements.
d.
Mathematically accurate vendor invoices.
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and Payment Cycle
67. A primary feature of automated control in the acquisition cycle includes which of the following?
a.
That authorization is no longer required.
b.
Limits as to the number of items that can be received by the warehouse.
c.
Calculated order quantities based on set criteria.
d.
Funds transfer at the request of the controller.
68. Bar code scanning may best be utilized in the receiving process to accomplish which of the following?
a.
Identify goods arriving automatically in conjunction with a count.
b.
Notify the shipper that product has arrived.
c.
Order new items on behalf of the purchasing department.
d.
Record inventory that has been written off the books.
69. When auditing expense accounts, which of the following would the auditor be least likely to subject to a
detailed test of transactions?
a.
Legal expense.
b.
Utilities expense.
c.
Repairs and maintenance expense.
d.
Travel expense.
70. Please indicate the proper sequence of the acquisition cycle:
1. Approval of items for payment.
2. Authorized requisition for goods or services.
3. Cash disbursements.
4. Receipt of goods and services.
5. Authorized purchase of goods or services.
a.
2, 5, 4, 1, 3
b.
2, 4, 5, 1, 3
c.
2, 1, 4, 5, 3
d.
2, 5, 1, 4, 3
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71. Which one of the following accounts would an auditor most likely test by performing analytical procedures?
a.
Sales commissions expense.
b.
Legal expenses.
c.
Repairs and maintenance expense.
d.
Travel expense.
72. Which of the following is NOT a reason why inventory is a complex accounting and auditing area?
a.
Diversity of items in inventory.
b.
Low volume of activity.
c.
Easily transportable.
d.
Difficulty in applying the lower of cost or market principle.
73. Which of the following is a reason why an automated purchasing system is beneficial?
a.
It applies preloaded specifications and materials lists to the system.
b.
It automatically flags invoices that do not reconcile with purchase orders.
c.
It creates change orders and analyzes variances from purchase orders.
d.
All of the above.
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74. Which of the following is not an inherent risk associated with inventory?
a.
Inventory accounts typically have a high volume of activity.
b.
Inventory is easily transportable
c.
Inventory may become obsolete.
d.
Inventory costing methods frequently change from one year to the next.
75. Which of the following is NOT a element of internal controls for inventory?
a.
Authorization for all purchases.
b.
Proper accounting for receipt of inventory.
c.
Perpetual inventory system.
d.
Rapid introduction of new products without market studies.
76. Which of the following would the auditor most likely do when testing the existence assertion for inventory?
a.
Observe the client’s count of the annual physical inventory and perform test counts.
b.
Review vendor invoices for the amounts recorded.
c.
Review open purchase orders at year end.
d.
Trace raw material purchases to invoices and to the general ledger.
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Obtaining Substantive Evidence in the Acquisition and Payment Cycle
77. Which of the following would the auditor most likely do when testing the valuation assertion for inventory?
a.
Confirm inventory on consignment.
b.
Examine receiving reports for inventory, tracing the recorded amounts.
c.
Observe the taking of physical inventory.
d.
Vouch inventory purchases to vendor invoices..
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Identify and Asses the Risk of Misstatement in the Acquisition and Payment Cycle
78. The auditor may discover that the recorded cost of inventory exceeds the designated market price when
testing which assertion?
a.
Existence.
b.
Cutoff.
c.
Valuation.
d.
Rights.
79. Which of the following procedures will usually be performed by the auditor to determine if obsolete
inventory exists?
a.
Confirmation of inventory with customers.
b.
Footing the inventory subsidiary ledger.
c.
Tracing inventory ordered by the client to receiving reports.
d.
Analysis of inventory turnover and sales reports.
d
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Obtaining Substantive Evidence in The Acquisition and Payment Cycle
80. A perpetual inventory system is preferable to a periodic system if adequately controlled and maintained
because of which of the following?
a.
It requires that a full inventory count be taken at year-end by all warehouse employees.
b.
It allows management to calculate cost of goods sold at year end.
c.
It provides information to management where book inventory is continuously in agreement with
inventory on hand within specified time periods.
d.
It better controls the receipt of goods.
81. Which of the following is NOT a procedure that the auditor should perform related to the physical inventory
count?
Chapter 11 – Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and
Payment Cycle
a.
Document the first and last tag numbers used.
b.
Take notations of all items that appear to be obsolete or are in questionable condition.
c.
Make counts of all items and record the counts for subsequent tracing into the client‘s inventory
compilation.
d.
Observe whether there is any physical movement of goods during the counting of the inventory.
82. The principle of lower of cost or market and the potential obsolescence of inventory are a concern for the
audit team because of which of the following?
a.
They are uncommon and may not exist.
b.
They are a burden to the auditor in the undue amount of work caused.
c.
They are likely to occur in the last month of the year and cause cutoff problems.
d.
They are an inherent component of complexity related to valuation.
83. An auditor reviews purchase contracts to assess the conditions for the return of merchandise as a test related
to which management assertion?
a.
Existence
b.
Completeness
c.
Rights and Obligations
d.
Valuation
1
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Obtaining Substantive Evidence in the Acquisition and Payment Cycle
84. Which of the following is not an item reviewed by the auditor to test the client’s assertion related to the
presentation and disclosure of inventory?
a.
The inventory valuation methods used.
b.
The amount of obsolete inventory on hand.
Chapter 11 – Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and
Payment Cycle
c.
The existence of contingent losses associated with long-term purchase commitments.
d.
The classification of inventory as raw material, work in process or finished goods.
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Obtaining Substantive Evidence in the Acquisition and Payment Cycle
85. Which of the following is a procedure used in an audit where there is a heightened risk of fraud related to
accounts payable and other related expense accounts?
a.
Send blank confirmations to vendors that ask them to furnish information about all outstanding
invoices, payment terms, and payment histories.
b.
Scan journals for unusual or large year-end transactions and adjustments.
c.
Obtain and examine documentation for payments of invoices that are for amounts just under the limit
that typically requires some level of approval.
d.
All the above.
86. Auditing the valuation assertion for inventory of a client utilizing the FIFO cost flow assumption will
require the auditor to examine which of the following?
a.
Invoices representing the more recent purchases of inventory.
b.
Invoices representing the purchase of base year inventory in the year of inception.
c.
Shipping documents for a sample of cost of goods sold transactions during the year.
d.
Shipping documents for a sample of units on hand in the interim period.
87. When testing a standard cost system, the auditor does not normally make which of the following inquiries?
a.
The method for developing standard costs.
b.
The method for identifying components of overhead and of allocating overhead to products.
c.
The method for identifying sales cutoff.
d.
The method used for allocating variances to inventory and cost of goods sold.
Chapter 11 – Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and
Payment Cycle
88. The acquisition cycle begins with which of the following?
a.
A payment.
b.
A purchase order.
c.
A requisition.
d.
A receiving report.
89. Which of the following is not a potential fraud indicator in the acquisition cycle?
a.
Expenses that are significantly above or below industry norms.
b.
Expense accounts that have significant debit entries.
c.
Unexpected increases in gross margin.
d.
Capital assets that seem to be growing faster than the business.
90. Which of the following is not a standard procedure that the auditor normally should follow in the
observation of inventory at year-end?
a.
Observe the client taking inventory.
b.
Make selected test counts and trace into client’s inventory compilation.
c.
Look for slow-moving, obsolete or damaged inventory.
d.
Review disclosure of inventory valuation.
91. Which of the following is a condition which would not create a conducive situation for a client to take a
physical inventory at an interim date before year end?
Chapter 11 – Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and
Payment Cycle
a.
The control risk over inventory is high.
b.
The auditor will be able to review material transactions in the roll-forward period.
c.
The auditor can effectively test the year-end balance through a combination of analytical procedures
and selective testing of transactions between the physical count and the year-end.
d.
The auditor reviews the intervening transactions for evidence of any manipulation or unusual
activity.
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Obtaining Substantive Evidence in the Acquisition and Payment Cycle
92. Which of the following might an auditor do in testing for the existence of accounts payable?
a.
Review client’s financial statement disclosure.
b.
Review long-term purchase commitments.
c.
Perform a cutoff test of purchases and cash disbursements.
d.
Perform analytical review of related expense accounts.
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93. Acquisition and payment processes
What are the five major phases of the acquisition and payment process?
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94. Centralized purchasing
List the advantages for implementing a centralized purchasing function. What are the disadvantages (if any)?
Chapter 11 – Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and
Payment Cycle
95. Cost accounting systems
When auditing a manufacturing concern, what major inquiries might be made by the auditor about the cost
accounting system?
96. Preparing for an inventory observation
In the audit of inventory the auditor must perform important procedures prior to the actual observation. Identify
the steps the auditor must take prior to the day the inventory is actually counted.
97. Physical inventory procedures
Discuss the procedures that the audit team will most likely perform upon arrival at each site right before
physical inventory is taken.
98. Auditing accounts payable
What are the procedures available to auditors in auditing accounts payable and what level of assurance is
obtained by each? Describe at least three. Which primary assertion is tested through these approaches?
99. Physical inventory procedures
Discuss the procedures the audit team will most likely perform during the physical observation of inventory.
100. Inventory obsolescence procedures
Identify and describe at least four procedures the audit team may perform in order to determine potential
obsolescence of items in the inventory balances.
101. Inventory controls
What are some of the important controls that are expected to be included in a well-conceived inventory control
system?
Chapter 11 – Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and
Payment Cycle
102. Comparison of Controls in Traditional and Automated Systems
Discuss the differences between a traditional receiving system and an automated integrated receiving system.