Ch12 Auditing the Purchasing and Payroll Processes Exam Prep - Auditing Data Analytics 1e Test Bank by Raymond N. Johnson. DOCX document preview.
Chapter 12
Auditing the Purchasing and Payroll Processes
Question Type: True or False
An entity’s purchasing process consists of activities related to the acquisition of, and payment for, goods and services.
A. True
B. False
Purchasing goods and services and making payments are NOT considered core purchase transactions.
A. True
B. False
As inherent risk factors vary from industry to industry, from client to client, and from year to year, each audit should be identical to address unique risks.
A. True
B. False
The purchasing or procurement process involves selecting customers, establishing payment terms, negotiating contracts, purchasing goods, receiving goods, and recording of purchases and payment of liabilities.
A. True
B. False
Prior experience in accounts payable turnover days combined with knowledge of current purchases can be useful in estimating current payables.
A. True
B. False
The expenditure process is particularly prone to a risk of employee fraud through unauthorized disbursements of cash
A. True
B. False
The first category of misstatements that is relevant to the purchasing and payroll cycles is "expense (payroll, selling, general, administration, other) recording issues."
A. True
B. False
A strong tone at the top about the importance of accurate financial reporting encourages the understatement of expenses and liabilities.
A. True
B. False
The transaction flow in a typical purchases process for a client purchasing goods includes approving purchases, shipping goods, recording purchases and recording accounts payable
A. True
B. False
An approved vendor master file is a computer file containing pertinent information on vendors and suppliers that have been approved to purchase services from and make payments to.
A. True
B. False
A Cash Disbursements Journal is a daily report showing checks written or electric funds transferred to vendors and amounts paid.
A. True
B. False
A voucher is an external document indicating the vendor, the amount due, and payment terms for the purchases received.
A. True
B. False
A cash disbursements journal is a daily report showing checks written or electronic funds transferred to vendors and amounts paid.
A. True
B. False
Electronic Invoice Presentment and Payment (EIPP) systems use an independent third party to settle business to business (B2B) transactions.
A. True
B. False
Many Evaluated Receipt Systems (ERS) use Electronic Invoice Presentment and Payment (EIPP) systems.
A. True
B. False
A shipping report is one of the important documents and records used in processing purchase adjustments in traditional or Evaluated Receipts Settlement (ERS) systems.
A. True
B. False
A Purchase Return Authorization is a form showing the description, quantity, and other data pertaining to the goods the vendor has authorized the purchaser to return.
A. True
B. False
Many frauds can be avoided with strong controls over the vendor master files, determining the appropriateness of support for payments to vendors before recording a liability (voucher), and the willingness to dispute inappropriate items with vendors.
A. True
B. False
The purchase cutoff test involves determining that purchase transactions occurring near the balance sheet date are recorded in the proper period.
A. True
B. False
Question Type: Multiple choice
An entity’s purchasing process consists of _______.
A. activities related to the acquisition of, and payment for, goods and services.
B. activities related to the selling of, and payment received for, goods and services.
C. repurchasing shares of stock from shareholders
D. refinancing loans and notes payable with a bank
Purchases of inventory on credit should involve _______.
A. debits to inventory and credits to payables
B. debits to payables and credits to inventory
C. debits to payables and credits to expenses
D. debits to expenses and credits to cash
For companies that purchase goods on account, the transaction should _______.
A. record purchases and accounts payable upon ordering of the goods
B. record purchases and accounts payable upon the receipt of goods
C. be input into the ledger by the auditor once it has been reviewed
D. overstate equity until the goods are paid for
If a company receives goods but waits to record the transaction until a vendor’s invoice is received, _______.
A. purchases and accounts payable will be understated
B. purchases and accounts payable will be overstated
C. purchases will be overstated and accounts payable will be understated
D. purchases will be understated and accounts payable will be overstated
If discounts are taken for early payment, _______.
A. purchase discounts are deferred when recording the cash disbursement
B. purchase discounts are recorded when recording the cash disbursement
C. accounts receivable should be debited for the amount of the discount
D. accounts payable should be credited for the amount of the discount
The rights and obligations assertion with respect to accounts payable relates to whether the _______.
A. accounts receivable reflect the recorded asset of the entity
B. accounts receivable reflect the recorded liability of the entity
C. accounts payable reflect the recorded liability of the entity
D. accounts payable reflect the recorded asset of the entity
Relevant assertions relating to purchases of materials or goods are _______.
A. occurrence, completeness, accuracy, cutoff, classification
B. going concern, completeness, accuracy, cutoff, classification
C. occurrence, completeness, accuracy, cutoff, verifiability
D. occurrence, completeness, accuracy, comparability
Key assertions relating to accounts payable account balances are _______.
A. existence, rights and obligations, completeness, valuation and allocation
B. existence, rights and obligations, truthfulness, valuation and allocation
C. existence, rights and obligations, going concern, valuation and allocation
D. presentability, rights and obligations, completeness, valuation and allocation
Key assertions relating to relevant disclosures for payables are _______.
A. going concern, completeness, classification and understandability, accuracy and valuation
B. occurrence and rights and obligations, completeness, classification and understandability, accuracy and valuation
C. occurrence and rights and obligations, completeness, classification and understandability, note disclosure
D. credibility, completeness, classification and understandability, accuracy and valuation
Which of the following is in an assertion of relevant account balances of a key purchase transaction?
A. Valuation and allocation at historical cost
B. Accounts payable
C. Purchase returns and allowances
D. Purchase returns
The "classification and understandability" assertion describing relevant disclosures is part of which of the following?
A. Key purchasing cycle assertions
B. Cash and purchase discounts
C. Purchase returns and allowances
D. Purchase transactions
Which of the following refer to making payments?
A. Cash disbursement transactions
B. Transactions
C. Net sale transactions
D. Purchase adjustments
The purchasing or procurement process involves _______.
A. selecting customers, establishing payment terms, negotiating contracts, purchasing goods, receiving goods, and recording of purchases and payment of liabilities
B. selecting vendors, establishing payment terms, negotiating contracts, purchasing goods, receiving goods, and recording of purchases and payment of liabilities
C. selecting vendors, establishing payment terms, negotiating contracts, selling goods, receiving goods, and recording of purchases and payment of liabilities
D. selecting vendors, establishing payment terms, negotiating contracts, purchasing goods, shipping goods, and recording of purchases and payment of liabilities
If a company is growing, it is common to expect purchases, inventory, and _______.
A. accounts receivable to grow at different rates
B. accounts payable to grow at different rates
C. accounts payable to grow at approximately the same rates
D. accounts receivable to grow at approximately the same rates
The purchasing or procurement process typically involves _______.
A. the revenue and receivables accounts
B. selecting vendors, establishing payment terms, negotiating contracts, selling goods, receiving goods, and recording of purchases and payment of liabilities
C. selecting vendors, establishing payment terms, negotiating contracts, purchasing goods, receiving goods, and recording of purchases and payment of liabilities
D. the revenue and cost of goods sold accounts
Purchasing/procurement is concerned with _______.
A. acquiring all of the goods and services that are vital to an organization
B. selling all of the goods and services that are vital to an organization
C. disposing of all of the goods and services that are vital to an organization
D. acquiring all of the goods and services that are vital to an organization's customers
With respect to the purchasing cycle, it is particularly important for the auditor _______.
A. to closely check the revenue and associated contra-revenue accounts
B. to be knowledgeable about the entity, the types of sales the entity makes, and how those sales support the earnings generation of the entity
C. to be knowledgeable about the entity, the types of purchases the entity makes, and how those purchases support the earnings generation of the entity
D. to determine the net realizable value of accounts receivable
An entity’s net operating cycle represents _______.
A. the time from using cash to purchasing goods or services to collecting cash from the sale of goods or services
B. the time from receiving cash to purchasing goods or services to collecting cash from the sale of goods or services
C. the time from using cash to selling goods or services to collecting cash from the sale of goods or services
D. the time from using cash to purchase property, plant, and equipment to collecting on the sale of receivables.
Every business has _______.
A. different market forces that place differing demands on the company’s cash flow
B. identical market forces that place differing demands on the company’s cash flow
C. different market forces that place identical demands on the company’s cash flow
D. identical market forces that place similar demands on the company’s cash flow
For a manufacturer or retailer, the gross operating cycle is estimated by _______.
A. the average number of days it takes to turn over receivables and collect receivables
B. the average number of days it takes to turn over inventory and collect receivables
C. the average number of days it takes to turn over payables and collect receivables
D. the length of time it takes to request and receive funds for a loan
The net operating cycle represents _______.
A. the gross operating cycle reduced by accounts payable turnover days, the amount of time that an entity’s customers will let it use trade credit before requiring payment for goods and services
B. the gross operating cycle reduced by accounts receivable turnover days, the amount of time that an entity’s suppliers will let it use trade credit before requiring payment for goods and services
C. the gross operating cycle reduced by accounts payable turnover days, the amount of time that an entity’s suppliers will let it use trade credit before requiring payment for goods and services
D. the gross financing cycle reduced by accounts payable turnover days, the amount of time that an entity’s suppliers will let it use trade credit before requiring payment for goods and services
Many analytical procedures focus on _______.
A. the relationship between purchases and accounts payable
B. the relationship between purchases and accounts receivable
C. the relationship between sales and accounts payable
D. the relationship between sales and purchases
When reviewing the results of analytical procedures, the auditor needs to bring an appropriate level of _______.
A. professional skepticism
B. professional confidence
C. statistical sampling
D. nonstatistical sampling
When an auditor updates his or her understanding of the entity and its environment, _______.
A. each audit should be viewed identically to previous audits
B. each audit should be viewed independently from previous audits
C. each audit should be viewed with respect to the current audit of other clients
D. the auditor should be sure that senior management agrees with the auditor's understanding, and modify appropriately if not
What is the procurement process?
A. A process that involves selecting vendors, establishing payment terms, negotiating contracts, purchasing goods, receiving goods, and recording of purchases and payment of liabilities.
B. A process in which a significant increase in the current ratio compared to prior years’ experience may indicate completeness problems.
C. A process in which a significant decline in payables as a percent of total assets may indicate completeness problems.
D. The purchase returns process involving return of goods.
Which of the following may NOT be significantly affected by price increase for purchased goods?
A. Purchases made by colleges, universities, and professional schools
B. Purchases made by hotels and motels
C. Purchases made by supermarkets
D. Purchases made by electronic computer manufacturing firms
Which of the following purchases must be managed aggressively to minimize inventory obsolescence?
A. Electronic computer manufacturing
B. Hotels and motels
C. Universities and colleges
D. Supermarkets and grocery stores
Pervasive factors that might motivate management to misstate purchases process assertions include _______.
A. pressure to understate expenses in order to report achieving announced profitability targets or industry norms, which were not achieved in reality
B. pressure to understate payables in order to report a higher level of working capital when the entity is experiencing liquidity problems
C. pressure to understate payables in order to report a higher level of working capital when the entity is experiencing going concern doubts
D. All of these answer choices are correct
When auditors perform analytical procedures during the risk assessment for purchases and payables, they should _______.
A. develop a skill in analyzing the likely assertions that might be misstated based on the data
B. develop a skill in analyzing the likely assertions that might be correctly stated based on the data
C. specifically request the help of the internal auditors
D. report any misstatements immediately to the SEC
In assessing inherent risk for purchasing process assertions, the auditor should _______.
A. rely on the opinions formed by the internal audit function
B. consider pervasive factors influencing the understatement or overstatement of payables and expenses.
C. consider pervasive factors influencing the understatement or overstatement of receivables and expenses.
D. consider pervasive factors influencing the correct statement of payables and expenses.
The expenditure process is particularly prone to a risk of employee fraud through _______.
A. unauthorized receipts of cash.
B. authorized disbursements of cash.
C. unauthorized disbursements of cash.
D. authorized receipts of cash.
Management and the auditor have to be alert to the risk of collusion with _______.
A. vendors and vendor kickbacks to employees
B. customers and vendor kickbacks to employees
C. customers and customer kickbacks to employees
D. vendors and vendor kickbacks to stockholders
The category of misstatements relevant to the purchasing and payroll cycles that consists of error or irregularities in approach, theory, or calculation associated with the expensing of assets or understatement of liabilities is ______.
A. expense recording issues
B. liabilities and payables
C. accrual estimate failure
D. reserve recording issues
The second category of misstatements is "_______," which includes the failure to record deferred revenue obligations or normal accruals.
A. liabilities, payables, reserves, and accrual estimate failure
B. expenses, payables, and reserves
C. expense recording issues
D. debt and equity issues
In assessing inherent risk for the purchasing process assertions, the auditor should consider pervasive factors that _______.
A. influence the understatement or overstatement of payables and expenses
B. influence the understatement of expenses only
C. influence the overstatement of payables only
D. lead to risk factors associated with purchases
A risk related to what can go wrong with respect to authorizing purchases relates to _______.
A. purchases being made from unauthorized vendors
B. purchases being made from authorized vendors
C. goods received that were not ordered
D. foods ordered that have not been received
A risk related to what can go wrong with respect to receiving goods is _______.
A. that purchases have been made from unauthorized vendors
B. that purchases have been made from authorized vendors
C. goods received may not have been ordered
D. goods received may have been ordered
Many clients build in redundant controls _______.
A. so if one control does not find a misstatement, another control will detect the problem
B. so if one control does not find a misstatement, another control will also not detect the problem
C. to increase automation and reduce human error
D. due to their large size and lack of communication across the organization
The quality of entity level controls is important to _______.
A. the ineffective functioning of transaction level controls
B. the effective functioning of transaction level controls
C. the differences between book and taxable income
D. the quantity of transaction level controls
A strong tone at the top about the importance of accurate financial reporting _______.
A. discourages the under accrual of expenses and liabilities
B. discourages the over accrual of expenses and liabilities
C. encourages the under accrual of expenses and liabilities
D. encourages the over accrual of expenses and liabilities
Steps used in developing an audit strategy for management assertions include _______.
A. understanding the flow of transactions in a given transaction cycle
B. assessing whether controls exist to mitigate what can go wrong
C. determining an audit strategy at the assertion level
D. All of these answer choices are correct
The transaction flow in a typical purchasing process for a client purchasing goods includes _______.
A. approving purchases, shipping goods, and recording purchases and accounts payable
B. approving purchases, receiving goods, and recording purchases and accounts payable
C. approving purchases, receiving goods, and recording purchases and accounts receivable
D. approving sales, receiving goods, and recording purchases and accounts receivable
Common documents and files that are found in the process of buying goods include_______.
A. purchase requisition
B. approved vendor master file
C. purchase order
D. All of these answer choices are correct.
Purchase requisition
Approved vendor master file
Purchase order
When management grants greater latitude to a department in initiating transactions, _______.
A. strong budget and accountability controls over a department’s expenditures are usually established
B. weak budget and accountability controls over a department’s expenditures are usually established
C. strong budget and accountability controls over a department’s receipts are usually established
D. weak budget and accountability controls over a department’s receipts are usually established
If the purchasing department establishes strong controls over putting authorized vendors on an authorized vendor list, _______.
A. it is easy for employees to initiate transactions with fictitious vendors
B. it is difficult for employees to initiate transactions with fictitious vendors
C. it is difficult for employees to initiate transactions with legitimate vendors
D. it is easy for employees to initiate transactions with legitimate vendors
The master vendor file should be reviewed _______.
A. on a regular basis to remove old vendors or potential duplicate vendors
B. every five years to remove old vendors or potential duplicate vendors
C. on a regular basis to remove new vendors or potential duplicate vendors
D. every five years to remove new vendors or potential duplicate vendors
The purchase requisition is often prepared _______.
A. manually, and it represents the end of the transaction trail of documentary evidence in support of management’s assertion of occurrence of purchase transactions
B. electronically, and it represents the end of the transaction trail of documentary evidence in support of management’s assertion of occurrence of purchase transactions
C. electronically, and it represents the start of the transaction trail of documentary evidence in support of management’s assertion of occurrence of purchase transactions
D. manually, and it represents the start of the transaction trail of documentary evidence in support of management’s assertion of occurrence of purchase transactions
The accuracy of purchases can be verified by which of the following processes?
A. A computer starts with the population of daily vouchers and compares quantities with the underlying receiving report, compares prices to the underlying purchase order, and checks the mathematical accuracy of the voucher.
B. A computer starts with the population of daily receiving reports and develops a one for one match with vouchers to ensure that each receiving report results in a voucher (the recording of a payable).
C. A computer starts with the population of daily vouchers and compares the date on the voucher with the date on the underlying receiving report.
D. Identifying what can go wrong (WCGW) from initiating the transaction to recording it in the general ledger.
What is a voucher?
A. It is an internal document used to record a purchase on account and has information about the vendor, amount due, payment date, and due date.
B. It is an electronic file that accumulates data on purchases, accounts payable, and cash disbursements.
C. The journal of original entry where each purchase is recorded.
D. It is the bill from the vendor stating the number of items shipped or services rendered, the amount due, the payment terms, and the date billed.
Which of the following is included in a three-way match?
A. Voucher
B. Accuracy of purchases
C. Receiving report
D. Occurrence of purchases
The cash disbursements process involves the following sub-processes: _______.
A. approving cash receipts and recording cash disbursements.
B. approving cash disbursements and recording cash disbursements.
C. approving cash receipts and recording cash receipts.
D. approving payables disbursements and recording cash disbursements.
Approving cash disbursements and recording cash disbursements.
Key assertions related to cash disbursements are _______.
A. completeness, occurrence, accuracy, and cutoff
B. verifiability, occurrence, accuracy, and cutoff
C. going concern, occurrence, accuracy, and cutoff
D. completeness, occurrence, accuracy, and comparability
The cash disbursements process involves which two following sub-processes?
A. approving cash disbursements and recording cash disbursements.
B. approving cash receipts and recording cash disbursements.
C. approving cash disbursements and recording cash receipts.
D. approving cash receipts and recording cash receipts.
In the United States, many businesses _______.
A. continue to write checks to stockholders for payment of goods received
B. continue to write checks to vendors
C. continue to write checks to their customers
D. continue to write checks to employees in order to account for cost of goods sold
A treasury or cash management function is responsible for determining that _______.
A. unpaid payables are processed for payment on their due dates
B. paid payables are processed for payment on their due dates
C. unpaid receivables are processed for payment on their due dates
D. unpaid dividends are processed for payment on their due dates
A company should make all payments by _______.
A. cash
B. check or electronic funds transfer
C. cash or electronic funds transfer
D. liquidating investments
The client should receive both a bank statement from the bank and a statement from vendors on a _______.
A. weekly basis
B. quarterly basis
C. monthly basis
D. yearly basis
Which of the following describes a purchases database?
A. Electronic files that accumulate data on purchases, accounts payable, and cash disbursements.
B. The check (EFT) information with purchase order and receiving.
C. The check (EFT) information with the underlying information on the voucher.
D. Electronic files that contain information on the cash disbursements journal with the related voucher information.
Which of the following assertions is tested by comparing information on the cash disbursements journal with the related voucher information?
A. Classification of cash disbursements
B. Cutoff of cash disbursements
C. Completeness of cash disbursements
D. Completeness, existence, and valuation of cash balances
Why does the client prepare independent bank reconciliation?
A. To check for the completeness, existence, and valuation of cash balances
B. To check accounts payable
C. To record purchase returns and allowances
D. To validate purchase returns
Upon the receipt of goods, _______.
A. the purchaser should match the goods shipped per the receiving report, to the purchase order, and advanced shipping notice (ASN)
B. the purchaser should match the goods received per the receiving report, to the purchase order, and advanced shipping notice (ASN)
C. the client should immediately debit the payable account and credit the cash account
D. the client should accrue a related receivable
Evaluated Receipts Settlement (ERS) is _______.
A. a highly-automated business process between suppliers and purchasers to exchange data electronically and electronically execute a purchase transaction.
B. a highly-manual business process between suppliers and purchasers to exchange data electronically and electronically execute a purchase transaction.
C. a highly-automated business process between suppliers and stockholders to exchange data electronically and electronically execute a purchase transaction.
D. a highly-manual business process between creditors and purchasers to exchange data electronically and electronically execute a purchase transaction.
In larger public companies, Evaluated Receipts Settlement (ERS) transactions represent _______.
A. 50 – 75% of all transactions
B. 75 – 90% of all transactions
C. 0 – 25% of all transactions
D. 25– 50% of all transactions
In smaller, privately owned companies, not-for-profit organizations, or governments, Evaluated Receipts Settlement (ERS) transactions are _______.
A. rare
B. commonplace
C. increasing being used
D. prohibited.
Evaluated Receipts Settlement (ERS) recognizes the key elements of a purchase transaction involving _______.
A. the nature and quantity of the goods received
B. the price of the goods received
C. the payment terms for the goods received
D. All of these answer choices are correct
- The nature and quantity of the goods received,
- The price of the goods received, and
- The payment terms for the goods received.
The first step in initiating an Evaluated Receipts Settlement (ERS) transaction is the _______.
A. contract, which may be the only “electronic” element in the process.
B. payment, which may be the only “paperwork” in the process.
C. contract, which may be the only “paperwork” in the process.
D. payment, which may be the only “electronic” element in the process.
Internal controls in an Evaluated Receipts Settlement (ERS) system _______.
A. are generally not required
B. are dissimilar to internal controls in a traditional computerized system
C. are similar to internal controls in a traditional computerized system
D. should be audited by the internal audit function, due to their increased familiarity with this function
What is a highly-automated business process between suppliers and purchasers to exchange data electronically and electronically execute a purchase transaction called?
A. Evaluated Receipts Settlement
B. Completeness of cash disbursements
C. Evaluation of Receipts Settlement
D. Cash disbursements
Which of the following is performed by Electronic Invoice Presentment and Payment (EIPP) systems?
A. Purchasing an electronic system that uses a third-party payment process to settle a business to business transaction
B. Creating a shipping notice system
C. Purchasing an evaluated receipt system
D. Processing a payment from the purchaser to the supplier as an independent third party
Which of the following is one of the key controls that are often found in the purchaser’s Evaluated Receipts Settlement (ERS) system for cash disbursements, categorized by relevant assertion?
A. Completeness of cash disbursements
B. Cash payments
C. Evaluation of Receipts Settlement
D. Evaluation of Receipts Statement
One of the common disclosures in the _______ is reclassification of material debit balances in accounts payable as accounts receivable.
A. purchase transactions
B. net sale transactions
C. purchase adjustments
D. purchasing process
Important documents and records used in processing purchase adjustments in traditional or Evaluated Receipts Settlement (ERS) systems include which of the following?
A. Purchase Return Authorization
B. Shipping Report
C. Debit Memo
D. All of these answer choices are correct.
Purchase Return
Authorization Shipping Report
Debit Memo.
Purchase returns and allowances involve _______.
A. reducing payables and expenses, improving reported liquidity and earnings
B. increasing payables and expenses, improving reported liquidity and earnings
C. reducing payables and expenses, decreasing reported liquidity and earnings
D. increasing payables and expenses, decreasing reported liquidity and earnings
There should be adequate segregation of duties between _______.
A. obtaining authorization for purchase returns, shipping goods, and recording debit memos
B. obtaining authorization for purchase returns, selling goods, and recording debit memos
C. obtaining authorization for purchase returns, shipping goods, and recording credit memos
D. obtaining authorization for purchase returns, selling goods, and recording payables memos
When there is the potential for material misstatements from purchase adjustments transactions, _______.
A. the auditor should obtain an understanding of all immaterial aspects of the internal control structure components and consider the factors that affect the risk of such misstatements
B. the auditor should obtain an understanding of all relevant aspects of the internal control structure components and consider the factors that affect the risk of such misstatements
C. the auditor should obtain an understanding of all relevant aspects of the client legal counsel's internal control structure components and consider the factors that affect the risk of such misstatements
D. the auditor should obtain an understanding of all relevant aspects of the external control structure components and consider the factors that affect the risk of such misstatements
If purchase adjustments are estimated at quarter end, _______.
A. management should establish controls to ensure adjustments are made based on analysts' information and that adjustments are consistent from quarter to quarter
B. the auditor should establish controls to ensure adjustments are made based on reliable information and that adjustments are consistent from quarter to quarter
C. management should establish controls to ensure adjustments are made based on reliable information and that adjustments are consistent from quarter to quarter
D. management should establish controls to ensure adjustments are made based on regulatory information and that adjustments are consistent from quarter to quarter
What is a shipping report?
A. A report prepared on the shipment of goods being returned to vendors and showing the type and quantities of goods shipped
B. A return authorization report
C. A report stating the particulars of a debit to accounts payable, including the specific items returned, prices, and amount debited
D. A report stating the particulars of a debit to accounts payable, including the specific items returned, prices, and amount credited
Which of the following is a form showing the description, quantity, and other data pertaining to the goods the vendor has authorized the purchaser to return?
A. Purchase return authorization
B. Report return authorization
C. Return authorization
D. Form authorization
Most auditors plan to test controls in the purchases cycle because of the _______.
A. high volume of routine transactions in this process
B. low volume of routine transactions in this process
C. high volume of irregular transactions in this process
D. low volume of irregular transactions in this process
Auditors often use test data on programmed application controls _______.
A. to determine how likely the system is to hacking and phishing attempts
B. to ensure expected results do not appear on exception reports
C. to determine whether expected results appear on exception reports
D. as a way to enter dummy transactions designed to increase audit fees
Procurement fraud risks include _______.
A. phantom vendors
B. fictitious invoices
C. kickbacks and bid rigging
D. All of these answer choices are correct.
- Phantom vendors,
- Fictitious invoices,
- Kickbacks and bid rigging,
Phantom vendors involve _______.
A. purchases that are made from fictitious vendors
B. purchases that are made from fictitious employees
C. payments received from fictitious vendors
D. payments received from fictitious employees
Kickbacks and bid rigging typically involve _______.
A. collusion between an employee and a customer
B. collusion between an employee and a vendor
C. paying for the same item twice
D. invoices that are submitted for services not received by the entity
Which of the following may be a risk when internal controls are poor over recording payables and cash disbursements?
A. Duplicate payments
B. Financial payments
C. Fictitious invoices
D. Phantom vendors
Which of the following risks are included in procurement fraud risks?
A. Kickbacks and bid rigging
B. Account fraud risks
C. Purchase fraud risks
D. Purchase returns fraud risks
In which of the following fraud risks is the payment usually made to an employee who submitted a fake invoice?
A. Fictitious invoices
B. Phantom vendors
C. Kickbacks and bid rigging
D. Duplicate payments
Understanding the significance of the purchasing cycle to the entity _______.
A. provides a context for important risk assessments
B. helps the auditor to understand if the entity is overstaffed or understaffed
C. has important implications on the financing cycle
D. is of only peripheral importance to the auditor, due to its extremely low risk assessment.
The purchases cutoff test involves determining that _______.
A. purchase transactions occurring near the balance sheet date are recorded in the proper period
B. sales transactions occurring near the balance sheet date are recorded in the proper period
C. purchase transactions occurring near the balance sheet date are recorded at the correct amounts
D. sales and purchasing transactions occurring after the balance sheet date are recorded at the correct amounts
Goods in transit shipped FOB (free-on-board) destination should _______.
A. remain in the inventory of the buyer and be excluded from the purchaser’s inventory and accounts payable until arrival at the purchasing entity’s receiving department.
B. remain in the inventory of the seller and be excluded from the purchaser’s inventory and accounts payable until arrival at the purchasing entity’s receiving department.
C. remain in the inventory of the buyer and be included from the purchaser’s inventory and accounts payable until arrival at the purchasing entity’s receiving department.
D. remain in the inventory of the seller and be included from the purchaser’s inventory and accounts payable until arrival at the purchasing entity’s receiving department.
Goods shipped FOB (free on board) shipping point should be _______.
A. included in inventory by both the buyer and seller upon shipment
B. included in the inventory and accounts payable of the selling entity upon shipment
C. included in the inventory and accounts payable of the purchasing entity upon shipment
D. excluded by both the buyer and seller upon shipment
The search for unrecorded liabilities consists of procedures designed specifically to detect _______.
A. significant unrecorded obligations at the balance sheet date (or as of an interim date)
B. insignificant unrecorded obligations at the balance sheet date (or as of an interim date)
C. significant unrecorded obligations at the income statement date (or as of an interim date)
D. significant recorded obligations at the balance sheet date (or as of an interim date)
When auditors choose to send confirmations of accounts payable, accounts with _______.
A. zero or small balances should be among those selected for negative confirmation because they may be more understated than accounts with large balances
B. zero or small balances should be ignored because they are likely immaterial
C. zero or small balances should be among those selected for confirmation because they may be more understated than accounts with large balances
D. extremely large balances should be among those selected for confirmation because they may be more understated than accounts with smaller balances
In which of the following shipment arrangements does title pass from seller to buyer when goods arrive at the purchasing entity’s warehouse?
A. FOB destination
B. FOB shipping point
C. FOB shipping stop
D. FOB port
In which of the following shipment arrangements does title pass from seller to buyer when goods are shipped?
A. FOB shipping point
B. FOB destination
C. FOB port
D. FOB location
Which of the following consists of procedures designed specifically to detect significant unrecorded obligations at the balance sheet date?
A. Search for unrecorded liabilities
B. Vouching of recorded purchase transactions
C. Confirmation of accounts payable
D. Procedures for purchase returns
The payroll process includes transactions and balances related to which of the following?
- Rebates
- Contractor payments
- Expense reimbursements
- Commissions
If the pay period does not coincide with the end of the accounting period, which of the following is true?
- Payroll entries are not made until payroll is paid.
- Payroll payable must be accrued.
- Overtime must be recalculated.
- None of the answer choices is correct.
All of the following are true about payroll accrual entries, EXCEPT:
- Payroll tax expense is debited.
- They may be charged to manufactured inventory.
- Overtime is not included.
- All of the answer choices are correct.
All of the following transactions would be considered part of the payroll process, EXCEPT _______.
- payment of payroll taxes
- payment of commissions
- payment of incentives
- payment of hourly wages
Which of the following is a key payroll process assertion for relevant transaction classes?
- Valuation
- Existence
- Accuracy
- All of the answer choices are correct.
All of the following are key payroll process assertions for relevant account balances, EXCEPT _______.
- occurrence
- existence
- completeness
- rights and obligations
Which of the following is important for the auditor to understand before proceeding with an audit of the payroll process?
- Knowledge of whether the entity is labor or capital intensive
- The nature of compensation (hourly vs. salaried)
- The importance of bonuses or other compensation arrangements
- All of the answer choices are correct.
Which of the following is tested by dividing current year payroll expenses by prior year payroll expenses?
- Revenue per employee
- Percentage change in payroll expenses from prior year
- Total payroll costs as a percent of revenues
- Compare current year payroll liability with prior year payroll liability
When an entity has more than one class of employee, it is important to evaluate the reasonableness of payroll based on employee class. Which of the following procedures is commonly used to test this?
- Calculate revenue per employee
- Calculate total payroll costs as a percent of revenue
- Comparing payroll expenses with prior year balances or budgets
- Calculate average payroll cost per employee classification
Which of the following is a reasonableness test of gross payroll for a group of employees?
- Revenue per employee
- Total payroll costs as a percent of revenue
- Comparing payroll expenses with prior year balances or budgets
- Average payroll cost per employee classification
Which of the following is a measure of productivity per employee?
- Revenue per employee
- Total payroll costs as a percent of revenue
- Comparing payroll expenses with prior year balances or budgets
- Average payroll cost per employee classification
Suppose an auditor is preparing for an audit of the payroll process of an entity and has identified that the entity is labor-intensive and depends largely on hourly compensation. The auditor still needs to understand all of the following about the entity, EXCEPT _______.
- The capital intensiveness of the entity
- The importance of bonuses or other compensation arrangements
- The level of variability of pay throughout the period
- None of the answer choices are correct.
Payroll fraud may occur in which of the following ways?
- Payroll transactions are processed for fictitious employees and the funds are diverted for personal use
- When there is frequent turnover, there is risk that a new employee will not get on the payroll promptly
- Management may misclassify or understate labor costs for government contract work
- All of the answer choices are correct.
If pay periods do not align well with month-end, quarter-end, or year-end, which of the following key assertions is most at risk of misstatement?
- Accuracy
- Cutoff
- Completeness
- None of the answer choices is correct.
If factory workers are paid based on time and/or productivity, there is likely high inherent risk for which of the following key assertions?
- Accuracy
- Cutoff
- Completeness
- None of the answer choices is correct.
All of the following are risks associated with payroll, EXCEPT _______.
- paying fictitious payroll
- inaccurate period-end cutoff
- “padded” labor costs in contract arrangements
- All of the answer choices are correct.
All of the following are source documents or files related to the payroll process, EXCEPT _______.
- payroll authorization
- time card
- vacation request form
- All of the answer choices are correct.
Data controls over payroll processing relate to which of the following assertions?
- Completeness and accuracy
- Accuracy and classification
- Completeness, accuracy, and classification
- Occurrence, completeness, accuracy, and classification
Which of the following is a control to address the risk that payroll may not be recorded?
- Supervisory review of hours worked for hourly and salaried employees
- Accounting software prints a report of all hours employees have worked that have not yet been paid
- Accounting software matches hours with the time card information and wage rate with the master payroll file
- Accounting software matches employee number on the time card with the employee number on the master payroll file
All of the following controls relate to the process of preparing payroll, EXCEPT:
- Information from electronic time cards should be forwarded to the supervisor for review and electronic approval.
- Before processing, the payroll program should check the employee name and payroll rates against the employee master file.
- The payroll program places a limit test on hours worked or gross payroll expenses.
- All of the answer choices are correct.
Accounting software starts with the population of payroll disbursements and develops a one-for-one match with underlying approved hours worked. A report is generated each pay period disclosing any payroll that is not supported by hours worked. The employee number is also compared with the approved master payroll file. A report is generated listing any transactions that are not supported by underlying documents or files. This is a description of a control over which of the following assertions for the payroll process?
- Accuracy of payroll
- Completeness of payroll
- Occurrence of payroll
- Completeness of payroll payables
If a client relies on information technology (IT) controls and the auditor plans to assess control risk as low for payroll assertions, the auditor will usually do all of the following, EXCEPT _______.
- test the effectiveness of manual controls
- use computer-assisted audit techniques (CAATs) to evaluate the effectiveness of IT application controls
- test the effectiveness of manual procedures to follow up on exceptions
- All of the answer choices are correct.
All of the following are true when an auditor uses audit data analytics, EXCEPT:
- Knowledge of the audit client helps refine the auditor’s ability to identify potential anomalies
- There may be legitimate business reasons for some anomalies
- Because of the analytics, it is not necessary for the auditor to investigate flagged items
- All of the answer choices are correct.
When testing the effectiveness of information technology (IT) general controls in payroll, the auditor may do any of the following, EXCEPT _______.
- collect supporting evidence regarding employee awareness of IT security issues
- determine how program access is controlled and monitored
- pay attention to the effectiveness of password controls
- All of the answer choices are correct.
When testing informational technology (IT) application controls in payroll, the auditor may do any of the following, EXCEPT _______.
- test important manual controls by reperforming the controls
- use test data and determine whether expected results appear in financial statements
- test the appropriateness of manual follow-up of exceptions
- All of the answer choices are correct.
After evaluating inherent risk and control risk, the auditor is in a position to evaluate which of the following types of risk?
- Transaction risk
- Loss risk
- Fraud risk
- None of the answer choices is correct.
Assume you are involved in an audit and your expectations regarding effective controls are not confirmed. In this situation, you will need to take all of the following steps, EXCEPT _______.
- determining if the client has a compensating control
- evaluating the significance of the weaknesses
- communicating the control weaknesses to management and those charged with governance
- All of the answer choices are correct.
All of the following are tests of details of balances for auditing the payroll process, EXCEPT _______.
- verifying totals of payroll registers
- recalculating accrued payroll liabilities at year-end
- determining that accrued payroll payables are the obligations of the entity
- recalculating accrued payroll tax liabilities at year-end
All of the following are tests of presentation and disclosure for auditing the payroll process, EXCEPT _______.
- reviewing presentation and disclosure for payroll costs in drafts of financial statements
- evaluating the completeness of presentation and disclosure for receivables in drafts of financial statements
- reading disclosures and independently evaluate their understandability
- verifying accrued payroll was reported and in the drafts of the financial statements
When performing substantive tests of the payroll process, recalculating accrued payroll tax liabilities at year-end to underlying payroll records is a test of which of the following key assertions?
- Occurrence, accuracy, and classification
- Occurrence, completeness, and valuation
- Occurrence, completeness, and valuation
- Completeness, valuation, and existence
The use of audit data analytics as a substantive test in auditing the payroll process depends on which of the following?
- The substance of the client’s data
- The quantity of the client’s data
- The quality of the client’s data
- The nature of the client’s data
Determining that accrued payroll payables are the obligations of the entity is an example of which of the following?
- Substantive analytical procedures
- Tests of details of transactions
- Tests of details of balances
- Audit data analytics
Which of the following tests or procedures are primarily focused on the completeness, existence, and valuation assertions?
- Vouching payroll transactions to supporting documentation
- Recalculating accrued payroll liabilities at year-end to underlying payroll records
- Reviewing activity in payroll accounts and investigate entries that appear unusual
- None of the answer choices is correct.
Question Type: Text Entry
Cash disbursement transactions are one of the major transactions classes with significant volumes of transactions in the_______.
Purchases cycle
The procurement process involves selecting vendors, establishing payment terms, negotiating contracts, purchasing goods, receiving goods, and recording of purchases and _______.
payment of liabilities
"Liabilities, payables, reserves, and accrual estimate failure" is one of the categories of _______ related to expense recording and liabilities.
misstatements
Often vendors will send a _______ showing the beginning payable balance, transactions during the month, and the ending payable balance.
monthly statement
An internal document indicating the vendor, the amount due, and payment terms for the purchases received is referred to as a _______
Voucher | voucher
Many audit clients build in _______ controls so if one control does not find a misstatement, another control is designed to surface the problem.
Redundant | redundant
A ________ is a formal order to a bank to pay the payee the indicated amount.
Check or electronic funds transfer | check or electronic funds transfer (EFT)
________ systems use an independent third party to settle a business to business (B2B) transaction.
EIPP | Electronic Invoice Presentment and Payment | Electronic Invoice Presentment and Payment (EIPP)
A ________is a form showing the description, quantity, and other data pertaining to the goods the vendor has authorized the purchaser to return. It serves as the basis for initiating the purchase return.
Purchase Return Authorization
A key tenet of internal control is _______ of duties
Segregation | segregation
________ involve collusion between an employee and a vendor.
Kickbacks and bid rigging
Examining ________ involves checking vouchers paid after balance sheet date to determine if the payment is for an obligation that existed as of the balance sheet date and whether the obligation was in fact recorded as of the balance sheet date.
subsequent payments
Question Type: Drop down
In the given table, match the categories on the left with those on the right.
A. Relevant transaction classes
||Purchases of materials or goods
Various expenses
B. Relevant account balances
||Accounts payable
Various purchased assets
C. Assertions of relevant transaction classes
||Occurrence
Completeness
Accuracy
Cutoff
Classification
D. Relevant disclosures
||Payable disclosures
Asset and expenditure disclosures
Cash disbursements (primarily focused on payment of payables)
Relevant transaction classes: purchases of materials or goods and various expenses
Relevant account balances: accounts payable and various purchased assets
Assertions of relevant transaction classes: occurrence, completeness, accuracy, cutoff, and classification
Relevant disclosures: payable disclosures, asset and expenditure disclosures, and cash disbursements (primarily focused on payment of payables)
In the given table, match the names of industries on the left with the industry traits on the right.
A. Hotels and motels
||Their purchases are less significant operating costs compared to those of retailers or manufacturers.
B. Colleges, universities, and other professional institutions
||Their purchases are incidental to the core product and their core process may not be significantly affected by price increases for purchased goods.
C. Oil and gas field machinery and equipment manufacturing
||Their purchases include raw materials (where quality is essential) for equipment.
D. Supermarkets and other grocery stores
||Their purchases include a wide array of products including products with perishable characteristics.
The purchases of hotels and motels are less significant operating costs compared to those of retailers or manufacturers.
The purchases of colleges, universities, and other professional Institutions are incidental to the core product and their core process may not be significantly affected by price increases for purchased goods.
The purchases of oil and gas field machinery and equipment manufacturing include raw materials (where quality is essential) for equipment.
The purchases of supermarkets and other grocery stores include a wide array of products including products with perishable characteristics.
In the given table, match the concepts related to risks in the purchasing process on the left with their descriptions on the right.
A. Liabilities, payables, reserves, and accrual estimate failure
||They consist of errors, irregularities, or omissions associated with the accrual or identification of liabilities on the balance sheet.
B. Cut-off problems due to failure to accrue liabilities
||They may contribute to misstatements in the purchasing cycle.
C. Expense recording issues
||They arise from any number of areas including failure to record certain expenses, reconcile certain amounts, or record certain payables on a timely basis.
D. Liquidity problems or going concern doubts
||They create pressures to understate payables in order to report a higher level of working capital.
Liabilities, payables, reserves, and accrual estimate failure consist of errors, irregularities or omissions associated with the accrual or identification of liabilities on the balance sheet.
Cut-off problems due to failure to accrue liabilities may contribute to misstatements in the purchasing cycle.
Expense recording issues arise from any number of areas including failure to record certain expenses, reconcile certain amounts, or record certain payables on a timely basis.
Liquidity problems or going concern doubts create pressures to understate payables in order to report a higher level of working capital.
In the given table, match the categories on the left with the explanations on the right.
A. Purchases database
||Electronic files that accumulate data on purchases, accounts payable, and cash disbursements.
B. Vendor invoice
||It is from the vendor stating the number of items shipped or services rendered, the amount due, the payment terms, and the date billed.
C. Receiving report
||It is prepared on the receipt of goods showing the kinds and quantities of goods received from vendors.
D. Purchase order
||The written offer from the purchasing department to a vendor or supplier to purchase goods or services specified in the order.
Purchases database: Electronic files that accumulate data on purchases, accounts payable, and cash disbursements.
Vendor invoice: It is from the vendor states the number of items shipped or services rendered, the amount due, the payment terms, and the date billed.
Receiving report: It is prepared on the receipt of goods showing the kinds and quantities of goods received from vendors.
Purchase order: The written offer from the purchasing department to a vendor or supplier to purchase goods or services specified in the order.
In the given table, match the terms related to cash disbursements on the left with their details on the right.
A. Check or Electronic Funds Transfer (EFT)
||It is a formal order to a bank to pay the payee the indicated amount.
B. Voucher
||It is an internal document used to authorize recording and paying a liability.
C. Cash disbursements journal
||It is a daily report showing checks written or electric funds transferred to vendors and amounts paid.
D. Treasury or cash management function
||It is responsible for determining that unpaid payables are processed for payment on their due dates.
A check or Electronic Funds Transfer (EFT) is a formal order to a bank to pay the payee the indicated amount.
A voucher is an internal document used to authorize recording and paying a liability.
A cash disbursements journal is a daily report showing checks written or electric funds transferred to vendors and amounts paid.
A treasury or cash management function is responsible for determining that unpaid payables are processed for payment on their due dates.
In the given table, match the internal controls in an Evaluated Receipts Settlement (ERS) system on the left with the descriptions on the right.
A. Occurrence of purchases
||A computer develops a daily report of any discrepancies between the recorded payable and quantities on the receiving report.
B. Accuracy of purchases
||A computer develops a daily report of any discrepancies between the recorded payable and quantities on the receiving report or prices on the purchase order, and other information such as freight and taxes on the advance shipping notice from the vendor.
C. Purchase cutoff
||A computer develops a daily report of any discrepancies between the accounting period on the receiving report and the accounting period on the recording of the purchase and liability.
D. Classification of expenses and payables
||A computer develops a daily report of any discrepancies between the vendor account coding and general ledger coding, which is compared with the purchase order and purchase requisition.
Occurrence of purchases: A computer develops a daily report of any discrepancies between the recorded payable and quantities on the receiving report.
Accuracy of purchases: A computer develops a daily report of any discrepancies between the recorded payable and quantities on the receiving report or prices on the purchase order, and other information such as freight and taxes on the advance shipping notice from the vendor.
Purchase cutoff: A computer develops a daily report of any discrepancies between the accounting period on the receiving report and the accounting period on the recording of the purchase and liability.
Classification of expenses and payables: A computer develops a daily report of any discrepancies between the vendor account coding and general ledger coding, which is compared with the purchase order and purchase requisition.
In the given table, match the concepts related to controls in the purchasing process on the left of the table with their details on the right.
A. Additional controls over payables
||They include comparing vendor statements with the balance in the accounts payable subsidiary ledger.
B. Sound controls over the cash balance
||They involve performing a bank reconciliation shortly after the month end.
C. Reclassification of material debit balances and expenses reportable by business segment
||They are common disclosures in the purchasing process.
D. Purchase returns
||They should be authorized by the vendor.
Additional controls over payables include comparing vendor statements with the balance in the accounts payable subsidiary ledger.
Sound controls over the cash balance involve performing a bank reconciliation shortly after the month end.
Reclassification of material debit balances and expenses reportable by business segment are common disclosures in the purchasing process.
Purchase returns should be authorized by the vendor.
In the given table, match the left of the table with the statements on the right-hand side of table.
A. This is often accomplished by setting up a fictitious vendor on the master vendor file, vendor information relates to an address or post office box controlled by an employee, and payments are made to that employee.
||Phantom vendor invoices
B. These are submitted for services not received by the entity, usually involving a fake vendor.
||Fictitious invoices
C. It involves collusion between an employee and a vendor to pay an inflated price and the employee receives a kickback associated with the product involved in a bidding situation.
||Bid rigging
D. This involves paying for the same item twice.
|| Duplicate invoicing
Solution: Phantom vendor purchases are made from fictitious vendors. This is often accomplished by setting up a fictitious vendor on the master vendor file, vendor information relates to an address or post office box controlled by an employee, and then payments are made to the employee.
Fictitious invoices: Invoices are submitted for services not received by the entity, usually involving a fictitious vendor. Payment is then made to an employee who submitted the fictitious invoice.
Kickbacks and bid rigging: These involve collusion between an employee and a vendor. The entity pays inflated prices to the vendor, and the employee get a kickback for facilitating the inflated transactions with vendor. Bid rigging also involves collusion between an employee and a vendor to pay an inflated price and the employee receives a kickback associated with the product involved in a bidding situation.
Duplicate payments: This involves paying for the same item twice. This is a risk when internal controls are poor over recording payables and cash disbursements.
In the given table, match the left of the table with the statements on the right-hand side of table.
A. This is often accomplished by setting up a fictitious vendor on the master vendor file, vendor information relates to an address or post office box controlled by an employee, and then payments are made to the employee.
||Phantom vendors
B. These are submitted for services not received by the entity, usually involving a fake vendor.
||Fictitious invoices
C. It also involves collusion between an employee and a vendor to pay an inflated price and the employee receives a kickback associated with the product involved in a bidding situation.
||Bid rigging
D. This involves paying for the same item twice.
||Duplicate payments
Fictitious invoices: Invoices are submitted for services not received by the entity, usually involving a fictitious vendor. Payment is then made to an employee who submitted the fictitious invoice.
Kickbacks and bid rigging: These involve collusion between an employee and a vendor. The entity pays inflated prices to the vendor, and the employee get a kickback for facilitating the inflated transactions with vendor. Bid rigging also involves collusion between an employee and a vendor to pay an inflated price and the employee receives a kickback associated with the product involved in a bidding situation.
Duplicate payments: This involves paying for the same item twice. This is a risk when internal controls are poor over recording payables and cash disbursements.
In the given table, match the left of the table with the statements on the right-hand side of table.
A. Substantive tests
||Perform substantive audit procedures
B. Examining vouchers paid after balance sheet date to determine if the payment is for an obligation that existed as of the balance sheet date.
||Examining subsequent payments
C. Procedures designed specifically to detect significant unrecorded obligations as of balance sheet date (or as of an interim date).
||Search for unrecorded liabilities
D. Title passes from seller to buyer when goods are shipped
||FOB Shipping Point
Substantive tests perform substantive audit procedures.
Examining subsequent payments: examining vouchers paid after balance sheet date (or an interim date) to determine if the payment is for an obligation that existed as of the balance sheet date (or an interim date) and whether the obligation was in fact recorded as of the balance sheet date (or an interim date).
Search for unrecorded liabilities: procedures designed specifically to detect significant unrecorded obligations as of balance sheet date (or as of an interim date).
FOB Shipping Point: title passes from seller to buyer when goods are shipped.
Question Type: Multiple choice multi select
Which three of the following are assertions of relevant transaction classes which belong to the key purchasing cycle assertion?
A. Occurrence
B. Completeness
C. Accuracy
D. Rights and obligations
Which three of the following are involved in the purchasing cycle?
A. Establishing payment terms
B. Selecting vendors
C. Purchasing goods
D. Selling goods
Which two of the following categories of misstatements are relevant to the purchasing and payroll cycles?
A. Expense (payroll, selling, administrative, general, and, other) recording issues
B. Liabilities, payables, reserves, and accrual estimate failure
C. Purchase failure
D. Account transaction issues
Which of the following are source documents and related computer files for the transaction flow in credit purchases?
A. Receiving report
B. Vendor invoice
C. Purchase requisition
D. Purchases database
Which two of the following are involved in recording cash disbursements?
A. Check or electronic funds transfer
B. Cash disbursements journal
C. Voucher
D. Purchases database
Which three of the following are steps involved in controlling activities in an Evaluated Receipts Settlement (ERS) system?
A. Initiating an ERS transaction
B. Receiving goods
C. Recording payables
D. Processing cash payments
Which three of the following are included in common disclosures in the purchases process?
A. Reclassification of material debit balances in accounts payable as accounts receivable
B. Segregation of short-term payables from long-term payables
C. Dependence on a single vendor or a small number of vendors
D. Credit Memo
Which three of the following will the auditor usually do if the client relies on computer controls and the auditor plans to assess control risk as low for purchasing process assertions?
A. Test the effectiveness of general controls.
B. Use computer-assisted audit techniques (CAATs) to evaluate the effectiveness of programmed application controls.
C. Test the effectiveness of manual procedures to follow-up on exceptions identified by programmed application controls.
D. Account transactions invoices.
*Test the effectiveness of general controls,
*Use computer-assisted audit techniques (CAATs) to evaluate the effectiveness of programmed application controls, and
* Test the effectiveness of manual procedures to follow-up on exceptions identified by programmed application controls.
Which three of the following categories focus on identifying the appropriate substantive tests for relevant assertions in the purchases process?
A. Tests of details of transactions
B. Analytical procedures as a substantive test
C. Data analytics
D. Audit tests for electronic systems
Question Type: Drag and Drop
Besides occurrence and completeness, _______ is the most common assertion in key purchasing cycle assertions.
[[ accuracy ]] | allocation | valuation | existence
The number of accounts payable turnover days is 30 for the _______industry.
[[electronic computer manufacturing]] | hotels and motels | supermarkets and other grocery stores | colleges universities and other professional institutions
The lack of growth in _______ should heighten the auditor’s professional skepticism with respect to the completeness of payables and cutoff of purchases and payables.
[[ accounts payable ]] | cash | cutoff category | existing category
A _______ is a written request for goods or services by an authorized individual or department.
[[ purchase requisition ]] | purchase order | receiving report | vendor invoice
A cash disbursements journal is a daily report showing checks written or electric funds transferred to _______ and amounts paid.
[[ vendors ]] | purchaser | bank | EFT
An independent, _______, such as a bank or payment processor, is used to make the payment from the purchaser to the supplier.
[[third party payment processor]] | transaction processor | cutoff payer | payment processor
A/an _______ reviews the estimates and aggregates with other adjustments to determine if an amount is material to the financial statements.
[[ disclosure committee ]] | audit committee | control committee | purchasing process committee
_______ involve paying for the same item twice.
[[ Duplicate payments ]] | Phantom vendors | Kickbacks | Phantom vendors
Confirming accounts payable is one of the two tests included in the _______.
[[ tests of details of balances ]] | obligations | cutoff obligation | existence
Question Type: Short Answer
An auditor must consider industry factors when auditing the purchasing process. Name two industry factors and explain why they are important.
A. The adequacy of the supply of raw materials is important to consider. If there is a shortage of key materials, it could significantly affect the operational and financial performance of the organization.
The stability of the price of raw materials is also important. An increase in the price of materials increases the cost to make the product. If the company cannot raise their prices to match the increase, the company's earnings will suffer.
Identify whether the following tests are substantive analytical procedures, tests of details of transactions, or tests of details of account balances:
1) Test a sample of purchase requisitions for proper authorization.
2) Test transactions around year-end to determine if they are recorded in the proper period.
3) Review results of confirmation of selected accounts payable.
4) Compare payables turnover to previous years' data.
5) Obtain selected vendors' statements and reconcile to vendor accounts.
6) Compare purchase returns and allowances as a percentage of revenue or cost of sales to industry data.
A. Tests of details of transactions
2) Tests of details of transactions
3) Tests of details of account balances
4) Substantive analytical procedures
5) Tests of details of account balances
6) Substantive analytical procedures
Identify the types of substantive procedures used by the auditor to test accounts payable and accrued expenses.
Also state whether the substantive procedures could be used as a test of controls or a dual-purpose test.
A. The auditor uses substantive procedures to detect material misstatements in accounts payable and related accounts. There are two categories of substantive procedures: (1) substantive analytical procedures and (2) tests of details of classes of transactions, account balances, and disclosures.
Substantive analytical procedures are used to examine plausible relationships among accounts payable and related accounts.
Tests of details focus on transactions, account balances, or disclosures. In the purchasing cycle, tests of details of transactions (also called substantive tests of transactions) focus mainly on the purchases and cash disbursement transactions. Tests of details of disclosures are concerned with the presentation and disclosures related to accounts payable and accrued expenses.
Tests of details of transactions (substantive tests of transactions) can be used as a test of controls or a dual-purpose test. However, if the tests of controls indicate that the controls are not operating effectively, the auditor may need to test transactions at the date the account balance is tested.
You are a senior auditor on a new audit client. Your supervisor has asked you to audit the cash disbursements of the new client. You begin by gaining an understanding of the flow of transactions. You now need to identify what could go wrong. Identify at least three risks (what could go wrong) for paying the liability and recording cash disbursements.
A check (EFT) may not be recorded. |
A check (EFT) may not be recorded promptly. |
Checks (EFT) may be issued for unauthorized purchases. |
A vendor’s invoice may be paid twice. |
A check (EFT) may be issued for the wrong amount. |
A check (EFT) may be posted to the wrong account. |
You are a senior auditor on a new audit client. Your supervisor has asked you to audit the cash disbursements of the new client. You begin by gaining an understanding of the flow of transactions and have identified the following risk (what could go wrong): A check may not be recorded.
Identify at least two controls that may address this risk.
Solution:
The computer reports any breaks in the sequence of a prenumbered check series and electronic funds transfers.
The computer compares the daily total in the cash disbursements journal with the total vouchers submitted for payment.
Access to blank checks and signature plates is controlled.
Independent bank reconciliation
Assume you are an audit manager for a middle market manufacturing company. Your client is interested in using Evaluated Receipts Settlement (ERS) with their primary supplier; however, your client is unsure of how the process works and asks about the process of initiating an ERS transaction. Draft a note to your client describing the process of initiating a purchase order through shipment of the goods.
Solution:
The purchase order is prenumbered to establish control over the population of purchases. The purchase order is usually sent electronically to the vendor (although it may be faxed or sent by mail).
The supplier will normally acknowledge the transaction electronically by sending an advance shipping notice (ASN) indicating the goods to be shipped, prices, and other information (e.g., freight costs or taxes). Upon shipment, the vender will create normal shipping documents such as a bill of lading and packing slip.
Explain how an Electronic Invoice Presentment and Payment (EIPP) system works and why they are used to settle business to business transactions.
Many ERS systems use what is called Electronic Invoice Presentment and Payment (EIPP) systems. EIPP systems use an independent third party to settle the business to business (B2B) transaction. An independent, third party payment processor, such as a bank or payment processor, is used to make the payment from the purchaser to the supplier.
In an EIPP system the purchasing entity:
(a) receives an electronic invoice from the vendor,
(b) validates the invoice (using a three-way match),
(c) cancels the vendor’s invoice so it is not paid twice, and
(d) approves the invoice for payment (usually taking advantage of early payment discounts).
Once the invoice is approved for payment, the third-party payment processor transfers funds from the purchasing entity to the vendor on the due date.
A third-party payment processor is often used to may payments because entities that store checking account number information must be Payment Card Industry (PCI) security compliant according to federal regulations, which requires investing in secure computer systems and paying for regular recertification.
Provide two examples of transactions that result in reducing payables and expenses in the form of purchase returns and allowances.
Solution: Student answers will vary.
On occasion, goods received from vendors are defective and must be returned. In addition, vendors offer a number of inducements to purchase inventory. In some cases, vendors will agree to reduce the price for goods rather than have goods returned. Some vendors offer incentives depending on the volume of their products sold. Other vendors offer various advertising allowances. For example, in the retail grocery industry, many vendors will pay some of the advertising costs for their products in the advertisements of the grocery store.
You are the auditor of Swanson Glass, Inc., a manufacturer of glass vases. Your intern has asked for clarification on the controls over the purchase returns and allowances for Swanson Glass. Provide your intern with an example of two control activities useful in reducing the risk of misstatements over purchase returns and allowances, focusing on the occurrence of such transactions.
Solution: Student answers will vary.
Control activities useful in reducing the risk of misstatements focus on establishing the occurrence of such transactions and include the following:
- All purchase returns should be authorized by the vendor,
- Goods should be retuned only with a proper purchase return authorization, and an independent count of goods returned should be recorded on shipping documents such as packing slips and bills of lading, and
- The computer should match the debit memo information with the authorization for purchase return and the shipping documents and report any discrepancies.
- A missing or invalid vendor code,
- An invalid product code,
- Transactions reporting receiving in quantities different from the amount ordered (both over and under),
- Prices, vendor numbers, or other information on vouchers that do not match information on the purchase order, or
- Voucher quantities that do not match quantities on receiving documents.
- Phantom vendors,
- Fictitious invoices,
- Kickbacks and bid rigging,
- Personal purchases with entity funds,
- Duplicate payments, and
- Product substitution.
- Payables by type. This allows the user to determine how much of the payables relate to the normal trade or business compared to other payables (i.e. employees).
2. Short and long-term payables. For purposes of a classified balance sheet.
3. Long-term purchase contracts, including any unusual purchase commitments. This requirement is to inform the users of what the agreement entails and can help them make decisions about the company.
4. Related-party transactions. These transactions must be identified separately on the financial statements, since they are not made at arms-length and are considered differently by potential users of the financial statements.
5. Dependence on a single vendor or a small number of vendors. This is to inform the users how much exposure the company would have if a significant vendor were to become unavailable for some reason.
6. Costs by reportable segment of the business. This would allow the users to evaluate separate segments of the entity individually.
- Vouch a sample of recorded purchases cycle transactions to supporting documentation. (Occurrence, Accuracy, Cutoff, Classification)
- Vouch recorded purchase transactions to supporting vendor’s invoices, receiving documents, and purchase orders.
- Vouch disbursement transactions to underlying vouchers and supporting documents.
- Vouch purchase returns to supporting shipping documents and subsequent recognition of return by the vendor.
- Trace a sample of purchase transactions from receivings to their recording in the purchases journal. Also trace a sample of cash disbursements and purchases returns to their recording in the accounting records. (Completeness)
- Perform cutoff tests for purchases and purchase returns. (Cutoff)
- Select a sample of receiving reports in the warehouse for several days before and after year-end and examine supporting vouchers to determine that purchases were recorded in the proper period.
- Select a sample of purchases returns from the shipping dock for several days before and after year end to determine that debits to accounts payable were recorded in the proper period.
- Perform cash disbursements cutoff tests by observing that all cash disbursed through the close of business on the last day of the fiscal year is included in the cash disbursements journal. (Cutoff)
- Perform a search for unrecorded liabilities. (Completeness)
- Examine subsequent payments between balance sheet date and end of field work, and when related documentation indicates payment was for an obligation in existence at balance sheet date, trace to accounts payable listing.
- Examine documentation for payables recorded at year-end that are still unpaid at end of field work.
- Investigate unmatched purchase orders, receiving reports, and vendor invoices at year-end.
- Inquire of accounting and purchasing personnel about unrecorded payables.
- Review capital budgets, work orders, and construction contracts for evidence of unrecorded payables.