Chapter 11 - Auditing the Purchasing Process

Chapter 11 Auditing the Purchasing Process

True / False Questions

1. Product costs should be matched directly with specific transactions and are recognized upon recognition of revenue. True False

. A purchase transaction usually begins with the preparation of a purchase order. True False

!. A receiving report is used to document the ordering of goods. True False

". The purchase #ournal is referred to as a chec$ register. True False

%. The principal business ob#ectives of the purchasing process are ac&uiring goods and services and paying for those goods and services. True False

'. The accounts payable department is responsible for ensuring that all vendor invoices( cash disbursements( and ad#ustments are recorded in the accounts payable records. True False

). After the controls are tested( the auditor sets the level of control ris$. True False

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Chapter 11 - Auditing the Purchasing Process

*. +ecause of the low volume of purchase return transactions( the auditor normally does not test the controls associated with these transactions. True False

,. Analytical procedures can be used to e-amine the reasonableness of accounts payable and accrued e-penses. True False

1.. Account payable confirmations are used less fre&uently by auditors than accounts receivable confirmations. True False

Multiple Choice Questions

11. A product cost is A. An e-pense allocated by a systematic procedure +. /ecognized during the period in which a liability is incurred C. /ecognized in the period during which related revenue is recognized 0. /ecognized in the period in which cash is spent

1 . 1hich of the following accounts is not affected by cash disbursement transactions2 A. Cash +. Accounts payable C. Purchase discounts 0. Purchase returns

1!. A debit memo A. /educes the amount of accounts payable to a vendor +. /educes accounts payable when payment is made C. 3s used by vendors to record cash payments received 0. Authorizes a debit to purchases when goods are received

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Chapter 11 - Auditing the Purchasing Process

1". 3n assessing control ris$ for purchases( an auditor vouches a sample of entries in the voucher register to the supporting documents. 1hich assertion would this test of controls most li$ely support2 A. Completeness +. 4ccurrence C. Accuracy 0. Classification

1%. The occurrence assertion for accounts payable includes A. 0etermining whether all accounts payable are recorded +. 0etermining whether all accounts payable actually are liabilities C. 0etermining whether all accounts payable are recorded in the proper period 0. 0etermining whether all accounts payable are properly classified in the financial statements

1'. The cutoff assertion for accounts payable includes A. 0etermining whether all accounts payable are recorded +. 0etermining whether all accounts payable actually are liabilities C. 0etermining whether all accounts payable are recorded in the proper period 0. 0etermining whether all accounts payable are properly classified in the financial statements

1). The accounts payable department receives the purchase order form to accomplish all of the following e-cept to A. Compare invoice price to purchase order price +. 5nsure that the purchase had been properly authorized C. 5nsure that the goods had been received by the party re&uesting the goods 0. Compare &uantity ordered to &uantity purchased

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Chapter 11 - Auditing the Purchasing Process

1*. 6nrecorded liabilities are most li$ely to be found during the review of which of the following documents2 A. 6npaid bills +. 7hipping records C. +ills of lading 0. 6nmatched sales invoices

1,. To determine whether accounts payable are complete( an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all A. Payment vouchers +. /eceiving reports C. Purchase re&uisitions 0. 8endor9s invoices

.. The cash disbursements #ournal also is called the A. 8oucher register +. Purchases #ournal C. Chec$ register 0. Accounts payable subsidiary ledger

1. An important primary purpose of the auditor9s review of the client9s procurement system should be to determine the effectiveness of the activities to protect against A. 3mproper materials handling +. 6nauthorized persons issuing purchase orders C. :ispostings of purchase returns 0. 5-cessive shrin$age or spoilage

. A client erroneously recorded a large purchase twice. 1hich of the following internal controls would be most li$ely to detect this error in a timely and efficient manner2 A. Footing the purchases #ournal +. /econciling vendors9 monthly statements with subsidiary payable ledger accounts C. Tracing totals from the purchases #ournal to the ledger accounts 0. 7ending written &uarterly confirmations to all vendors

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Chapter 11 - Auditing the Purchasing Process

!. An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all A. :erchandise received +. 8endors9 invoices C. Canceled chec$s 0. /eceiving reports

". An auditor compares information on canceled chec$s with information contained in the cash disbursements #ournal. The ob#ective of this test is to determine that A. /ecorded cash disbursement transactions are properly authorized +. Proper cash purchase discounts have been recorded C. Cash disbursements are for goods and services actually received 0. ;o discrepancies e-ist between the data on the chec$s and the data in the #ournal

%. 1hich of the following procedures would an auditor most li$ely perform in searching for unrecorded payables2 A. /econcile receiving reports with related cash payments made #ust prior to year-end +. Contrast the ratio of accounts payable to purchases with the prior year9s ratio C. 8ouch a sample of creditor balances to supporting invoices( receiving reports and purchase orders 0. Compare cash payments occurring after the balance sheet date with the accounts payable trial balance

'. Tests designed to detect purchases made before the end of the year that have been recorded in the subse&uent year most li$ely would provide assurance about management9s assertion of A. Accuracy +. 4ccurrence C. Cutoff 0. Classification

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Chapter 11 - Auditing the Purchasing Process

). The audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts payable because A. Accrued liabilities usually pertain to services of a continuing nature( while accounts payable are the result of completed transactions +. Accrued liability balances are less material than accounts payable balances C. 5vidence supporting accrued liabilities is none-istent( while evidence supporting accounts payable is readily available 0. Accrued liabilities at year-end will become accounts payable during the following year

*. The auditor is most li$ely to verify accrued commissions payable in con#unction with the A. 7ales cutoff review +. 8erification of employees C. /eview of post balance sheet date disbursements 0. 5-amination of trade accounts payable

,. 1hich of the following procedures relating to the e-amination of accounts payable could the auditor delegate entirely to the client9s employees2 A. Test footings in the accounts payable ledger +. /econcile unpaid invoices to vendors9 statements C. Prepare a schedule of accounts payable 0. :ail confirmations for selected account balances

!.. 1hich of the following audit procedures is least li$ely to detect an unrecorded liability2 A. Analysis and recomputation of interest e-pense +. Analysis and recomputation of depreciation e-pense C. :ailing of standard ban$ confirmation forms 0. /eading of the minutes of meetings of the board of directors

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Chapter 11 - Auditing the Purchasing Process

!1. A client9s procurement system ends with the assumption of a liability and the eventual payment of the liability. 1hich of the following best describes the auditor9s primary concern with respect to liabilities resulting from the procurement system2 A. Accounts payable are not materially understated +. Authority to incur liabilities is restricted to one designated person C. Ac&uisition of materials is not made from one vendor or one group of vendors 0. Commitments for all purchases are made only after established competitive bidding procedures are followed

! . For effective internal control( the accounts payable department should compare the information on each vendor9s invoice with the A. /eceiving report and the purchase order +. /eceiving report and the voucher C. 8endor9s pac$ing slip and the purchase order 0. 8endor9s pac$ing slip and the voucher

!!. The authority to accept incoming goods in receiving should be based on a<an=> A. 8endor9s invoice +. :aterials re&uisition C. +ill of lading 0. Approved purchase order

!". A voucher A. 3s a bill from the vendor +. 3s a document that records the receipt of goods C. 3s a document that re&uests goods from an authorized individual in the entity 0. 7erves as the basis for recording a vendor9s invoice in the purchases #ournal

!%. 4perating control over the chec$ signature plate normally should be the responsibility of the A. 7ecretary +. Chief accountant C. 8ice president of finance 0. Treasurer

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Chapter 11 - Auditing the Purchasing Process

!'. 3n testing controls over cash disbursements( an auditor most li$ely would determine that the person who signs the chec$s also A. /eviews the monthly ban$ reconciliation +. /eturns the chec$s to accounts payable C. 3s denied access to the supporting documents 0. 3s responsible for mailing the chec$s

!). 1ith respect to a small company9s system of purchasing supplies( an auditor9s primary concern should be to obtain satisfaction that supplies ordered and paid for have been A. /e&uested and approved by authorized individuals who have no incompatible duties +. /eceived( counted( and chec$ed to &uantities and amounts on purchase orders and invoices C. Properly recorded as assets and systematically amortized over the estimated useful life of the supplies 0. 6sed in the course of business and solely for business purposes during the year under audit

!*. As an in-charge auditor( you are reviewing a summary of control wea$nesses in cash disbursement procedures. 1hich one of the following wea$nesses( standing alone( should cause you the least concern2 A. Chec$s are signed by only one person +. 7igned chec$s are distributed by the controller to approved payees C. Treasurer fails to establish validity of names and addresses of chec$ payees 0. Cash disbursements are made directly out of cash receipts

!,. Tests of controls for the occurrence assertion for purchases include all of the following e-cept A. 5valuating proper segregation of duties +. Testing a sample of vouchers for an authorized purchase order C. Testing a sample of vouchers for matching receiving reports 0. Tracing a sample of vouchers to purchases #ournal

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Chapter 11 - Auditing the Purchasing Process

".. An internal control &uestionnaire indicates that an approved receiving report is re&uired to accompany every chec$ re&uest for payment of merchandise. 1hich of the following procedures provides the greatest assurance that this control is operating effectively2 A. 7elect and e-amine receiving reports and ascertain that the related canceled chec$s are dated no earlier than the receiving reports +. 7elect and e-amine receiving reports and ascertain that the related canceled chec$s are dated no later than the receiving reports C. 7elect and e-amine canceled chec$s and ascertain that the related receiving reports are dated no earlier than the chec$s 0. 7elect and e-amine canceled chec$s and ascertain that the related receiving reports are dated no later than the chec$s

"1. An auditor wishes to perform tests of controls on a client9s cash disbursements procedures. 3f the control activities leave no audit trail of documentary evidence( the auditor most li$ely will test the procedures by A. 3n&uiry and analytical procedures +. Confirmation and observation C. 4bservation and in&uiry 0. Analytical procedures and confirmation

" . An entity9s internal control re&uires that for every chec$ re&uest there be an approved voucher( supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether chec$s are being issued for unauthorized e-penditures( an auditor most li$ely would select items for testing from the population of all A. Purchase orders +. Canceled chec$s C. /eceiving reports 0. Approved vouchers

"!. To provide assurance that each voucher is submitted and paid only once( an auditor most li$ely would e-amine a sample of paid vouchers and determine whether each voucher is A. 7upported by a vendor9s invoice +. 7tamped ?paid? by the chec$ signer C. Prenumbered and accounted for 0. Approved for authorized purchases

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Chapter 11 - Auditing the Purchasing Process

"". 1hich of the following is the most effective control activity to detect vouchers prepared for the payment of goods that were not received2 A. Counting of goods upon receipt in the storeroom +. :atching of purchase order( receiving report( and vendor invoice for each voucher in the accounts payable department C. Comparison of goods received with goods re&uisitioned in the receiving department 0. 8erification of vouchers for accuracy and approval in the internal audit department

"%. 1hen an auditor selects a sample of items from the vouchers payable register for the last month of the period under audit and traces these items to underlying documents( the auditor is gathering evidence primarily in support of the assertion that A. /ecorded obligations were paid +. 3ncurred obligations were recorded in the correct period C. /ecorded obligations were valid 0. Cash disbursements were recorded as incurred obligations

"'. An auditor traced a sample of purchase orders and the related receiving reports to the purchases #ournal and the cash disbursements #ournal. The purpose of this substantive procedure most li$ely was to A. 3dentify unusually large purchases that should be investigated further +. 8erify that cash disbursements were for goods actually received C. 0etermine that purchases were properly recorded 0. Test whether payments were for goods actually ordered

"). 7ubstantive procedures to e-amine the occurrence assertion for accounts payable include A. 7electing a sample of vouchers and agreeing them to authorized purchase orders +. 7electing a sample of vouchers and tracing them to the purchases #ournal C. Comparing dates on vouchers to dates in the purchases #ournal 0. /ecomputing the mathematical accuracy of a sample of vendor invoices

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Chapter 11 - Auditing the Purchasing Process

"*. 7ubstantive procedures to e-amine the completeness assertion for accounts payable include A. 7electing a sample of vouchers and agreeing them to authorized purchase orders +. 7electing a sample of vouchers and tracing them to the purchases #ournal C. Comparing dates on vouchers to dates in the purchases #ournal 0. /ecomputing the mathematical accuracy of a sample of vendor invoices

",. 7ubstantive procedures to e-amine the cutoff assertion for accounts payable include A. 7electing a sample of vouchers and agreeing them to authorized purchase orders +. 7electing a sample of vouchers and agreeing them to the purchases #ournal C. 7electing a sample of receiving reports around year-end and comparing dates on related vouchers to dates in the purchases #ournal 0. /ecomputing the mathematical accuracy of a sample of vendor invoices

%.. Purchase cutoff procedures should be designed to test whether or not all inventory A. Purchased and received before the year-end was recorded before year-end +. 4n the year-end balance sheet was carried at lower of cost or mar$et C. 4n the year-end balance sheet was paid for by the company 0. 4wned by the company is in the possession of the company

%1. 1hen searching for unrecorded liabilities at year-end( the population identified for sampling would be A. Cash receipts from related parties recorded before year-end +. Creditors whose accounts appear on a subsidiary trial balance of accounts payable C. Cash disbursements recorded in the period subse&uent to year-end 0. 3nvoices dated a few days before and after year-end

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Chapter 11 - Auditing the Purchasing Process

% . 1hich of the following is a substantive procedure that an auditor most li$ely would perform to verify the e-istence of recorded accounts payable2 A. 3nvestigating the open purchase order file to ascertain that prenumbered purchase orders are used and accounted for +. /eceiving the client9s mail( unopened( for a reasonable period of time after the year-end to search for unrecorded vendor9s invoices C. 8ouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports 0. Confirming accounts payable balances with $nown suppliers who have zero balances

%!. 1hich of the following procedures would an auditor most li$ely perform in searching for unrecorded liabilities2 A. Trace a sample of accounts payable entries recorded #ust before year-end to the unmatched receiving report file +. Compare a sample of purchase orders issued #ust after year-end with the year-end accounts payable trial balance C. 8ouch a sample of cash disbursements recorded #ust after year-end to receiving reports and vendor invoices 0. 7can the cash disbursements entries recorded #ust before year-end for indications of unusual transactions

%". 1hich of the following procedures would an auditor least li$ely perform before the balance sheet date2 A. Assessment of inherent ris$ +. 4bservation of merchandise inventory C. Assessment of control ris$ 0. 3dentification of related parties

%%. An e-amination of the balance in the accounts payable account is ordinarily not designed to A. 0etermine that the amounts represent obligations of the company +. 8erify that accounts payable were properly authorized C. Ascertain the reasonableness of recorded liabilities 0. 0etermine that all e-isting liabilities at the balance sheet date have been recorded

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Chapter 11 - Auditing the Purchasing Process

%'. Accounts payable confirmations are used to test A. +oth the e-istence and completeness audit assertions +. 4nly the e-istence audit assertion C. 4nly the completeness audit assertion 0. 5ither e-istence or completeness( depending upon the response rate

%). 3f completeness is a concern for accounts payable( auditors will send accounts payable confirmations to A. Primarily vendors with large accounts payable balances +. Primarily vendors with small or zero accounts payable balances C. All vendors 0. A random sample of all vendors

%*. 3n auditing accounts payable( an auditor9s procedures most li$ely would focus primarily on management9s assertion of A. 5-istence +. /ights and obligations C. Completeness 0. 8aluation and allocation

%,. +udd( the purchasing agent for @a$e Aardware 1holesalers( has a relative who owns a retail hardware store. +udd arranged for hardware to be delivered by manufacturers to the retail store on a C.4.0. basis( thereby enabling his relative to buy at @a$e9s wholesale prices. +udd was probably able to accomplish this because of @a$e9s poor internal control over A. Purchase re&uisitions +. Cash receipts C. Perpetual inventory records 0. Purchase orders

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Chapter 11 - Auditing the Purchasing Process

'.. 1hich of the following control activities is not usually performed in the accounts payable department2 A. 0etermining the mathematical accuracy of the vendor9s invoice +. Aaving an authorized person approve the voucher C. Controlling the mailing of the chec$ and remittance advice 0. :atching the receiving report with the purchase order

'1. 1hich of the following is an internal control that would prevent a paid disbursement voucher from being presented for payment a second time2 A. 8ouchers should be prepared by individuals who are responsible for signing disbursement chec$s +. 0isbursement vouchers should be approved by at least two responsible management officials C. The date on a disbursement voucher should be within a few days of the date the voucher is presented for payment 0. The official signing the chec$ should compare the chec$ with the voucher and should ?cancel? the voucher documents by mar$ing them ?paid?

' . The mailing of disbursement chec$s and remittance advices should be controlled by the employee who A. 7igned the chec$s last +. Approved the vouchers for payment C. :atched the receiving reports( purchase orders and vendors9 invoices 0. 8erified the mathematical accuracy of the vouchers and remittance advices

'!. Assertions about classes of transactions and events for the period under audit include> A. 5-istence( completeness( and accuracy. +. 5-istence( completeness( and classification. C. 4ccurrence( completeness( and cutoff. 0. 4ccurrence( completeness( and valuation and allocation.

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Chapter 11 - Auditing the Purchasing Process

'". Assertions about account balances at the period end include> A. 5-istence( completeness( and accuracy. +. 5-istence( completeness( and classification. C. 5-istence( rights and obligations( and completeness. 0. 5-istence( rights and obligations( and classification.

'%. The following test<s= of details of transactions can be used as a dual-purpose test in con#unction with tests of controls> A. Test a sample of purchase re&uisitions for proper authorization. +. 4btain selected vendors9 statements and reconcile to vendor accounts. C. 4btain listing of accounts payable and compare total to general ledger. 0. /eview results of confirmations of selected accounts payable.

''. 1hich of the following &uestions would most li$ely be included in an internal control &uestionnaire concerning the completeness assertion for purchases2 A. 3s an authorized purchase order re&uired before the receiving department can accept a shipment or the vouchers payable department can record a voucher2 +. Are purchase re&uisitions prenumbered and independently matched with vendor invoices2 C. 3s the unpaid voucher file periodically reconciled with inventory records by an employee who does not have access to purchase re&uisitions2 0. Are purchase orders( receiving reports( and vouchers prenumbered and periodically accounted for2

'). 3f payables turnover has increased significantly since the prior year( this is an indication that which of the following assertions for accounts payable might be violated2 A. 5-istence or occurrence +. Completeness C. /ights and obligations 0. 8aluation and allocation

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Chapter 11 - Auditing the Purchasing Process

'*. 1hich of the following describes a temporary difference2 A. A difference that will be corrected in an amended ta- return. +. A difference arising from an uncertain ta- position. C. A fundamental difference in what constitutes revenue or e-pense for BAAP and tapurposes. 0. A timing difference between the recognition of revenue or e-pense under BAAP and ta-.

',. 1hich of the following describes a permanent difference2 A. A difference that will be corrected in an amended ta- return. +. A difference arising from an uncertain ta- position. C. A fundamental difference in what constitutes revenue or e-pense for BAAP and tapurposes. 0. A timing difference between the recognition of revenue or e-pense under BAAP and ta-.

Short Answer Questions

).. 0escribe three categories of e-penses outlined in FA7+ Concept 7tatement ;o. %.

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Chapter 11 - Auditing the Purchasing Process

)1. @isted below are si- assertions regarding the financial presentations made in the purchasing process. For each( give an e-ample of how an auditor could use one of the typical documents used in the purchasing process to test the assertion. 4ccurrence Completeness Authorization Accuracy Cutoff Classification -

) . 3dentify the primary functions in the purchases cycle and describe each function.

)!. @isted below are the ma#or functions of the purchasing process. 1= Purchasing function. = Beneral @edger function. != 3nvoice-processing function. "= 0isbursement function. %= Accounts Payable function. '= /e&uisition and receiving function. ;ame four pairs of functions that should be segregated from each other and e-plain why the segregation is important.

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Chapter 11 - Auditing the Purchasing Process

)". The $ey inherent ris$ factors an auditor must consider when auditing the purchasing process are industry factors. 1hich two are most important and why2

)%. :atch the test of controls described below to the appropriate assertion it is used to test> Assertions a= 4ccurrence b= Completeness c= Authorization d= Accuracy e= Cutoff f= Classification Test of Controls 1= Compare the dates on the receiving reports with the dates of the relevant vouchers = /eview monthly ban$ reconciliations != /eview client9s competitive bidding procedures "= Test a sample of vouchers for the presence of authorized purchase order and receiving report %= /eview the cash disbursements #ournal for reasonableness of account distribution '= Trace a sample of receiving reports to their respective vendor invoices and vouchers

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Chapter 11 - Auditing the Purchasing Process

)'. 3dentify the types of substantive procedures used by the auditor to test accounts payable and accrued e-penses. Provide an e-ample of how the auditor may use each substantive procedure. 3dentify if any of the substantive procedures can be used as a test of controls or a dual-purpose test.

)). 3dentify 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 re&uisitions for proper authorization. = Test transactions around year-end to determine if they are recorded in the proper period. != /eview results of confirmation of selected accounts payable. "= Compare payables turnover to previous years9 data. %= 4btain selected vendors9 statements and reconcile to vendor accounts. '= Compare purchase returns and allowances as a percentage of revenue or cost of sales to industry data.

)*. There are several important disclosure items to consider when auditing the purchasing process. 0iscuss what they are and why they are important.

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Chapter 11 - Auditing the Purchasing Process

),. 1hich type of confirmation is used more fre&uently by auditors - accounts receivable confirmations or accounts payable confirmations2 1hy2

*.. The auditor can often obtain sufficient appropriate evidence in the audit of a ta- provision without the use of a specialist. Aowever( several situations may indicate a need for the auditor to involve a ta- specialist. 3dentify three of these situations.

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Chapter 11 - Auditing the Purchasing Process

Chapter 11 Auditing the Purchasing Process Answer Cey

True / False Questions

1. Product costs should be matched directly with specific transactions and are recognized upon recognition of revenue. TRUE

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Knowledge ifficulty: !asy "earning #b$ecti%e: &

. A purchase transaction usually begins with the preparation of a purchase order. FALSE

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Knowledge ifficulty: !asy "earning #b$ecti%e: '

!. A receiving report is used to document the ordering of goods. FALSE

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Knowledge ifficulty: !asy "earning #b$ecti%e: '

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Chapter 11 - Auditing the Purchasing Process

". The purchase #ournal is referred to as a chec$ register. FALSE

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Knowledge ifficulty: !asy "earning #b$ecti%e: '

%. The principal business ob#ectives of the purchasing process are ac&uiring goods and services and paying for those goods and services. TRUE

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Knowledge ifficulty: !asy "earning #b$ecti%e: (

'. The accounts payable department is responsible for ensuring that all vendor invoices( cash disbursements( and ad#ustments are recorded in the accounts payable records. TRUE

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Knowledge ifficulty: !asy "earning #b$ecti%e: (

). After the controls are tested( the auditor sets the level of control ris$. TRUE

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Knowledge ifficulty: !asy "earning #b$ecti%e: )

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Chapter 11 - Auditing the Purchasing Process

*. +ecause of the low volume of purchase return transactions( the auditor normally does not test the controls associated with these transactions. TRUE

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Knowledge ifficulty: !asy "earning #b$ecti%e: *

,. Analytical procedures can be used to e-amine the reasonableness of accounts payable and accrued e-penses. TRUE

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Knowledge ifficulty: !asy "earning #b$ecti%e: &&

1.. Account payable confirmations are used less fre&uently by auditors than accounts receivable confirmations. TRUE

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Knowledge ifficulty: !asy "earning #b$ecti%e: &'

Multiple Choice Questions

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Chapter 11 - Auditing the Purchasing Process

11. A product cost is A. An e-pense allocated by a systematic procedure +. /ecognized during the period in which a liability is incurred C /ecognized in the period during which related revenue is recognized 0. /ecognized in the period in which cash is spent

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Knowledge ifficulty: !asy "earning #b$ecti%e: &

1 . 1hich of the following accounts is not affected by cash disbursement transactions2 A. Cash +. Accounts payable C. Purchase discounts ! Purchase returns

AACSB: Communications AICPA BB: Industry AICPA FN: ecision Ma+ing Bloom's: Knowledge ifficulty: !asy "earning #b$ecti%e: , "earning #b$ecti%e: -

1!. A debit memo A /educes the amount of accounts payable to a vendor +. /educes accounts payable when payment is made C. 3s used by vendors to record cash payments received 0. Authorizes a debit to purchases when goods are received

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Knowledge ifficulty: !asy "earning #b$ecti%e: , "earning #b$ecti%e: "earning #b$ecti%e: '

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Chapter 11 - Auditing the Purchasing Process

1". 3n assessing control ris$ for purchases( an auditor vouches a sample of entries in the voucher register to the supporting documents. 1hich assertion would this test of controls most li$ely support2 A. Completeness " 4ccurrence C. Accuracy 0. Classification

AACSB: Analytic AICPA BB: Industry AICPA FN: .is+ Analysis Bloom's: Com/re0ension ifficulty: !asy "earning #b$ecti%e: , "earning #b$ecti%e: ) "earning #b$ecti%e: *

1%. The occurrence assertion for accounts payable includes A. 0etermining whether all accounts payable are recorded " 0etermining whether all accounts payable actually are liabilities C. 0etermining whether all accounts payable are recorded in the proper period 0. 0etermining whether all accounts payable are properly classified in the financial statements

AACSB: Communications AICPA BB: Critical 10in+ing AICPA FN: .is+ Analysis Bloom's: Com/re0ension ifficulty: !asy "earning #b$ecti%e: , "earning #b$ecti%e: *

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Chapter 11 - Auditing the Purchasing Process

1'. The cutoff assertion for accounts payable includes A. 0etermining whether all accounts payable are recorded +. 0etermining whether all accounts payable actually are liabilities C 0etermining whether all accounts payable are recorded in the proper period 0. 0etermining whether all accounts payable are properly classified in the financial statements

AACSB: Communications AICPA BB: Critical 10in+ing AICPA FN: .is+ Analysis Bloom's: Com/re0ension ifficulty: !asy "earning #b$ecti%e: , "earning #b$ecti%e: *

1). The accounts payable department receives the purchase order form to accomplish all of the following e-cept to A. Compare invoice price to purchase order price +. 5nsure that the purchase had been properly authorized C 5nsure that the goods had been received by the party re&uesting the goods 0. Compare &uantity ordered to &uantity purchased

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: A//lication ifficulty: !asy "earning #b$ecti%e: , "earning #b$ecti%e: ' "earning #b$ecti%e: (

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Chapter 11 - Auditing the Purchasing Process

1*. 6nrecorded liabilities are most li$ely to be found during the review of which of the following documents2 A 6npaid bills +. 7hipping records C. +ills of lading 0. 6nmatched sales invoices

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: A//lication ifficulty: !asy "earning #b$ecti%e: , "earning #b$ecti%e: '

1,. To determine whether accounts payable are complete( an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all A. Payment vouchers " /eceiving reports C. Purchase re&uisitions 0. 8endor9s invoices

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: A//lication ifficulty: !asy "earning #b$ecti%e: , "earning #b$ecti%e: ' "earning #b$ecti%e: *

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Chapter 11 - Auditing the Purchasing Process

.. The cash disbursements #ournal also is called the A. 8oucher register +. Purchases #ournal C Chec$ register 0. Accounts payable subsidiary ledger

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Knowledge ifficulty: !asy "earning #b$ecti%e: , "earning #b$ecti%e: '

1. An important primary purpose of the auditor9s review of the client9s procurement system should be to determine the effectiveness of the activities to protect against A. 3mproper materials handling " 6nauthorized persons issuing purchase orders C. :ispostings of purchase returns 0. 5-cessive shrin$age or spoilage

AACSB: Communications AICPA BB: Industry AICPA FN: .is+ Analysis Bloom's: A//lication ifficulty: !asy "earning #b$ecti%e: , "earning #b$ecti%e: *

. A client erroneously recorded a large purchase twice. 1hich of the following internal controls would be most li$ely to detect this error in a timely and efficient manner2 A. Footing the purchases #ournal " /econciling vendors9 monthly statements with subsidiary payable ledger accounts C. Tracing totals from the purchases #ournal to the ledger accounts 0. 7ending written &uarterly confirmations to all vendors

AACSB: Communications AICPA BB: Industry AICPA FN: .is+ Analysis Bloom's: Knowledge ifficulty: !asy "earning #b$ecti%e: , "earning #b$ecti%e: *

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Chapter 11 - Auditing the Purchasing Process

!. An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test consists of all A. :erchandise received " 8endors9 invoices C. Canceled chec$s 0. /eceiving reports

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: A//lication ifficulty: Moderate "earning #b$ecti%e: , "earning #b$ecti%e: *

". An auditor compares information on canceled chec$s with information contained in the cash disbursements #ournal. The ob#ective of this test is to determine that A. /ecorded cash disbursement transactions are properly authorized +. Proper cash purchase discounts have been recorded C. Cash disbursements are for goods and services actually received ! ;o discrepancies e-ist between the data on the chec$s and the data in the #ournal

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: A//lication ifficulty: !asy "earning #b$ecti%e: &, "earning #b$ecti%e: ,

11- ,

Chapter 11 - Auditing the Purchasing Process

%. 1hich of the following procedures would an auditor most li$ely perform in searching for unrecorded payables2 A. /econcile receiving reports with related cash payments made #ust prior to year-end +. Contrast the ratio of accounts payable to purchases with the prior year9s ratio C. 8ouch a sample of creditor balances to supporting invoices( receiving reports and purchase orders ! Compare cash payments occurring after the balance sheet date with the accounts payable trial balance

AACSB: Analytic AICPA BB: Industry AICPA FN: ecision Ma+ing Bloom's: A//lication ifficulty: !asy "earning #b$ecti%e: &, "earning #b$ecti%e: &-

'. Tests designed to detect purchases made before the end of the year that have been recorded in the subse&uent year most li$ely would provide assurance about management9s assertion of A. Accuracy +. 4ccurrence C Cutoff 0. Classification

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Com/re0ension ifficulty: !asy "earning #b$ecti%e: &, "earning #b$ecti%e: &"earning #b$ecti%e: &(

11-!.

Chapter 11 - Auditing the Purchasing Process

). The audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts payable because A Accrued liabilities usually pertain to services of a continuing nature( while accounts payable are the result of completed transactions +. Accrued liability balances are less material than accounts payable balances C. 5vidence supporting accrued liabilities is none-istent( while evidence supporting accounts payable is readily available 0. Accrued liabilities at year-end will become accounts payable during the following year

AACSB: Communications AICPA BB: Industry AICPA FN: .is+ Analysis Bloom's: Analysis ifficulty: !asy "earning #b$ecti%e: &-

*. The auditor is most li$ely to verify accrued commissions payable in con#unction with the A 7ales cutoff review +. 8erification of employees C. /eview of post balance sheet date disbursements 0. 5-amination of trade accounts payable

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Analysis ifficulty: !asy "earning #b$ecti%e: &-

,. 1hich of the following procedures relating to the e-amination of accounts payable could the auditor delegate entirely to the client9s employees2 A. Test footings in the accounts payable ledger +. /econcile unpaid invoices to vendors9 statements C Prepare a schedule of accounts payable 0. :ail confirmations for selected account balances

AACSB: Communications AICPA BB: .esource Management AICPA FN: .is+ Analysis Bloom's: A//lication ifficulty: !asy "earning #b$ecti%e: &-

11-!1

Chapter 11 - Auditing the Purchasing Process

!.. 1hich of the following audit procedures is least li$ely to detect an unrecorded liability2 A. Analysis and recomputation of interest e-pense " Analysis and recomputation of depreciation e-pense C. :ailing of standard ban$ confirmation forms 0. /eading of the minutes of meetings of the board of directors

AACSB: Communications AICPA BB: Industry AICPA FN: .is+ Analysis Bloom's: Analysis ifficulty: !asy "earning #b$ecti%e: &-

!1. A client9s procurement system ends with the assumption of a liability and the eventual payment of the liability. 1hich of the following best describes the auditor9s primary concern with respect to liabilities resulting from the procurement system2 A Accounts payable are not materially understated +. Authority to incur liabilities is restricted to one designated person C. Ac&uisition of materials is not made from one vendor or one group of vendors 0. Commitments for all purchases are made only after established competitive bidding procedures are followed

AACSB: Communications AICPA BB: Industry AICPA FN: .is+ Analysis Bloom's: Com/re0ension ifficulty: Moderate "earning #b$ecti%e: & "earning #b$ecti%e: ,

11-!

Chapter 11 - Auditing the Purchasing Process

! . For effective internal control( the accounts payable department should compare the information on each vendor9s invoice with the A /eceiving report and the purchase order +. /eceiving report and the voucher C. 8endor9s pac$ing slip and the purchase order 0. 8endor9s pac$ing slip and the voucher

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Knowledge ifficulty: Moderate "earning #b$ecti%e: , "earning #b$ecti%e: ' "earning #b$ecti%e: *

!!. The authority to accept incoming goods in receiving should be based on a<an=> A. 8endor9s invoice +. :aterials re&uisition C. +ill of lading ! Approved purchase order

AACSB: Communications AICPA BB: Industry AICPA FN: .is+ Analysis Bloom's: Knowledge ifficulty: Moderate "earning #b$ecti%e: , "earning #b$ecti%e: '

!". A voucher A. 3s a bill from the vendor +. 3s a document that records the receipt of goods C. 3s a document that re&uests goods from an authorized individual in the entity ! 7erves as the basis for recording a vendor9s invoice in the purchases #ournal

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Knowledge ifficulty: Moderate "earning #b$ecti%e: , "earning #b$ecti%e: '

11-!!

Chapter 11 - Auditing the Purchasing Process

!%. 4perating control over the chec$ signature plate normally should be the responsibility of the A. 7ecretary +. Chief accountant C. 8ice president of finance ! Treasurer

AACSB: Communications AICPA BB: Industry AICPA FN: .is+ Analysis Bloom's: A//lication ifficulty: Moderate "earning #b$ecti%e: , "earning #b$ecti%e: ( "earning #b$ecti%e: 2

!'. 3n testing controls over cash disbursements( an auditor most li$ely would determine that the person who signs the chec$s also A. /eviews the monthly ban$ reconciliation +. /eturns the chec$s to accounts payable C. 3s denied access to the supporting documents ! 3s responsible for mailing the chec$s

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Knowledge ifficulty: Moderate "earning #b$ecti%e: , "earning #b$ecti%e: ( "earning #b$ecti%e: *

11-!"

Chapter 11 - Auditing the Purchasing Process

!). 1ith respect to a small company9s system of purchasing supplies( an auditor9s primary concern should be to obtain satisfaction that supplies ordered and paid for have been A. /e&uested and approved by authorized individuals who have no incompatible duties " /eceived( counted( and chec$ed to &uantities and amounts on purchase orders and invoices C. Properly recorded as assets and systematically amortized over the estimated useful life of the supplies 0. 6sed in the course of business and solely for business purposes during the year under audit

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Knowledge ifficulty: Moderate "earning #b$ecti%e: , "earning #b$ecti%e: 2 "earning #b$ecti%e: *

!*. As an in-charge auditor( you are reviewing a summary of control wea$nesses in cash disbursement procedures. 1hich one of the following wea$nesses( standing alone( should cause you the least concern2 A Chec$s are signed by only one person +. 7igned chec$s are distributed by the controller to approved payees C. Treasurer fails to establish validity of names and addresses of chec$ payees 0. Cash disbursements are made directly out of cash receipts

AACSB: Communications AICPA BB: Industry AICPA FN: .is+ Analysis Bloom's: A//lication ifficulty: Moderate "earning #b$ecti%e: , "earning #b$ecti%e: 2 "earning #b$ecti%e: *

11-!%

Chapter 11 - Auditing the Purchasing Process

!,. Tests of controls for the occurrence assertion for purchases include all of the following e-cept A. 5valuating proper segregation of duties +. Testing a sample of vouchers for an authorized purchase order C. Testing a sample of vouchers for matching receiving reports ! Tracing a sample of vouchers to purchases #ournal

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: A//lication ifficulty: Moderate "earning #b$ecti%e: , "earning #b$ecti%e: 2 "earning #b$ecti%e: *

".. An internal control &uestionnaire indicates that an approved receiving report is re&uired to accompany every chec$ re&uest for payment of merchandise. 1hich of the following procedures provides the greatest assurance that this control is operating effectively2 A. 7elect and e-amine receiving reports and ascertain that the related canceled chec$s are dated no earlier than the receiving reports +. 7elect and e-amine receiving reports and ascertain that the related canceled chec$s are dated no later than the receiving reports C. 7elect and e-amine canceled chec$s and ascertain that the related receiving reports are dated no earlier than the chec$s ! 7elect and e-amine canceled chec$s and ascertain that the related receiving reports are dated no later than the chec$s

AACSB: Communications AICPA BB: Industry AICPA FN: .is+ Analysis Bloom's: A//lication ifficulty: Moderate "earning #b$ecti%e: , "earning #b$ecti%e: *

11-!'

Chapter 11 - Auditing the Purchasing Process

"1. An auditor wishes to perform tests of controls on a client9s cash disbursements procedures. 3f the control activities leave no audit trail of documentary evidence( the auditor most li$ely will test the procedures by A. 3n&uiry and analytical procedures +. Confirmation and observation C 4bservation and in&uiry 0. Analytical procedures and confirmation

AACSB: Analytic AICPA BB: Industry AICPA FN: ecision Ma+ing Bloom's: A//lication ifficulty: Moderate "earning #b$ecti%e: , "earning #b$ecti%e: *

" . An entity9s internal control re&uires that for every chec$ re&uest there be an approved voucher( supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether chec$s are being issued for unauthorized e-penditures( an auditor most li$ely would select items for testing from the population of all A. Purchase orders " Canceled chec$s C. /eceiving reports 0. Approved vouchers

AACSB: Analytic AICPA BB: Industry AICPA FN: ecision Ma+ing Bloom's: A//lication ifficulty: Moderate "earning #b$ecti%e: , "earning #b$ecti%e: *

11-!)

Chapter 11 - Auditing the Purchasing Process

"!. To provide assurance that each voucher is submitted and paid only once( an auditor most li$ely would e-amine a sample of paid vouchers and determine whether each voucher is A. 7upported by a vendor9s invoice " 7tamped ?paid? by the chec$ signer C. Prenumbered and accounted for 0. Approved for authorized purchases

AACSB: Analytic AICPA BB: Industry AICPA FN: ecision Ma+ing Bloom's: A//lication ifficulty: Moderate "earning #b$ecti%e: , "earning #b$ecti%e: *

"". 1hich of the following is the most effective control activity to detect vouchers prepared for the payment of goods that were not received2 A. Counting of goods upon receipt in the storeroom " :atching of purchase order( receiving report( and vendor invoice for each voucher in the accounts payable department C. Comparison of goods received with goods re&uisitioned in the receiving department 0. 8erification of vouchers for accuracy and approval in the internal audit department

AACSB: Analytic AICPA BB: Industry AICPA FN: ecision Ma+ing Bloom's: A//lication ifficulty: Moderate "earning #b$ecti%e: , "earning #b$ecti%e: *

11-!*

Chapter 11 - Auditing the Purchasing Process

"%. 1hen an auditor selects a sample of items from the vouchers payable register for the last month of the period under audit and traces these items to underlying documents( the auditor is gathering evidence primarily in support of the assertion that A. /ecorded obligations were paid +. 3ncurred obligations were recorded in the correct period C /ecorded obligations were valid 0. Cash disbursements were recorded as incurred obligations

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: A//lication ifficulty: Moderate "earning #b$ecti%e: &, "earning #b$ecti%e: ,

"'. An auditor traced a sample of purchase orders and the related receiving reports to the purchases #ournal and the cash disbursements #ournal. The purpose of this substantive procedure most li$ely was to A. 3dentify unusually large purchases that should be investigated further +. 8erify that cash disbursements were for goods actually received C 0etermine that purchases were properly recorded 0. Test whether payments were for goods actually ordered

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: A//lication ifficulty: Moderate "earning #b$ecti%e: &,

"). 7ubstantive procedures to e-amine the occurrence assertion for accounts payable include A 7electing a sample of vouchers and agreeing them to authorized purchase orders +. 7electing a sample of vouchers and tracing them to the purchases #ournal C. Comparing dates on vouchers to dates in the purchases #ournal 0. /ecomputing the mathematical accuracy of a sample of vendor invoices

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: A//lication ifficulty: Moderate "earning #b$ecti%e: &,

11-!,

Chapter 11 - Auditing the Purchasing Process

"*. 7ubstantive procedures to e-amine the completeness assertion for accounts payable include A. 7electing a sample of vouchers and agreeing them to authorized purchase orders " 7electing a sample of vouchers and tracing them to the purchases #ournal C. Comparing dates on vouchers to dates in the purchases #ournal 0. /ecomputing the mathematical accuracy of a sample of vendor invoices

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: A//lication ifficulty: Moderate "earning #b$ecti%e: &,

",. 7ubstantive procedures to e-amine the cutoff assertion for accounts payable include A. 7electing a sample of vouchers and agreeing them to authorized purchase orders +. 7electing a sample of vouchers and agreeing them to the purchases #ournal C 7electing a sample of receiving reports around year-end and comparing dates on related vouchers to dates in the purchases #ournal 0. /ecomputing the mathematical accuracy of a sample of vendor invoices

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: A//lication ifficulty: Moderate "earning #b$ecti%e: &,

%.. Purchase cutoff procedures should be designed to test whether or not all inventory A Purchased and received before the year-end was recorded before year-end +. 4n the year-end balance sheet was carried at lower of cost or mar$et C. 4n the year-end balance sheet was paid for by the company 0. 4wned by the company is in the possession of the company

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: A//lication ifficulty: Moderate "earning #b$ecti%e: &, "earning #b$ecti%e: &-

11-".

Chapter 11 - Auditing the Purchasing Process

%1. 1hen searching for unrecorded liabilities at year-end( the population identified for sampling would be A. Cash receipts from related parties recorded before year-end +. Creditors whose accounts appear on a subsidiary trial balance of accounts payable C Cash disbursements recorded in the period subse&uent to year-end 0. 3nvoices dated a few days before and after year-end

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: A//lication ifficulty: Moderate "earning #b$ecti%e: &, "earning #b$ecti%e: &-

% . 1hich of the following is a substantive procedure that an auditor most li$ely would perform to verify the e-istence of recorded accounts payable2 A. 3nvestigating the open purchase order file to ascertain that prenumbered purchase orders are used and accounted for +. /eceiving the client9s mail( unopened( for a reasonable period of time after the year-end to search for unrecorded vendor9s invoices C 8ouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports 0. Confirming accounts payable balances with $nown suppliers who have zero balances

AACSB: Analytic AICPA BB: Industry AICPA FN: ecision Ma+ing Bloom's: A//lication ifficulty: Moderate "earning #b$ecti%e: &, "earning #b$ecti%e: &-

11-"1

Chapter 11 - Auditing the Purchasing Process

%!. 1hich of the following procedures would an auditor most li$ely perform in searching for unrecorded liabilities2 A. Trace a sample of accounts payable entries recorded #ust before year-end to the unmatched receiving report file +. Compare a sample of purchase orders issued #ust after year-end with the year-end accounts payable trial balance C 8ouch a sample of cash disbursements recorded #ust after year-end to receiving reports and vendor invoices 0. 7can the cash disbursements entries recorded #ust before year-end for indications of unusual transactions

AACSB: Analytic AICPA BB: Industry AICPA FN: ecision Ma+ing Bloom's: A//lication ifficulty: Moderate "earning #b$ecti%e: &, "earning #b$ecti%e: &-

%". 1hich of the following procedures would an auditor least li$ely perform before the balance sheet date2 A. Assessment of inherent ris$ " 4bservation of merchandise inventory C. Assessment of control ris$ 0. 3dentification of related parties

AACSB: Analytic AICPA BB: Industry AICPA FN: .is+ Analysis Bloom's: A//lication ifficulty: Moderate "earning #b$ecti%e: &-

11-"

Chapter 11 - Auditing the Purchasing Process

%%. An e-amination of the balance in the accounts payable account is ordinarily not designed to A. 0etermine that the amounts represent obligations of the company " 8erify that accounts payable were properly authorized C. Ascertain the reasonableness of recorded liabilities 0. 0etermine that all e-isting liabilities at the balance sheet date have been recorded

AACSB: Communications AICPA BB: Critical 10in+ing AICPA FN: ecision Ma+ing Bloom's: A//lication ifficulty: Moderate "earning #b$ecti%e: &-

%'. Accounts payable confirmations are used to test A +oth the e-istence and completeness audit assertions +. 4nly the e-istence audit assertion C. 4nly the completeness audit assertion 0. 5ither e-istence or completeness( depending upon the response rate

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: A//lication ifficulty: Moderate "earning #b$ecti%e: &"earning #b$ecti%e: &'

%). 3f completeness is a concern for accounts payable( auditors will send accounts payable confirmations to A. Primarily vendors with large accounts payable balances " Primarily vendors with small or zero accounts payable balances C. All vendors 0. A random sample of all vendors

AACSB: Communications AICPA BB: Industry AICPA FN: ecision Ma+ing Bloom's: A//lication ifficulty: Moderate "earning #b$ecti%e: &"earning #b$ecti%e: &'

11-"!

Chapter 11 - Auditing the Purchasing Process

%*. 3n auditing accounts payable( an auditor9s procedures most li$ely would focus primarily on management9s assertion of A. 5-istence +. /ights and obligations C Completeness 0. 8aluation and allocation

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: Com/re0ension ifficulty: Moderate "earning #b$ecti%e: &"earning #b$ecti%e: &(

%,. +udd( the purchasing agent for @a$e Aardware 1holesalers( has a relative who owns a retail hardware store. +udd arranged for hardware to be delivered by manufacturers to the retail store on a C.4.0. basis( thereby enabling his relative to buy at @a$e9s wholesale prices. +udd was probably able to accomplish this because of @a$e9s poor internal control over A. Purchase re&uisitions +. Cash receipts C. Perpetual inventory records ! Purchase orders

AACSB: Communications AICPA BB: Industry AICPA FN: .is+ Analysis Bloom's: A//lication ifficulty: 3ard "earning #b$ecti%e: , "earning #b$ecti%e: ' "earning #b$ecti%e: *

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Chapter 11 - Auditing the Purchasing Process

'.. 1hich of the following control activities is not usually performed in the accounts payable department2 A. 0etermining the mathematical accuracy of the vendor9s invoice +. Aaving an authorized person approve the voucher C Controlling the mailing of the chec$ and remittance advice 0. :atching the receiving report with the purchase order

AACSB: Communications AICPA BB: Industry AICPA FN: .is+ Analysis Bloom's: A//lication ifficulty: 3ard "earning #b$ecti%e: , "earning #b$ecti%e: (

'1. 1hich of the following is an internal control that would prevent a paid disbursement voucher from being presented for payment a second time2 A. 8ouchers should be prepared by individuals who are responsible for signing disbursement chec$s +. 0isbursement vouchers should be approved by at least two responsible management officials C. The date on a disbursement voucher should be within a few days of the date the voucher is presented for payment ! The official signing the chec$ should compare the chec$ with the voucher and should ?cancel? the voucher documents by mar$ing them ?paid?

AACSB: Communications AICPA BB: Industry AICPA FN: .is+ Analysis Bloom's: A//lication ifficulty: 3ard "earning #b$ecti%e: , "earning #b$ecti%e: 2 "earning #b$ecti%e: *

11-"%

Chapter 11 - Auditing the Purchasing Process

' . The mailing of disbursement chec$s and remittance advices should be controlled by the employee who A 7igned the chec$s last +. Approved the vouchers for payment C. :atched the receiving reports( purchase orders and vendors9 invoices 0. 8erified the mathematical accuracy of the vouchers and remittance advices

AACSB: Communications AICPA BB: Industry AICPA FN: .is+ Analysis Bloom's: A//lication ifficulty: 3ard "earning #b$ecti%e: , "earning #b$ecti%e: 2

'!. Assertions about classes of transactions and events for the period under audit include> A. 5-istence( completeness( and accuracy. +. 5-istence( completeness( and classification. C 4ccurrence( completeness( and cutoff. 0. 4ccurrence( completeness( and valuation and allocation.

AACSB: Communications AICPA BB: Industry AICPA FN: .is+ Analysis Bloom's: Knowledge ifficulty: !asy "earning #b$ecti%e: &4

'". Assertions about account balances at the period end include> A. 5-istence( completeness( and accuracy. +. 5-istence( completeness( and classification. C 5-istence( rights and obligations( and completeness. 0. 5-istence( rights and obligations( and classification.

AACSB: Communications AICPA BB: Industry AICPA FN: .is+ Analysis Bloom's: Knowledge ifficulty: !asy "earning #b$ecti%e: &4

11-"'

Chapter 11 - Auditing the Purchasing Process

'%. The following test<s= of details of transactions can be used as a dual-purpose test in con#unction with tests of controls> A Test a sample of purchase re&uisitions for proper authorization. +. 4btain selected vendors9 statements and reconcile to vendor accounts. C. 4btain listing of accounts payable and compare total to general ledger. 0. /eview results of confirmations of selected accounts payable.

AACSB: Communications AICPA BB: Industry AICPA FN: .is+ Analysis Bloom's: A//lication ifficulty: !asy "earning #b$ecti%e: &,

''. 1hich of the following &uestions would most li$ely be included in an internal control &uestionnaire concerning the completeness assertion for purchases2 A. 3s an authorized purchase order re&uired before the receiving department can accept a shipment or the vouchers payable department can record a voucher2 +. Are purchase re&uisitions prenumbered and independently matched with vendor invoices2 C. 3s the unpaid voucher file periodically reconciled with inventory records by an employee who does not have access to purchase re&uisitions2 ! Are purchase orders( receiving reports( and vouchers prenumbered and periodically accounted for2

AACSB: Communications AICPA BB: Industry AICPA FN: .is+ Analysis Bloom's: A//lication ifficulty: 3ard "earning #b$ecti%e: , "earning #b$ecti%e: *

11-")

Chapter 11 - Auditing the Purchasing Process

'). 3f payables turnover has increased significantly since the prior year( this is an indication that which of the following assertions for accounts payable might be violated2 A. 5-istence or occurrence " Completeness C. /ights and obligations 0. 8aluation and allocation

AACSB: Analytic AICPA BB: Industry AICPA FN: .is+ Analysis Bloom's: A//lication ifficulty: 3ard "earning #b$ecti%e: &&

'*. 1hich of the following describes a temporary difference2 A. A difference that will be corrected in an amended ta- return. +. A difference arising from an uncertain ta- position. C. A fundamental difference in what constitutes revenue or e-pense for BAAP and tapurposes. ! A timing difference between the recognition of revenue or e-pense under BAAP and ta-.

AACSB: Communications AICPA BB: Industry AICPA FN: ecision Ma+ing Bloom's: Knowledge ifficulty: !asy "earning #b$ecti%e: &2

',. 1hich of the following describes a permanent difference2 A. A difference that will be corrected in an amended ta- return. +. A difference arising from an uncertain ta- position. C A fundamental difference in what constitutes revenue or e-pense for BAAP and tapurposes. 0. A timing difference between the recognition of revenue or e-pense under BAAP and ta-.

AACSB: Communications AICPA BB: Industry AICPA FN: ecision Ma+ing Bloom's: Knowledge ifficulty: !asy "earning #b$ecti%e: &2

11-"*

Chapter 11 - Auditing the Purchasing Process

Short Answer Questions

).. 0escribe three categories of e-penses outlined in FA7+ Concept 7tatement ;o. %. 1. The first type of e-pense is a product cost. These costs can be directly matched to specific transactions or events and are recognized upon recognition of revenue. . The second type is a period cost. These are e-penses recognized during the period in which cash is spent or liabilities are incurred for goods and services to be used up within a short amount of time. !. The last type includes e-penses that are allocated systematically and rationally to the period during which the related assets are e-pected to provide benefits.

AACSB: Communications AICPA BB: "egal AICPA FN: Measurement Bloom's: Knowledge ifficulty: !asy "earning #b$ecti%e: &

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Chapter 11 - Auditing the Purchasing Process

)1. @isted below are si- assertions regarding the financial presentations made in the purchasing process. For each( give an e-ample of how an auditor could use one of the typical documents used in the purchasing process to test the assertion. 4ccurrence Completeness Authorization Accuracy Cutoff Classification #ccurrence - The receiving report provides evidence regarding the occurrence assertion. This document records the receipt of goods. The auditor can test vouchers for the presence of an authorized receiving report to ensure that goods were actually received. Co$pleteness - The auditor can use the client9s vouchers and vendor invoices to test for completeness. 3n this case( the auditor will start with these documents and trace them to the purchases #ournal. This will provide assurance that all purchased items have been recorded. Authori%ation - 4ne e-ample of a document used to test authorization is the purchase re&uisition form. This form is used to re&uest goods or services for an authorized individual. The auditor can chec$ that all purchase re&uisitions have been properly approved by reviewing these documents for authorization. This can be an important step in testing controls. Accurac& - To test accuracy( an auditor can recalculate the amounts listed on the vendor invoice. This will help ensure that the proper amounts were paid and recorded in the #ournals. Cuto'' - The dates on the receiving reports and the dates on the vouchers can be compared with the dates in the purchases #ournal to test that the purchase transactions were recorded in the proper period. Classi'ication - The purchases #ournal is used to test for proper classification through an auditor9s review of the #ournal. The #ournal provides details about each of the transactions made and to which accounts the transactions were posted.

AACSB: Communications AICPA BB: Critical 10in+ing AICPA FN: Measurement Bloom's: A//lication ifficulty: Moderate "earning #b$ecti%e: ' "earning #b$ecti%e: *

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Chapter 11 - Auditing the Purchasing Process

) . 3dentify the primary functions in the purchases cycle and describe each function. Functions in the purchasing process include> /e&uisitioning. 3nitiation and approval of re&uest for goods and services by authorized individuals consistent with management criteria. Purchasing. Approval of purchase orders and proper e-ecution as to price( &uantity( &uality( and vendor. /eceiving. /eceipt of properly authorized goods or services. 3nvoice Processing. Processing of vendor invoices for goods and services receivedD also( processing of ad#ustments for allowances( discounts( and returns. 0isbursements. Processing of payment to vendors. Accounts Payable. /ecording of all vendor invoices( cash disbursements( and ad#ustments in individual vendor accounts. Beneral @edger. Proper accumulation( classification and summarization of purchases( cash 0isbursements( and payables in the general ledger.

AACSB: Communications AICPA BB: Critical 10in+ing AICPA FN: Measurement Bloom's: Knowledge ifficulty: Moderate "earning #b$ecti%e: (

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Chapter 11 - Auditing the Purchasing Process

)!. @isted below are the ma#or functions of the purchasing process. 1= Purchasing function. = Beneral @edger function. != 3nvoice-processing function. "= 0isbursement function. %= Accounts Payable function. '= /e&uisition and receiving function. ;ame four pairs of functions that should be segregated from each other and e-plain why the segregation is important. 1 should be separated from ' - An individual who performs both of these duties can easily ma$e fictitious purchases and steal cash. ! should be separated from % - This segregation prevents an individual from overpaying for goods received and stealing cash. " should be separated from % - 6nauthorized transactions can be made by an individual with control over both of these functions. This can lead to unauthorized chec$s being written and the individual stealing cash. % should be separate from - The segregation of these duties ma$es it difficult to cover up defalcation of the company9s records.

AACSB: Communications AICPA BB: Critical 10in+ing AICPA FN: .is+ Analysis Bloom's: A//lication ifficulty: Moderate "earning #b$ecti%e: 2

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Chapter 11 - Auditing the Purchasing Process

)". The $ey inherent ris$ factors an auditor must consider when auditing the purchasing process are industry factors. 1hich two are most important and why2 The ade&uacy of the supply of raw materials is important to consider. 3f there is a shortage of $ey materials( it could significantly affect the financial performance of the organization. The stability of the price of raw materials is also important. An increase in the price of materials increases the cost to ma$e the product. 3f the company cannot raise their prices to match the increase( the company9s earnings will suffer.

AACSB: Communications AICPA BB: Industry AICPA FN: .is+ Analysis Bloom's: A//lication ifficulty: !asy "earning #b$ecti%e: 5

)%. :atch the test of controls described below to the appropriate assertion it is used to test> Assertions a= 4ccurrence b= Completeness c= Authorization d= Accuracy e= Cutoff f= Classification Test of Controls 1= Compare the dates on the receiving reports with the dates of the relevant vouchers = /eview monthly ban$ reconciliations != /eview client9s competitive bidding procedures "= Test a sample of vouchers for the presence of authorized purchase order and receiving report %= /eview the cash disbursements #ournal for reasonableness of account distribution '= Trace a sample of receiving reports to their respective vendor invoices and vouchers 1= eD = dD != cD "= aD %= fD '= b

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: A//lication ifficulty: !asy "earning #b$ecti%e: *

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Chapter 11 - Auditing the Purchasing Process

)'. 3dentify the types of substantive procedures used by the auditor to test accounts payable and accrued e-penses. Provide an e-ample of how the auditor may use each substantive procedure. 3dentify if any of the substantive procedures can be used as a test of controls or a dual-purpose test. 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 < = tests of details of classes of transactions( account balances( and disclosures. 1. 7ubstantive analytical procedures are used to e-amine plausible relationships among accounts payable and related accounts. 5-ample> The auditor might compare payables turnover and days outstanding in accounts payable to previous years9 and industry data or purchase returns or amounts owed to individual vendors in the current year9s accounts payable listing to amounts owed in prior years. . Tests of details focus on transactions( account balances( or disclosures. 3n the purchasing cycle( tests of details of transactions <also called substantive tests of transactions= focus mainly on the purchases and cash disbursement transactions. 5-amples> To test the occurrence assertion about a purchase( the auditor can test a sample of vouchers for the presence of an authorized purchase order and receiving report. To test the completeness assertion( the auditor can trace a sample of vouchers to the purchases #ournal. Tests of details of account balances concentrate on the detailed amounts or estimates that ma$e up the ending balance for accounts payable and accrued e-penses. 5-ample> To test the e-istence assertion about purchases( the auditor can vouch selected amounts from the accounts payable listing and schedules for accruals to voucher pac$ets or other supporting documentation. Tests of details of disclosures are concerned with the presentation and disclosures related to accounts payable and accrued e-penses. 5-ample> To test the completeness assertions about accounts payable and accrued e-penses( the auditor can complete a financial reporting chec$list to ensure that all financial statement disclosures related to accounts payable and accrued e-penses have been appropriately disclosed. Tests of details of transactions <substantive tests of transactions= can be used as a test of controls or a dual-purpose test. Aowever( 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.

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Chapter 11 - Auditing the Purchasing Process

AACSB: Communications AICPA BB: Industry AICPA FN: Measurement Bloom's: A//lication ifficulty: !asy "earning #b$ecti%e: &4

)). 3dentify 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 re&uisitions for proper authorization. = Test transactions around year-end to determine if they are recorded in the proper period. != /eview results of confirmation of selected accounts payable. "= Compare payables turnover to previous years9 data. %= 4btain selected vendors9 statements and reconcile to vendor accounts. '= Compare purchase returns and allowances as a percentage of revenue or cost of sales to industry data. 1= Tests of details of transactions = Tests of details of transactions != Tests of details of account balances "= 7ubstantive analytical procedures %= Tests of details of account balances '= 7ubstantive analytical procedures

AACSB: Communications AICPA BB: Critical 10in+ing AICPA FN: Measurement Bloom's: Com/re0ension ifficulty: 3ard "earning #b$ecti%e: && "earning #b$ecti%e: &, "earning #b$ecti%e: &-

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Chapter 11 - Auditing the Purchasing Process

)*. There are several important disclosure items to consider when auditing the purchasing process. 0iscuss what they are and why they are important. 1. 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= . 7hort and long-term payables. For purposes of a classified balance sheet. !. @ong-term purchase contracts( including any unusual purchase commitments. This re&uirement is to inform the users of what the agreement entails and can help them ma$e decisions about the company. ". /elated-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. %. 0ependence on a single vendor or a small number of vendors. This is to inform the users how much e-posure the company would have if a significant vendor were to become unavailable for some reason. '. Costs by reportable segment of the business. This would allow the users to evaluate separate segments of the entity individually.

AACSB: Communications AICPA BB: Industry AICPA FN: .e/orting Bloom's: Com/re0ension ifficulty: !asy "earning #b$ecti%e: &-

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Chapter 11 - Auditing the Purchasing Process

),. 1hich type of confirmation is used more fre&uently by auditors - accounts receivable confirmations or accounts payable confirmations2 1hy2 Auditors typically use confirmations for accounts receivable rather than accounts payable because of the reliability of other evidence. To test accounts payable( the auditor can e-amine vendor invoices and vendor statements. These documents originate from sources outside of the entity being audited and are therefore considered very reliable. 0ocumentation for accounts receivable is normally generated within the entity( so confirmations provide a more reliable way of testing the account.

AACSB: Communications AICPA BB: Industry AICPA FN: ecision Ma+ing Bloom's: Com/re0ension ifficulty: !asy "earning #b$ecti%e: &'

*.. The auditor can often obtain sufficient appropriate evidence in the audit of a ta- provision without the use of a specialist. Aowever( several situations may indicate a need for the auditor to involve a ta- specialist. 3dentify three of these situations. Answers should include three o' the 'ollowing( 1. :ultiple locations with foreign operations and related foreign ta- issues . +usiness combinations !. 7ubsidiary dispositions ". :aterial uncertain ta- positions <F3;"*= %. 7ignificant changes in ownership '. 7ignificant changes in business operations ). 7ignificant changes in ta- status

AACSB: Communications AICPA BB: Critical 10in+ing AICPA FN: Measurement Bloom's: Com/re0ension ifficulty: Moderate "earning #b$ecti%e: &2

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