Auditing, 12e (Arens)
Chapter 16 Audit of the Acquisition and Payment Cycle
16.1 Describe the major business functions, documents, and records 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.
2) 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.
3) One of the ways to prevent the use of fictitious suppliers 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.
4) One of the ways to prevent the use of fictitious suppliers 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.
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 purchases 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
6) To protect against theft of physical assets (such as computer equipment), the company should
A) assign the computers to specific individuals at the company.
B) assign the computers to specific areas within the company.
C) use strong access controls (such as login passwords) to prevent access.
D) have them engraved or otherwise permanently labeled and a subsidiary ledger maintained.
7) To ensure that goods and services acquired are for authorized company purposes, and 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.
8) 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 suppliers automatically replenish the shelves.
C) ensure that re-order points are monitored.
D) have receiving reports matched to the purchase order amounts.
9) A document identifying the description, supplier, 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.
10) 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.
11) 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) 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 supplier invoice detail
C) the inventory transaction processing systems should not be accessible to the receiving
department
D) purchasing department should not be responsible for authorizing the acquisition or receiving
the goods
12) 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.
13) Many companies have inventory that is easy to steal and is readily marketable. Which of the
following controls help 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
14) 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 supplier
D) supplier invoices matched to receiving reports and authorized purchase documents
15) 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.
16) Before a new supplier is added into the supplier master file (or the purchasing master file),
the company should
A) conduct a credit check on the new supplier.
B) have the supplier detail matched against the invoice detail.
C) ask the purchasing manager to verify the authenticity of the supplier.
D) have the accounting department enter the necessary detail about the supplier.
17) After the supplier master file data has been entered, to best improve internal controls the
A) supplier master file data should be matched to the accounts payable files.
B) transaction file detail should be matched to the supplier master file.
C) data entry should be independently verified.
D) accounting department should file the new supplier authorization form sequentially.
18) 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.
19) A) Describe each of the five 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 the recognizing the liability function in the
acquisitions and payment cycle.
16.2 Develop tests of controls for the acquisition and payment cycle
1) 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 supplier invoice.
C) sequentially numbered purchase requisitions and purchase orders (with matching numbers).
D) having receiving report numbers match the numbers on the supplier invoices for improved
tracking.
2) Since the audit of accounts payable generally takes a considerable amount of audit time,
effective internal controls, properly tested, can significantly reduce audit costs by reducing
A) tests of controls.
B) confirmations.
C) tests of details of balances.
D) analytical procedures.
3) 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 supplier invoices, vendor master file changes, shipment of goods to customers
D) processing purchase orders, vendor master file changes, receiving goods and services
4) Internal controls which 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.
5) 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.
6) 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.
7) 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.
8) The internal control which requires “approval of acquisitions at the proper level” satisfies the
objective of
A) occurrence.
B) completeness.
C) accuracy.
D) posting and summarization.
9) The internal control which requires “new vendors and changes to vendor file be approved”
satisfies the objective of
A) occurrence.
B) completeness.
C) accuracy.
D) posting and summarization.
10) The internal control objective to determine that “existing acquisition transactions are
recorded” describes the objective of
A) occurrence.
B) classification.
C) completeness.
D) accuracy.
11) The internal control which requires that “purchase orders, receiving reports, and vouchers are
prenumbered and accounted for” satisfies the objective of
A) occurrence.
B) classification.
C) completeness.
D) accuracy.
12) The internal control which requires “purchase orders be prenumbered and accounted for”
satisfies the objective of
A) occurrence.
B) completeness.
C) accuracy.
D) posting and summarization.
13) The internal control which requires an “independent verification of calculations and
amounts” satisfies the objective of
A) occurrence.
B) completeness.
C) accuracy.
D) posting and summarization.
14) The control test which 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.
15) The test of transactions which requires “the recomputing of cash discounts” satisfies the
objective of
A) occurrence.
B) completeness.
C) accuracy.
D) posting and summarization.
16) Which of the following controls help to ensure that the receipt of raw materials for inventory
is recorded in the correct period?
A) supplier details are automatically retrieved from the supplier 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) transaction date entered must be the same as the system date
17) 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 cut-off 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.
18) 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 cut-off 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.
19) 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.
20) State each of the five specific transaction-related audit objectives for acquisitions and, for
each objective, describe one common test of transactions.
21) Describe the three types of tests that need to be performed by the auditor when auditing a
client’s data conversion process.
16.3 Design substantive tests (analytical review and tests of details) for accounts payable
1) 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 supplier discounts
D) significant related party transactions
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.
3) The analytical procedure which 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
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.
5) The purpose of the audit procedure to “examine underlying documentation for subsequent
cash disbursements” is to
A) uncover liabilities on the balance sheet which 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 which should be
recorded in that period.
6) 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.
7) 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.
8) 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.
9) 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.
10) 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.
11) State five specific balance-related audit objectives for accounts payable and, for each
objective, describe one common test of details of balances.
12) Describe the audit procedures typically used to test for out-of-period liabilities (also referred
to as the search for unrecorded accounts payable).
16.4 Consider the risks and audit processes for selected accounts
1) 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.
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.
3) The starting point for the verification of current-year acquisitions of manufacturing equipment
is 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.
4) 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.
5) The tests of details of balances procedure for manufacturing equipment which 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.
6) 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.
7) 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.
8) The most important objectives for amortization expense are valuation and
A) accuracy.
B) classification.
C) cutoff.
D) understandability.
9) 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.
10) State each of the seven specific balance-related audit objectives for manufacturing equipment
additions and, for each objective, describe one common test of details of balances.
11) Discuss the key internal controls related to the disposal of manufacturing equipment.
12) Discuss the audit tests the auditor would use to audit capital assets acquired in prior years.
13) Describe the two objectives that are most important in auditing accumulated amortization.
Explain why these objectives are important.