Ch11 Auditing Purchases, Payables, Test Questions & Answers

CHAPTER 11

AUDITING PURCHASES, PAYABLES, AND PAYROLL

CHAPTER LEARNING OBJECTIVES

1. Identify the audit objectives applicable to purchases, payables, and payroll.

In the auditing of purchases, the key issue is often to ensure that the purchases are all recorded and are not understated; therefore, the focus is on completeness, accuracy, and cut-off assertions. For payables that are derived from the purchases, the key issue is to ensure they are all fully recorded in the accounts as liabilities; therefore, the focus is on the completeness and accuracy, valuation and allocation assertions. Lastly, the focus of the payroll expense is to ensure the expense has been properly recorded and the associated deductions for income tax, employee benefits, and related liabilities are properly recorded as liabilities. This means the focus is on the completeness, occurrence, and accuracy assertions as well as assertions related to balances of completeness, existence, and accuracy, valuation and allocation.

2. Describe the functions and control procedures normally found in information systems for processing purchase, payment, and purchase adjustment transactions.

The processing of purchase transactions involves the following functions: requisitioning goods and services, preparing purchase orders, receiving the goods, storing goods received in inventory, checking and approving the supplier’s invoice, and recording the liability. Control procedures such as using pre-numbered cheques, approval of purchases by authorized personnel, and segregation of duties should be interwoven into each process to reduce the risk of material misstatement.

3. Describe the functions and control procedures normally found in information systems for payroll transactions.

The processing of payroll transactions involves the following functions: hiring employees, authorizing payroll changes, preparing attendance and timekeeping data, preparing the payroll, recording the payroll, paying the payroll, and protecting unclaimed wages. Control procedures such as limiting access to payroll records, independently reviewing the payroll, and making payments by direct deposit should be included in each process to reduce the risk of material misstatements.

4. Discuss considerations relevant to determining the audit strategy for purchases, payables, and payroll.

The audit process starts with obtaining an understanding of the purchases, payables, and payroll systems to help assess the inherent and control risks. For audit purposes, the most significant inherent risk is usually that of understatement of purchase transactions and accounts payable balances in order to boost reported profits and enhance liquidity. For the entity, the greatest inherent risk is that of improper purchasing and payments to fictitious employees. Next, the auditor assesses the control risk. Based on the effectiveness of the internal controls, the auditor then drafts the audit program based on the preliminary assessment of control risk. The assessed level of control risk is confirmed on completion of the tests of operating effectiveness, which leads to the final determination of an audit strategy. For purchases and payroll, the audit strategy is likely to be one based on a combined approach.

5. Indicate the factors relevant to determining an acceptable level of detection risk for the audit of purchases, payables, and payroll.

Once the auditor assesses the inherent and control risks, detection risk is set to achieve the required audit risk. This detection risk will be used by the auditor to determine the nature, timing, and extent of substantive procedures that need to be performed. The level and detail of substantive procedures performed is a matter of professional judgement. If detection risk is set as low, the auditor will be required to perform extensive substantive testing. If the detection risk is set as high, the auditor may perform a combined audit.

6. Design a substantive audit program for purchases, payables, and payroll.

The final stage of the audit is the performance of substantive procedures. It is usually more cost-effective to test the balance of accounts payable than to test the transactions making up that balance. The most important test of transactions is that of cut-off at the year end.
The major test of balances is the examination of suppliers’ statements. Because these are documentary evidence received from third parties, they are moderately reliable; however, the auditor needs to be alert to the possibility that such statements may be forged or altered by the entity. Finally, the auditor must also verify directors’ and officers’ salaries.

TRUE-FALSE STATEMENTS

1. In the audit of payroll, one of the key issues is to ensure that the payroll expense has

been properly recorded and the associated deductions for income tax, employee benefits,

and related liabilities are properly recorded as liabilities.

Difficulty: Easy

Learning Objective: Identify the audit objectives applicable to purchases, payables, and payroll.

Section Reference: 11.1 Audit objectives

CPA Competency: Audit and Assurance

AACSB: Analytic

2. The occurrence objective for purchases, payables, and payroll requires that accounts

payable and payroll liabilities include all amounts owed by the entity to suppliers of goods

and services at the end of the reporting period.

Difficulty: Easy

Learning Objective: Identify the audit objectives applicable to purchases, payables, and payroll.

Section Reference: 11.1 Audit objectives

CPA Competency: Audit and Assurance

AACSB: Analytic

3. A purchase order is a form issued by the supplier detailing the goods or services supplied

and the amount owing.

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for processing purchase, payment, and purchase adjustment transactions.

Section Reference: 11.2 The process for purchase transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

4. The segregation of receiving goods from the requisitioning and purchasing of those

goods prevents those making requisitions from ordering goods directly from suppliers and

also prevents the purchasing department from gaining access to goods improperly ordered.

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for processing purchase, payment, and purchase adjustment transactions.

Section Reference: 11.2 The process for purchase transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

5. Employees are generally hired by the company’s purchasing department.

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for payroll transactions.

Section Reference: 11.3 The process for payroll transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

6. Even though an employee’s supervisor may initiate a request for payroll change, such as

a change in job classification or wage rate increase, all changes should be authorized in

writing by the personnel department before being entered into the personnel data master

file.

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for payroll transactions.

Section Reference: 11.3 The process for payroll transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

7. Purchase and payroll transactions account for the major expenses incurred by a

business, and so are a major component in the determination of profit, and also relate to the

acquisition of major classes of assets including inventories and capital assets.

Difficulty: Easy

Learning Objective: Discuss considerations relevant to determining the audit strategy for purchases, payables, and payroll.

Section Reference: 11.4 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

8. The auditor knows that overstatements of payroll may result from unintentional errors or

fraud through payments to fictitious employees, payments to actual employees for hours not

worked, and payments to actual employees at higher than authorized rates.

Difficulty: Easy

Learning Objective: Discuss considerations relevant to determining the audit strategy for purchases, payables, and payroll.

Section Reference: 11.4 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

9. Accounts payable is usually the smallest current liability on the balance sheet and a

insignificant factor in the evaluation of an entity’s short-term solvency, especially when the

accounts payable is affected by a high volume of transactions and thus is susceptible to

misstatements.

Difficulty: Easy

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of purchases, payables, and payroll.

Section Reference: 11.5 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

10. Accounts payable is affected by purchase transactions that increase the account

balance and payment transactions that decrease the balance, thus, detection risk for

payables assertions is affected by the control and inherent risk factors related to both these

transaction classes.

Difficulty: Easy

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of purchases, payables, and payroll.

Section Reference: 11.5 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

11. A substantive audit procedure for verifying accounts payable should include tracing the

opening balance to the previous year’s working papers.

Difficulty: Easy

Learning Objective: Design a substantive audit program for purchases, payables, and payroll.

Section Reference: 11.6 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

12. A proper cut-off of payment transactions at the year end, such as verifying and

examining the date of cheques outstanding as at the end of the reporting period, is essential

to the correct presentation of cash and accounts payable at the end of the reporting period.

Difficulty: Easy

Learning Objective: Design a substantive audit program for purchases, payables, and payroll.

Section Reference: 11.6 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

MULTIPLE CHOICE QUESTIONS

13. Which of these is not directly affected by purchases and payments transactions?

a) plant assets

b) work-in-process inventory

c) accounts payable

d) prepaid expenses

Difficulty: Easy

Learning Objective: Identify the audit objectives applicable to purchases, payables, and payroll.

Section Reference: 11.1 Audit objectives

CPA Competency: Audit and Assurance

AACSB: Analytic

14. The specific audit objective “accounts payable are liabilities of the entity at the balance date” is derived from the:

a) completeness assertion.

b) valuation assertion.

c) presentation assertion.

d) rights and obligations assertion.

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for processing purchase, payment, and purchase adjustment transactions.

Section Reference: 11.2 The process for purchase transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

15. On delivery of the goods to stores or other requisitioning departments, receiving clerks should obtain

a) a signed receipt on the copy of the receiving report retained by the receiving department.

b) an original copy of the receiving report released by the receiving department.

c) a copy of the receiving report retained by the receiving department.

d) an authority for receiving report retained by the receiving department.

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for processing purchase, payment, and purchase adjustment transactions.

Section Reference: 11.2 The process for purchase transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

16. The control related to the completeness assertion is

a) determining the mathematical accuracy of the suppliers’ invoices.

b) serially numbering suppliers’ invoices on receipt so that subsequent checks of numerical continuity can confirm that all invoices are recorded.

c) preparing a daily prelist of suppliers’ invoices approved for payment.

d) coding the account distributions on the suppliers’ invoices.

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found in information systems for processing purchase, payment, and purchase adjustment transactions.

Section Reference: 11.2 The process for purchase transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

17. Purchases transactions relate

a) solely to the purchase of inventory held for sale.

b) to the purchase of inventory, plant and equipment, and supplies.

c) to the purchase of all goods and services.

d) to the purchase of all goods and services and the payroll function.

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for processing purchase, payment, and purchase adjustment transactions.

Section Reference: 11.2 The process for purchase transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

18. Which of the following is least likely to be a function of the processing of purchase transactions?

a) storing goods received for inventory

b) checking and approving the supplier’s invoice

c) return to customers

d) receiving the goods

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for processing purchase, payment, and purchase adjustment transactions.

Section Reference: 11.2 The process for purchase transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

19. The correct statement in relation to purchase requisitions is:

a) all purchase requisitions in the organization should originate from the warehouse.

b) all managers in the organization should be able to sign a requisition order.

c) the purchase requisition represents the start of the trail of documentary evidence in support of management’s assertion as to the occurrence of the purchase transaction.

d) all of the above

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for processing purchase, payment, and purchase adjustment transactions.

Section Reference: 11.2 The process for purchase transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

20. Purchase requisitions may originate from

a) personnel manager, for plant and equipment.

b) the warehouse, for inventory.

c) purchases for a delivery vehicle.

d) both b and c

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for payroll transactions.

Section Reference: 11.3 The process for payroll transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

21. Purchase orders become part of the transaction trail of documentary evidence that directly supports which assertion for purchase transactions?

a) existence or occurrence

b) rights and obligations

c) accuracy and valuation

d) presentation

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for payroll transactions.

Section Reference: 11.3 The process for payroll transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

22. The quantity ordered may not be displayed on the copy of the purchase order sent directly to the

a) requesting department.

b) vouchers payable department.

c) receiving department.

d) accounts receivable department.

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for payroll transactions.

Section Reference: 11.3 The process for payroll transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

23. The receiving department should be instructed to accept no goods without having on file a properly authorized

a) purchase requisition.

b) invoice.

c) receiving report.

d) purchase order.

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for payroll transactions.

Section Reference: 11.3 The process for payroll transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

24. A copy of the receiving report should be sent directly by the receiving department to the

a) accounts (receivable) department.

b) chief financial controller.

c) purchasing department.

d) accounts (payable) department.

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for payroll transactions.

Section Reference: 11.3 The process for payroll transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

25. A check by the auditor on the numeric sequence of prenumbered receiving reports to determine that a supplier’s invoice was recorded for each relates to the

a) existence or occurrence assertion.

b) completeness assertion.

c) presentation assertion.

d) rights and obligations assertion.

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found in information systems for payroll transactions.

Section Reference: 11.3 The process for payroll transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

26. A responsibility not normally assigned to receiving department personnel is to

a) compare goods received with description of goods ordered.

b) prepare a prenumbered receiving report for every order received.

c) enter cheque requisition data and verify the batch total.

d) file the purchase order copy pending arrival of goods.

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for payroll transactions.

Section Reference: 11.3 The process for payroll transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

27. Prior to recording purchases transactions, supplier’s invoices are checked and approved in the accounting department. Controls over this function include all of the following except

a) marking all supporting documentation as “paid”.

b) approving the supplier’s invoice for payment by having an authorized person sign the invoice.

c) agreeing the details of the supplier’s invoice with the related receiving report and purchase order.

d) determining the mathematical accuracy of the supplier’s invoice.

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found in information systems for payroll transactions.

Section Reference: 11.3 The process for payroll transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

28. For the purchasing firm the processing of purchases and payment transactions requires all of the following functions except:

a) requisitioning goods and services.

b) preparing purchase invoices.

c) preparing the cheque requisition.

d) All of the above functions are required.

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found in information systems for payroll transactions.

Section Reference: 11.3 The process for payroll transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

29. Responsibility for determining that unpaid supplier’s invoices are processed for payment on their due dates generally lies with the

a) warehouse department.

b) accounts payable department.

c) purchasing department.

d) internal audit department.

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for payroll transactions.

Section Reference: 11.3 The process for payroll transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

30. Segregation of the functions of payroll and personnel do all of the following, except

a) reduce the risk of payments to fictitious employees.

b) reduce the risk of payments to terminated employees.

c) restrict the recording of new employee data to the payroll department.

d) restrict the payment of wages to the payroll department.

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found in information systems for payroll transactions.

Section Reference: 11.3 The process for payroll transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

31. Controls over the preparation and signing of cheques include all of the following except

a) authorized personnel in the accounting department should be responsible for signing the cheques.

b) the cheque requisition and supporting documents should be cancelled (stamped) when the cheque is signed.

c) the signed cheque and the supporting documents should be returned to the accounts payable clerk for review and mailing.

d) prenumbered cheques should be used.

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found in information systems for payroll transactions.

Section Reference: 11.3 The process for payroll transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

32. Controls specific to the recording of cash payments include which of the following?

a) an independent check by the accounting supervisor of the agreement of the amounts authorized and posted to accounts payable with the cheque summary received from the general accounting department

b) an independent check of the agreement of the total of cheques issued with a batch total of the vouchers processed for payment.

c) limits on access to blank cheques

d) all of the above

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found in information systems for payroll transactions.

Section Reference: 11.3 The process for payroll transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

33. Payroll functions include all of the following except

a) hiring employees.

b) deciding on the number of workers required to work on a particular day.

c) preparing the payroll.

d) protecting unclaimed wages.

Difficulty: Easy

Learning Objective: Discuss considerations relevant to determining the audit strategy for purchases, payables, and payroll.

Section Reference: 11.4 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

34. Payroll functions include all of the following except

a) preparing attendance and timekeeping data.

b) authorized payroll changes.

c) terminating employees.

d) hiring employees.

Difficulty: Easy

Learning Objective: Discuss considerations relevant to determining the audit strategy for purchases, payables, and payroll.

Section Reference: 11.4 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

35. A special supervisor’s password is required in order to add a new employee to the personnel data master file. This control relates primarily to the

a) existence or occurrence assertion.

b) completeness assertion.

c) presentation assertion.

d) accuracy, valuation, and allocation assertion.

Difficulty: Easy

Learning Objective: Discuss considerations relevant to determining the audit strategy for purchases, payables, and payroll.

Section Reference: 11.4 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

36. Responsibility for updating of the personnel data master file should rest with authorized employees in the

a) personnel department.

b) payroll department.

c) controller’s department.

d) employee’s operating department.

Difficulty: Easy

Learning Objective: Discuss considerations relevant to determining the audit strategy for purchases, payables, and payroll.

Section Reference: 11.4 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

37. In most modern organizations, employee timekeeping data is recorded via

a) employee badges.

b) time-clock cards.

c) security identification cards.

d) sign-in/sign-off book.

Difficulty: Easy

Learning Objective: Discuss considerations relevant to determining the audit strategy for purchases, payables, and payroll.

Section Reference: 11.4 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

38. Wage rate increases should be authorized in writing by the

a) payroll department.

b) personnel department.

c) finance department.

d) data entry department.

Difficulty: Easy

Learning Objective: Discuss considerations relevant to determining the audit strategy for purchases, payables, and payroll.

Section Reference: 11.4 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

39. A programmed routine in the edit run for payroll lists all employees who worked more than 50 hours during the week for review. This is an example of a

a) reasonableness test.

b) validity test.

c) sequence test.

d) self-checking test.

Difficulty: Medium

Learning Objective: Discuss considerations relevant to determining the audit strategy for purchases, payables, and payroll.

Section Reference: 11.4 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

40. For proper control, unclaimed payroll cheques should be stored by the

a) finance department.

b) payroll department.

c) personnel department.

d) timekeeping department.

Difficulty: Easy

Learning Objective: Discuss considerations relevant to determining the audit strategy for purchases, payables, and payroll.

Section Reference: 11.4 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

41. Controls applicable to paying the payroll and protecting unclaimed wages include all of the following except

a) payroll cheques and bank transfers should be signed or authorized by finance office personnel involved in preparing or recording the payroll.

b) payroll cheques, where used should be distributed to employees by finance office personnel not involved in preparing or recording the payroll.

c) any unclaimed payroll cheques should be stored in a safe or vault in the finance office.

d) finance office personnel should check the agreement of the names and amounts on cheques or bank transfers with payroll register entries.

Difficulty: Medium

Learning Objective: Discuss considerations relevant to determining the audit strategy for purchases, payables, and payroll.

Section Reference: 11.4 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

42. The batching of payroll documents is normally done in the

a) timekeeping department.

b) payroll department.

c) data entry department.

d) personnel department.

Difficulty: Easy

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of purchases, payables, and payroll.

Section Reference: 11.5 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

43. An important consideration in assessing inherent risk for purchase transactions is any motivation management may have to misstate expenditure. Which of the following is not a factor that may contribute to misstatement?

a) the need to achieve announced profitability targets.

b) the need to disclose concern over control problems.

c) temptations for employees to make unauthorized purchases.

d) temptations for employees to misappropriate purchased assets.

Difficulty: Easy

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of purchases, payables, and payroll.

Section Reference: 11.5 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

44. Which of the following is not a factor that tends to increase the inherent risk for purchases and payables?

a) the number of directors

b) a high volume of transactions

c) issues over costs being capitalized versus being expensed

d) the complexity of payroll calculations.

Difficulty: Easy

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of purchases, payables, and payroll.

Section Reference: 11.5 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

45. Test data may be used to test application controls over accepting and recording data for unpaid suppliers’ invoices. Which of the following conditions would not be relevant?

a) numeric characters in an alphanumeric field

b) missing or invalid supplier numbers

c) missing due date or payment terms

d) alphabetical characters in a numeric field

Difficulty: Medium

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of purchases, payables, and payroll.

Section Reference: 11.5 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

46. In witnessing a payroll distribution, the auditor would not be expected to observe that

a) the segregation of duties exist between the preparation and payment of payroll.

b) the correct payroll entries are made in the firm’s ledger and journal

c) there is proper control and disposal of unclaimed cheques.

d) each employee receives only one cheque or pay envelope.

Difficulty: Medium

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of purchases, payables, and payroll.

Section Reference: 11.5 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

47. Factors relating to the internal control environment that the auditor needs to consider when assessing control risk for purchase, payment, and payroll transactions include all of these except

a) integrity and ethical values.

b) management’s commitment to competence.

c) design of substantive procedures.

d) assignment of authority and responsibility.

Difficulty: Easy

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of purchases, payables, and payroll.

Section Reference: 11.5 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

48. Which of these is not a source of potential misstatement for the function of recording a payment?

a) a cheque may be issued for unauthorised purchases

b) a cheque may not be recorded promptly

c) errors may be made in recording cheques

d) All of the above are sources of potential misstatement for the function of recording a payment.

Difficulty: Medium

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of purchases, payables, and payroll.

Section Reference: 11.5 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

49. Which of these is the least likely risk factor for payroll?

a) payments to fictitious employees

b) payments to actual employees for hours less than they worked

c) payment to actual employees for hours not worked

d) payments to actual employees at higher than authorized rates

Difficulty: Medium

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of purchases, payables, and payroll.

Section Reference: 11.5 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

50. Which of the following is not an initial procedure for verifying accounts payable?

a) trace the opening balance to the prior year’s working papers (if applicable)

b) review activity in the general ledger account for any unusual entries

c) reconcile accounts to monthly supplier’s statements

d) obtain a listing of amounts owed at the balance sheet date

Difficulty: Medium

Learning Objective: Design a substantive audit program for purchases, payables, and payroll.

Section Reference: 11.6 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

51. Confirmation of accounts payable will provide the least amount of evidence for the

a) existence or occurrence assertion.

b) completeness assertion.

c) accuracy and valuation assertion.

d) rights and obligations assertion.

Difficulty: Easy

Learning Objective: Design a substantive audit program for purchases, payables, and payroll.

Section Reference: 11.6 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

52. Which of these is not a procedure for identifying unrecorded liabilities?

a) examination of the subsequent period’s purchase and payment transactions

b) analytical procedures for expense and liability balances

c) examination of contractual commitments

d) confirmation of accounts payable

Difficulty: Medium

Learning Objective: Design a substantive audit program for purchases, payables, and payroll.

Section Reference: 11.6 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

53. Tests of details of transactions for payables balances include

a) vouching recorded payables to supporting documentation.

b) confirming payables with major suppliers by reviewing the accounts payable ledger or accounts payable master file.

c) comparing financial statement presentation with applicable regulations and accounting standards.

d) verifying directors’ and executive officers’ remuneration.

Difficulty: Easy

Learning Objective: Design a substantive audit program for purchases, payables, and payroll.

Section Reference: 11.6 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

54. Tests of details of balances for payables include all of the following except

a) reconciling payables with monthly statements received by the entity from suppliers.

b) confirming accounts payable.

c) searching for unrecorded liabilities.

d) verifying directors’ and executive officers’ remuneration.

Difficulty: Medium

Learning Objective: Design a substantive audit program for purchases, payables, and payroll.

Section Reference: 11.6 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

55. The third stage of applying analytical procedures is to

a) identify absolute changes in amounts between the current year and the prior year.

b) use ratios and trends.

c) make an objective assessment regarding usability of analytical procedures.

d) document expected and unexpected changes.

Difficulty: Easy

Learning Objective: Design a substantive audit program for purchases, payables, and payroll.

Section Reference: 11.6 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

56. Which of these tests would be the least useful when using analytical procedures on expenses?

a) comparing prior year amounts with current year amounts

b) comparing current year amounts as a percentage of sales with prior year

c) comparing relationships between related expenses

d) comparing total expenses to the bank balance at balance date

Difficulty: Medium

Learning Objective: Design a substantive audit program for purchases, payables, and payroll.

Section Reference: 11.6 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

57. A purchases cut-off test would satisfy the audit objective assertion of

a) classification.

b) rights and obligations.

c) completeness

d) none of the above

Difficulty: Easy

Learning Objective: Design a substantive audit program for purchases, payables, and payroll.

Section Reference: 11.6 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

58. A confirmation is performed less frequently for accounts payable than it is for accounts receivable because

a) only a negative confirmation can be sent.

b) confirmation offers no assurance that unrecorded liabilities will be discovered.

c) it is only performed when detection risk is high.

d) it specifies the amount due to the supplier.

Difficulty: Easy

Learning Objective: Design a substantive audit program for purchases, payables, and payroll.

Section Reference: 11.6 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

59. Each major class of creditors and borrowings must be disclosed in the balance sheet. Which of these would not be shown as a class of creditors and borrowings?

a) taxation liabilities

b) revenue owing

c) employee benefits

d) lease liabilities

Difficulty: Easy

Learning Objective: Design a substantive audit program for purchases, payables, and payroll.

Section Reference: 11.6 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

SHORT ANSWER QUESTIONS

60. Identify the assertion relating to classes of transactions that corresponds with the following descriptions.

1. All purchases, payments, and payroll transactions are recorded in the correct accounts.
2. Particularly relevant to transactions around the year end; all purchases, cash payments, purchase adjustments, and payroll transactions arising before the period end are recorded in the current period and those arising after the period end are included in the next accounting period.
3. Recorded payroll expenses relate to employee services received in the period.
4. All payments that occurred during the period and that should have been recorded have been recorded.
5. Purchase, payment, and payroll transactions are properly (accurately) recorded.

Difficulty: Medium

Learning Objective: Identify the audit objectives applicable to purchases, payments, and payroll

Section Reference: 11.1 Audit objectives

CPA Competency: Audit and Assurance

AACSB: Analytic

61. Identify the assertion relating to account balances that corresponds with the following descriptions.

1. Accounts payable represent gross amounts due to suppliers and agree with the sum of the accounts payable in the accounts payable subsidiary ledger.
2. Accounts payable include all amounts owed by the entity to suppliers of goods and services at the end of the reporting period.
3. Accounts payable and accrued payroll liabilities are liabilities of the entity at the end of the reporting period.
4. Accrued payroll liabilities include all amounts owed in respect of payroll and deductions at the end of the reporting period.
5. Recorded accounts payable represent amounts owed by the entity at the end of the reporting period.

Difficulty: Medium

Learning Objective: Identify the audit objectives applicable to purchases, payments, and payroll

Section Reference: 11.1 Audit objectives

CPA Competency: Audit and Assurance

AACSB: Analytic

62. Describe a control procedure over the preparation and signing of cheques and electronic fund transfers.

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found in information systems for processing purchase, payment, and purchase adjustment transactions

Section Reference: 11.2 The process for purchase transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

63. Identify and describe three key issues relevant to the audit of purchases, payables and payroll.

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found in information systems for processing purchase, payment, and purchase adjustment transactions.

Section Reference: 11.2 The process for purchase transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

64. Identify key controls that ought to be in place for the preparation and signing of cheques.

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found in information systems for payroll transactions.

Section Reference: 11.3 The process for payroll transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

65. Following is a description of Out of Control corporations’ inventory purchases process for skateboard wheels. Identify the weaknesses in the controls and suggest possible improvements.

When stock falls below 100 the computer automatically produces a purchase requisition for more stock from the supplier. If there is a special promotion coming up, Tony, the marketing manager, might put in an extra purchase requisition for promotional stock. The computer numbers the dockets in sequence and sends them to the purchasing department.

The purchasing department issues a purchase order with their standard supplier when they receive an authorized purchase requisition. Tony used to work in purchasing, and is good friends with Mika who now manages the purchasing department. Tony sometimes covers a shift for Mika when he has a day off.

When the order arrives at the warehouse receiving dock, the purchase order is compared to the goods received: The personnel check that the right types of wheels are included, the right number of wheels is included, and that they are undamaged. They then prepare a prenumbered receiving report and forward it to accounting along with the supplier invoice.

Accounting then enters the amounts from the supplier invoices into the system.

Solution:

Purchase requisitions: The authority to order promotional stock should be allocated to a specific manager in the warehouse division.

Purchase orders: Tony covering Mika’ shifts will cause a situation where there is no separation of requisitioning from ordering, leaving an opening for fraudulent orders.

Receiving dock: It would be a better control to have a special copy of the purchase order produced for the receiving personnel that does not include the number of wheels ordered. This will ensure a more accurate count is performed.

The supplier should forward the suppliers’ invoice separately to accounting so that accounting can check them off against delivery counts. If they go through the dock there is an opportunity for fraud.

Checking and approving the suppliers’ invoice: the invoice is not checked, but just entered directly. Some checks may include:

• serially numbering suppliers’ invoices on receipt.
• checking supplier invoices with the related receiving reports and purchase orders.
• determining the mathematical accuracy of the suppliers’ invoices
• coding account distributions on the invoices.
• approving for payment, with an authorized individual’s signature.
• preparing daily prelist of suppliers’ invoices approved for payment.

Recording the liability: the accounting software could be set up to do a lot of the checks in the previous point automatically; for example, by comparing invoices to orders and checking for valid suppliers.

Bloomcode: Application

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found in information systems for payroll transactions.

Section Reference: 11.3 The process for payroll transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

66. What could motivate management to misstate expenditures? What other factors may lead to misstatements?

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found in information systems for payroll transactions.

Section Reference: 11.3 The process for payroll transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

67. Identify the need for controls over hiring employees, authorising payroll changes, and preparing attendance and timekeeping data.

Solution:

Hiring employees: controls are needed to prevent the creation of fictitious employees through which wages can be redirected to the perpetrator of the fraud.

Authorizing payroll changes: changes such as promotions and pay rate increases provide a fraud threat through the overpayment of wages.

Preparing attendance and timekeeping data: employees need to clock on and off in a way that ensures they are only paid for hours actually worked. The payroll may be prepared straight from this data.

Bloomcode: Application

Difficulty: Medium

Learning Objective: Discuss considerations relevant to determining the audit strategy for purchases, payables, and payroll.

Section Reference: 11.4 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

68. Explain the nature and use of an imprest payroll account.

Difficulty: Medium

Learning Objective: Discuss considerations relevant to determining the audit strategy for purchases, payables, and payroll.

Section Reference: 11.4 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

69. Provide three relevant analytical procedures related to the audit of purchases, payments, and payroll.

Difficulty: Medium

Learning Objective: Discuss considerations relevant to determining the audit strategy for purchases, payables, and payroll

Section Reference: 11.4 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

70. Provide three inherent risks related to the audit of purchases, payables, and payroll.

Difficulty: Medium

Learning Objective: Discuss considerations relevant to determining the audit strategy for purchases, payables, and payroll

Section Reference: 11.4 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

71. Describe a preventative control for each of the WCGW (what can go wrong) provided in the table below.

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found in information systems for payroll transactions.

Learning Objective: Discuss considerations relevant to determining the audit strategy for purchases, payables, and payroll.

Section Reference: 11.3 The process for payroll transactions

Section Reference: 11.4 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

72. Describe a preventative control for each of the WCGW (what can go wrong) provided in the table below.

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found in information systems for payroll transactions.

Learning Objective: Discuss considerations relevant to determining the audit strategy for purchases, payables, and payroll.

Section Reference: 11.3 The process for payroll transactions

Section Reference: 11.4 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

73. With regards to control risk assessment for purchase transactions, align the potential misstatements in the following chart with their possible tests of operating effectiveness.

Difficulty: Medium

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of purchases, payables, and payroll.

Section Reference: 11.5 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

74. List three tests of details of balances for accounts payable and two tests for payroll balances.

Difficulty: Medium

Learning Objective: Design a substantive audit program for purchases, payables, and payroll.

Section Reference: 11.6 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

75.

1. On what basis are the tests of details of balances planned?

2. What are the stages in applying analytical procedures to payables?

Difficulty: Medium

Learning Objective: Design a substantive audit program for purchases, payables, and payroll.

Section Reference: 11.6 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

76. Why are directors’ and executive officers’ remuneration considered to be audit sensitive?

What procedure could be used to check directors’ and executive officers’ remuneration?

Difficulty: Medium

Learning Objective: Design a substantive audit program for purchases, payables, and payroll.

Section Reference: 11.6 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

ESSAY QUESTIONS

77. Describe the audit process for purchase transactions. Indicate the audit risks that need to be addressed and the mitigating controls that can be implemented.

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found in information systems for processing purchase, payment, and purchase adjustment transactions.

Section Reference: 11.2 The process for purchase transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

78. Describe the audit process for payroll transactions. Indicate the audit risks that need to be addressed and the mitigating controls that can be implemented.

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found in information systems for payroll transactions.

Section Reference: 11.3 The process for payroll transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

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