Chap 008

Chapter 08
Acquisition and Expenditure Cycle
True / False Questions

1. The basic acquisition and expenditure activities are (1) purchasing
goods and services, (2) receiving the goods or services, (3) recording
the asset or expense and related liability, and (4) paying the vendors.
True
False
2. Purchases are ordered by a purchasing department that seeks the best

prices and quality.
True
False
3. Checks are signed by the accounts payable department after

assembling the invoice, purchase order, and receiving report.
True
False
4. Purchase orders are "open" from the time they are issued until the
goods are received.
True
False
5. Normally, liabilities should be recorded on the date the goods are

received and accepted.
True
False
6. Auditors' "search for unrecorded liabilities" should emphasize the large

balances, especially for regular vendors.
True
False
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7. Auditors can inspect the "unmatched invoice file" and compare it to the
"unmatched receiving report" file to determine whether liabilities are
unrecorded.
True
False
8. Proper separation of duties involves authorization of purchases by

persons who do not have custody, recording, or reconciliation duties.
True
False
9. If personnel in the organization are not performing their control

activities very well, auditors will need to design substantive procedures
to try to detect whether control failures have produced misleading
financial statement account balances.
True
False
10 If the risk of material misstatement is assessed as very low, it is likely

. that additional substantive procedures will be required.
True
False
11 The emphasis is on the existence assertion because financial statement

. users tend to be more concerned about understated expenses and
liabilities than overstated.
True
False
12 Evidence is much easier to obtain to verify the completeness assertion

. for liabilities than the existence assertion for assets.
True
False
13 The search for unrecorded liabilities should normally be performed up

. to the last day of fieldwork in the period following the audit client's
balance sheet date.
True
False
14 The principal goal of the physical inspection of property, plant, and

. equipment is to determine actual existence and condition of property.
True
False
15 All pay base data (hours, job number, absences, etc.) should be
. approved by an employee's immediate supervisor.
True
False
16 The main feature of custody in the payroll cycle is the possession of the
. payroll checks.
True
False
17 Persons in charge of authorization and custody payroll functions should

. not prepare the payroll.
True
False
18 The payroll bank account cannot be reconciled like the other bank
. accounts.
True
False
19 Record keeping is performed by payroll and cost accounting personnel

. who do not make authorizations or distribute pay.
True
False
Multiple Choice Questions
20 When confirming accounts payable, emphasis should be put on what

. kind of accounts?
A.
Accounts with small or zero balances.
B. All accounts should be equally emphasized.
C.
Accounts with large balances.
D. Accounts listed in the accounts payable subsidiary.
21 "Recorded vouchers (accounts payable entries) in the voucher register
. (e.g., purchases journal) supported by completed voucher
documentation" is a specific example of which management assertion?
A.
B.
C.
D.
Classification.
Occurrence.
Completeness.
Cutoff.
22 "All purchase orders are supported by requisitions from proper persons"

. is a specific example of which management assertion?
A.
B.
C.
D.
Occurrence.
Completeness.
Cutoff.
Classification.
23 Cash disbursements are authorized by

.
A.
B.
C.
D.
Purchase orders.
Invoices.
Receiving reports.
A complete voucher package.
24 For the copy of the purchase order that goes to the receiving
. department, it is best to
A. Leave off the description of the goods ordered.

B. Leave off the quantity of the goods ordered.
C.
Leave off the name of the vendor.
D. Have the receiving department forward all copies of the purchase
order to accounts payable.
25 Vouchers should be stamped PAID to
.
A.
Prevent duplicate payment.
B.
Generate a new purchase order.
C. Indicate posting in the voucher register.
D. Facilitate preparation of the bank reconciliation.
26 A voucher package is used to
.
A.
Document receipt of inventory.
B.
Document completion of services.
C.
Document a purchase contract.
D. Provide a source document for recording the purchase of a good or
service.
27 An auditor traced a sample of purchase orders and the related receiving
. reports to the purchases journal. The purpose of this substantive audit
procedure most likely was to
A.
B.
C.
D.
Identify usually large purchases that should be investigated further.

Verify that cash disbursements were for goods actually received.
Determine that purchases were properly recorded.
Test whether payments were for goods actually ordered.
28 The usual source for journal entries posted to the general ledger to
. record the purchase of inventory is
A. Sales invoices updated with cost data from the inventory records
department.
B. Purchase invoices updated with cost data from the inventory records
department.
C. Receiving reports updated with cost data from the accounts payable
department.
D. Vouchers payable journal from the accounts payable department.
29 Which of the following would detect the understatement of a purchase
. discount?
A. Verify the arithmetic accuracy of the purchases journal.

B. Compare purchase disbursement records and checks with invoice
terms.
C. Compare approved purchase orders to receiving reports.
D. Verify the receipt of items ordered and invoiced.
30 Which of the following situations indicates a potential material
. weakness in internal control over acquisition and expenditure?
A. Purchase orders are not prepared for services acquired directly under
authorization of department heads.
B. The same person authorizes voucher packages and signs checks.
C. Unacceptable goods are not scheduled on receiving reports.
D. The same person signs checks and stamps vouchers PAID.
31 Which of the following client control activities is not usually performed
. in the vouchers payable (accounts payable) department?
A. Determining the mathematical accuracy of the vendors' invoices.

B. Writing checks for the treasurer's signature to take advantage of
purchase discounts.
C. Controlling the mailing of the check and remittance advice.
D. Checking the prices on the vendor's invoice.
32 When auditing merchandise inventory at year-end, the auditor performs

. a purchase cutoff test to obtain evidence that
A. All goods purchased before year-end are received before the physical
inventory count.
B. No goods held on consignment for customers are included in the
inventory balance.
C. No goods observed during the physical count are pledged or sold.
D. All goods owned at year-end are included in the inventory balance.
33 Auditors may conclude that depreciation charges are too small by
. noting
A. Insured values much larger than book values.

B. Large numbers of fully depreciated assets.
C. Frequent trade-ins of relatively new assets.
D. Large and frequent losses on assets retired.
34 The auditor decided to test accounts payable by sending open-ended
. (blank) confirmations to selected vendors. The auditor's best approach
in selecting the vendor accounts to confirm is to
A. Select vendor accounts with large balances.

B. Select vendor accounts at random in order to apply a statistical
sampling procedure.
C. Select vendor accounts based on the number of purchases from
vendors during the year.
D. Select vendor accounts that are past due.
35 What evidence is appropriate to determine whether recorded purchase
. transactions are valid and the vendors charged the correct prices?
A. Purchase requisitions and accounts payable entries.

B. Receiving reports and purchase orders.
C. Purchase requisitions and purchases orders.
D.
Purchase orders and bid quotes.
36 Purchase cutoff procedures should be designed to produce evidence of

. whether merchandise is included in the inventory of the client company
if the company
A.
Has paid for the merchandise.
B. Has physical possession of the merchandise.
C.
Holds legal title to the merchandise.
D. Holds the shipping documents for the merchandise issued in the
company's name.
37 Which of the following accounts would most likely be reviewed by the
. auditor to gain reasonable assurance that additions to the equipment
account are not understated?
A.
B.
C.
D.
Depreciation expense.
Gain on disposal of equipment.
Accounts payable.
Repairs and maintenance expense.
38 Which of the following would not be included in the supporting

. documents for a voucher?
A.
B.
C.
D.
Purchase order.
Vendor invoice.
Receiving report.
Blank check.
39 A voucher would typically contain

.
A. A purchase requisition, purchase order, vendor invoice, receiving
report, and check copy.
B. A purchase requisition, purchase order, sales invoice, receiving
C. A purchase requisition, sales order, sales invoice, receiving report,
and check copy.
D. A purchase requisition, sales order, vendor invoice, receiving report,
and check copy.
40 When using confirmations to provide evidence about the completeness

. assertion for accounts payable, the appropriate population most likely
would be
A. Vendors with whom the entity has previously done business.

B. Amounts recorded in the accounts payable subsidiary ledger.
C. Payees of checks drawn in the month after the year-end.
D. Invoices filed in the entity's open invoice file.
41 Which of the following procedures would an auditor most likely perform
. in searching for unrecorded payables?
A. Reconcile receiving reports with related cash payments made just

prior to year-end.
B. Contrast the ratio of accounts payable to purchases with the prior
year's ratio.
C. Vouch a sample of creditor balances to supporting invoices, receiving
reports, and purchase orders.
D. Compare cash payments occurring after the balance sheet date with
the accounts payable trial balance.
42 An entity's internal control structure requires for every check request
. that there be an approved voucher, supported by a prenumbered
purchase order and a prenumbered receiving report. To determine
whether checks are being issued for unauthorized expenditures, an
auditor most likely would select items for testing from the population of
all
A.
B.
C.
D.
Purchase orders.
Canceled checks.
Receiving reports.
Approved vouchers.
43 An auditor wishes to perform tests of controls on a client's purchasing

. procedures. If the control activities leave no audit trail of documentary
evidence, the auditor most likely will test the procedures by
A.
B.
C.
D.
Confirmation and observation.

Observation and inquiry.
Analytical procedures and confirmation.
Inquiry and analytical procedures.
44 Which of the following audit procedures is best for identifying

. unrecorded accounts payable?
A. Reviewing cash disbursements recorded subsequent to the balance

sheet date to determine whether the related payables apply to the
prior period.
B. Investigating payables recorded just prior to and just subsequent to
the balance sheet date to determine whether they are supported by
receiving reports.
C. Examining unusual relationships between monthly accounts payable
balances and recorded cash payments.
D. Reconciling vendors' statements to the file of receiving reports to
identify items received just prior to the balance sheet date.
45 To provide assurance that each voucher is submitted and paid only
. once, an auditor most likely would examine a sample of paid vouchers
and determine whether each voucher is
A.
B.
C.
D.
Supported by a vendor's invoice.

Stamped "paid" by the check signer.
Prenumbered and accounted for.
Approved for authorized purchases.
46 Cutoff tests designed to detect purchases made before the end of the
. year that have been recorded in the subsequent year most likely would
provide assurance about management's assertion of
A.
B.
C.
D.
Valuation or allocation.
Existence or occurrence.
Completeness.
Rights and obligations.
47 When auditing PP&E, the auditor's approach is generally to

.
A. Examine evidence supporting the amounts in the ending balance.
B. Examine evidence supporting additions during the year.
C. Follow a reliance strategy, testing internal controls and analytical
procedures.
D. Concentrate on finding unrecorded assets.
48 Which of the following procedures would an auditor most likely perform
. in searching for unrecorded liabilities?
A. Trace a sample of accounts payable entries recorded just before yearend to the unmatched receiving report file.
B. Compare a sample of purchase orders issued just after year-end with
the year-end accounts payable trial balance.
C. Vouch a sample of cash disbursements recorded just after year-end
to receiving reports and vendor invoices.
D. Scan the cash disbursements entries recorded just before year-end
for indications of unusual transactions.
49 In performing a search for unrecorded retirements of fixed assets, an

. auditor most likely would
A. Inspect the property ledger and the insurance and tax records, and
then tour the client's facilities.
B. Tour the client's facilities, and then inspect the property ledger, and
the insurance and tax records.
C. Analyze the repair and maintenance account, and then tour the
client's facilities.
D. Tour the client's facilities, and then analyze the repair and
maintenance account.
50 A weakness in internal control over recording retirements of equipment
. may cause an auditor to
A. Inspect certain items of equipment in the plant and trace those items
to the accounting records.
B. Review the subsidiary ledger to ascertain whether depreciation was
taken on each item of equipment during the year.
C. Trace additions to the "other assets" account to search for equipment
that is still on hand but no longer being used.
D. Select certain items of equipment from the accounting records and
locate them in the plant.
51 Failure to record a liability generally results in
.
A.
B.
C.
D.
An understatement of profit.
An understatement of current ratio.
An overstatement of profit.
An overstatement of assets.
52 Improperly capitalizing an expense item results in.

.
A. Understatement of profit in the current year and overstatement in
future years.
B. Understatement of profit in the current year and in future years.
C. Overstatement of profit in the current year and understatement in
future years.
D. Overstatement of profit in the current year and in future years.
53 A liability for a long-term purchase contract should generally be
. recognized when
A.
B.
C.
D.
The contract is signed.

The goods are shipped.
The goods are received.
The goods are sold to match the cost.
54 Which of the following expense accounts would not normally be tested

. by listing all debits and examining any significant items?
A.
B.
C.
D.
Legal expense.
Miscellaneous expense.
Repairs and Maintenance.
Payroll expense.
55 Which of the following would be an indicator of potential fraud?

.
A.
B.
C.
D.
Photocopies of invoices in the voucher file.

Vendor invoices in numerical order.
Vendors with only post office box addresses.
All of the above indicate potential fraud.
56 Which of the following fraud detection steps could not be performed by

. CAATs?
A.
Look for photocopies in invoice files.
B. Look for vendor invoices in numerical order.
C. Look for vendor invoices slightly below the approval threshold.
D.
Look for duplicate vendor numbers.
57 Tracing a sample of time clock cards to payroll registers (journals) is a
. procedure designed to obtain evidence about the transaction
assertion(s) of
A.
B.
C.
D.
Occurrence only.
Occurrence and accuracy only.
Completeness only.
Accuracy only.
58 The permanent reference files (master files) in a personnel and payroll

. database ordinarily do not include which of the following?
A.
B.
C.
D.
Deduction table.
Payroll master.
Compensation table.
Employee earning record.
59 Which of the following situations represents an internal control

. weakness in the payroll department?
A.
B.
C.
D.
Payroll department personnel are rotated in their duties.

Paychecks are distributed by the employees' immediate supervisor.
Payroll records are reconciled with quarterly tax reports.
The timekeeping function is independent of the payroll department.
60 Which of the following personnel department procedures reduces the

. risk of payroll fraud and represents an appropriate responsibility for the
department?
A.
Distributing paychecks.
B.
Authorizing overtime hours.
C. Authorizing the addition or deletion of employees from the payroll.
D. Collecting and retaining unclaimed paychecks.
61 To test the transaction assertion of occurrence in the area of payroll, the
. auditor most likely would
A. Select a sample of personnel files and trace the pay rate to union
contracts or other rate rights and obligations.
B. Select a sample of personnel files and trace the pay rate to payroll
department files used in payroll preparation.
C. Select a sample of payroll register entries and recalculate gross pay,
deductions, and net pay.
D. Select a sample of payroll register entries and vouch hours worked to
clock time cards.
62 Small Corporation uses a Wages Clearing Account for its payroll
. disbursements. At the end of February, a reasonably large debit
balance remained in this account. The most likely reason for this is that
A. More labor cost had been assigned to the expense accounts than had
been paid.
B. Some labor cost had not been properly classified in the expense
accounts.
C. Some employees had not yet cashed their checks.
D. Not enough cash had been transferred to the bank account.
63 Which of the following is not a major control risk in the payroll cycle?
.
A.
B.
C.
D.
Paying fictitious "employees."

Overpaying for time or production.
Losing employees to competitors.
Incorrect accounting for costs or expenses.
64 The sampling unit in a test of controls pertaining to the existence or

. occurrence of payroll transactions ordinarily is a(an)
A.
B.
C.
D.
Clock card or time ticket.

Employee Form W-2.
Employee personnel record.
Payroll register (journal) entry.
65 The purpose of segregating the duties of hiring personnel and

. distributing payroll checks is to separate the
A.
B.
C.
D.
Human resources function from the controllership function.

Administrative controls from the internal accounting controls.
Authorization of transactions from the custody of related assets.
Operational responsibility from the record keeping responsibility.
66 An auditor most likely would assess control risk at the maximum if the
. payroll department supervisor is responsible for
A. Examining authorization forms for new employees.

B. Comparing payroll registers with original batch transmittal data.
C. Distribute payroll checks to all employees.
D. Hiring all subordinate payroll department employees.
67 An auditor most likely would extend substantive tests of payroll when
.
A.
B.
C.
D.
Payroll is extensively audited by the state government.

Payroll expense is substantially higher than in the prior year.
Overpayments are discovered in performing tests of controls.
Employees complain to management about too much overtime.
68 An auditor most likely would perform substantive procedures on payroll

. transactions and balances when
A. Cutoff tests indicate a substantial amount of accrued payroll

expense.
B. The assessed level of control risk relative to payroll transactions is
low.
C. Analytical procedures indicate unusual fluctuations in recurring
payroll entries.
D. Accrued payroll expense consists primarily of unpaid commissions.
69 An auditor vouched data for a sample of employees in a payroll register
. to approved clock card data to provide assurance that
A. Payments to employees are computed at authorized rates.

B. Employees work the number of hours for which they are paid.
C. Separation of duties exists between the preparation and distribution
of the payroll.
D. Internal controls relating to unclaimed payroll checks are operating
effectively.
70 Substantive tests of account balances in the payroll cycle are likely to
. include the following procedures except
A.
Analytical review procedures.
B.
Recalculation of accruals.
C. Comparison of accruals to subsequent payments.
D. Detail vouching of payroll expense entries.
71 Which of the following accounts does not appear in the acquisition and
. expenditure cycle?
A.
B.
C.
D.
Cash.
Purchases Returns.
Sales Returns.
Prepaid Insurance.
72 For which of the following accounts would the matching concept be the
. most appropriate?
A.
B.
C.
D.
Cost of Goods Sold.

Research and Development.
Depreciation Expense.
Sales.
73 Which of the following would not overstate current-period net income?

.
A. Capitalizing an expenditure that should be expensed.
B. Failing to record a liability for an expenditure.
C. Failing to record a check paying an item in vouchers payable.
D. All of the above would overstate net income.
74 A client's purchasing system ends with the recording of a liability and
. its eventual payment. Which of the following best describes auditors'
primary concern with respect to liabilities resulting from the purchasing
system?
A. Accounts payable are not materially understated.

B. Authority to incur liabilities is restricted to one designated person.
C. Acquisition of materials is not made from one vendor or one group of
vendors.
D. Commitments for all purchases are made only after established
competitive bidding procedures are followed.
75 Which of the following is an internal control activity that could prevent a

. paid disbursement voucher from being presented for payment a second
time?
A. Vouchers should be prepared by individuals who are responsible for

signing disbursement checks.
B. Disbursement 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.
D. The official who signs the check should compare the check with the
voucher and should stamp PAID on the voucher documents.
76 R. Budd, the purchasing agent of Lake Hardware Wholesalers, has a
. relative who owns a retail hardware store. Budd arranged for hardware
to be delivered by manufacturers to the retail store on a cash-ondelivery (COD) basis, thereby enabling his relative to buy at Lake's
wholesale prices. Budd was probably able to accomplish this because of
Lake's poor internal control over
A.
B.
C.
D.
Purchase requisitions.
Cash receipts.
Perpetual inventory records.
Purchase orders.
77 Which of the following is the best audit procedure for determining the
. existence of unrecorded liabilities?
A. Examine confirmation requests returned by creditors whose accounts

are on a subsidiary trial balance of accounts payable.
B. Examine a sample of cash disbursements in the period subsequent to
year-end.
C. Examine a sample of invoices a few days prior to and subsequent to
year-end to ascertain whether they have been properly recorded.
D. Examine unusual relationships between monthly accounts payable
and recorded purchases.
78 Which of the following procedures is least likely to be performed before

. the balance-sheet date?
A.
Observation of inventory.
B. Review of internal control over cash disbursements.
C.
Search for unrecorded liabilities.
D.
Confirmation of receivables.
79 To determine whether accounts payable are complete, auditors perform
. a test to verify that all merchandise received has been recorded. The
population for this test consists of all
A.
B.
C.
D.
Vendors' invoices.
Purchase orders.
Receiving reports.
Canceled checks.
80 When verifying debits to the perpetual inventory records of a

. nonmanufacturing company, auditors would be most interested in
examining a sample of purchase
A.
B.
C.
D.
Approvals.
Requisitions.
Invoices.
Orders.
81 A furniture company ordered 84 tables from a supplier. The supplier

. accidentally sent only 48 tables, but the receiving department at the
furniture company accepted the tables. The invoice was eventually
received but was for the 84 tables ordered. The furniture company paid
the entire amount. Which of the following controls would have been
least likely to have prevented this erroneous payment?
A. The copy of the purchase order sent to the furniture company's

receiving department should not have shown an expected quantity.
B. Personnel in the furniture company's accounts payable department
should compare the receiving report to the purchase invoice before
creation of the voucher.
C. Personnel in the furniture company's cash disbursements department
should compare the check that is prepared to all of the backup
documentation.
D. Personnel in the furniture company's purchasing department should
compare the purchase requisition to the purchase order.
82 L. Curtis, a maintenance supervisor, submitted maintenance invoices
. from a phony repair company and received the checks at a post office
box. This should have been prevented by
A. Comparison of the company name to the approved vendor list by the

check signer.
B. Recognition of the excess maintenance costs by Curtis's supervisor.
C. Refusal by the purchasing department to approve the vendor.
D.
All of the above.
83 An audit team would most likely examine the detail support for which of
. the following charges?
A.
B.
C.
D.
Payroll expense.
Cost of goods sold.
Supplies expense.
Legal expense.
84 Which of the following accounts would most likely be audited in

. connection with a related balance sheet account?
A.
B.
C.
D.
Property Tax Expense.

Payroll Expense.
Legal Expense.
85 When auditing liabilities account balances, auditors are most concerned

. with management' assertion about
A.
B.
C.
D.
Existence.
Completeness.
Valuation and allocation.
86 In a test of controls, auditors may trace receiving reports to vouchers

. recorded in the voucher register. This is a test for
A.
B.
C.
D.
Occurrence.
Completeness.
Classification.
Cutoff.
87 An audit team most likely would assess control risk at the maximum if
. the payroll department supervisor is responsible for
A.
B.
C.
D.
Examining authorization forms for new employees.

Comparing payroll registers with original batch transmittal data.
Authorizing payroll rate changes for all employees.
Hiring all subordinate payroll department employees.
88 Which of the following departments most likely would approve changes

. in pay rates and deductions from employee salaries?
A.
B.
C.
D.
Personnel.
Treasurer.
Controller.
Payroll.
89 Matthew Corp. has changed from a system of recording time worked on

. clock cards to a computerized payroll system in which employees
record time in and out with magnetic cards. The computerized system
automatically updates all payroll records. Because of this change,
A. A generalized computer audit plan must be used.

B.
Part of the audit trail is altered.
C. The potential for payroll-related fraud is diminished.
D. Transactions must be processed in batches.
90 Effective control over the cash payroll function would mandate which of
. the following?
A. The payroll clerk should fill the envelopes with cash and include a
computation of the net wages.
B. The paymaster should be retain unclaimed payroll envelopes.
C. Each employee should be asked to sign a receipt for wages received.
D. A separate checking account for payroll should be maintained.
91 A large retail enterprise has established a policy that requires the

. paymaster to deliver all unclaimed payroll checks to the internal audit
department at the end of each payroll distribution day. This policy was
most likely adopted to
A. Ensure that employees who were absent on a payroll distribution day

are not paid for that day.
B. Prevent the paymaster from cashing checks that are unclaimed for
several weeks.
C. Prevent a bona fide employee's check from being claimed by another
employee.
D. Detect any fictitious employee who may have been placed on the
payroll.
92 Auditors ordinarily ascertain whether payroll checks are properly
. endorsed during the audit of
A.
B.
C.
D.
Clock cards.
The voucher system.
Cash in bank.
Accrued payroll.
93 In determining the effectiveness of an entity's policies and procedures

. relating to the occurrence assertion for payroll transactions, auditors
most likely would inquire about and
A. Observe the separation of duties concerning personnel

responsibilities and payroll disbursement.
B. Inspect evidence of accounting for prenumbered payroll checks.
C. Recompute the payroll deductions for employee fringe benefits.
D. Verify the preparation of the monthly payroll account bank
reconciliation.
94 Which of the following activities most likely would be considered a

. weakness in an entity's internal control over payroll?
A. A voucher for the amount of the payroll is prepared in the general

accounting department based on the payroll department's payroll
summary.
B. Payroll checks are prepared by the accounts payable department and
signed by the treasurer.
C. The employee who distributes payroll checks returns unclaimed
payroll checks to the payroll department.
D. The personnel department sends employees' termination notices to
the payroll department.
95 The transactions typically classified in the acquisition and expenditure
. cycle flow do not include
A. Requesting goods, services, or assets.

B.
Placing the sales order.
C. Receiving, inspecting, and accepting the assets.
D.
Accounting for accounts payable.
96 The review phase of the transaction flow in the acquisition and
. expenditure cycle does not include
A.
B.
C.
D.
Interviews.
Observations.
Collecting sample documents.
Substantive procedures.
97 The internal control questionnaire for receipt of purchases

. completeness objective would not include which of the following
questions?
A. Are the purchase order forms prenumbered and the numerical

sequence checked for missing documents?
B. Are receiving report forms prenumbered and the numerical sequence
checked for missing documents?
C. Are competitive bids received and reviewed for certain items?
D. Is the accounts payable department notified of goods returned to
vendors?
98 A voucher typically does not have attached to it a copy of which of the
. following documents?
A.
B.
C.
D.
Requisition.
Purchase order.
Vendor's invoice.
Check register.
99 Computer controls that might be found in an advanced on-line

. acquisition and expenditure system would not include
A. All vendor invoices are prenumbered and the numbers accounted for.
B. Each terminal performs only designated functions.
C. An identification number and password are required to enter the
nonautomatic purchase orders.
D. The check signature is printed using a signature plate that is
installed on the computer printer only when checks are printed.
100 Specific balance assertions typical of accounts payable would not
.
include
A. Recorded liabilities are obligations of the entity.

B. Estimated liabilities are properly valued.
C. Accounts payable are not pledged as collateral.
D. Payables are recorded in the proper period.
101 The inherent risk that accounts payable may be omitted or otherwise
.
understated typically is
A.
B.
C.
D.
Low.
High.
Moderate.
Indeterminate.
102 An audit plan for accounts payable would not include which of the
.
following procedures?
A. Obtaining a trial balance of recorded accounts payable.

B. Sending confirmation to accounts with zero balances.
C. Reviewing cash receipts for the period after year-end.
D. Obtaining written client representations about related-party
payables and pledges of assets as collateral for liabilities.
103 Which of the following would not typically be a specific relevant
.
assertion about fixed asset accounts?
A. Fixed assets in the accounts exist and are in productive use.

B. Net carrying book values in the accounts are reflected at current
market values.
C. Depreciation has been calculated properly using accepted methods
and reasonable estimates of useful life and other factors.
D. Fixed assets are properly classified in the balance sheet under
appropriate descriptive captions.
104 The typical functions of the personnel and payroll cycle would not
.
include
A.
B.
C.
D.
Labor relations.
Report of attendance and work performed.
Allocation to cost of goods sold.
Payroll accounting.
105 An internal control questionnaire for payroll processing occurrence

.
assertion would not include which of the following questions?
A. Are names of terminated employees reported in writing to the

payroll department?
B. Is the payroll compared to personnel files periodically?
C. Are checks distributed by the employee's immediate supervisor?
D. Are all wage rates determined by contract or approved by a
personnel officer?
106 Which of the following functional responsibilities would not typically
.
relate to salaried employees?
A.
B.
C.
D.
Collecting timekeeping data.

Supervision.
Personnel or labor relations.
Payroll distribution.
Fill in the Blank Questions

107 The _____________________________________ inspects the goods received
.
for _____________________________ and _____________________________ and
then puts them in the hands of other responsible persons.
________________________________________
108 When the _________________________________,
.
______________________________ and _________________________ are in
hand, the accountants can record the accounts payable.
________________________________________
109 Auditors can compare the ________________________________ file to the

.
_________________________________ to determine whether the company
has material unrecorded liabilities on the financial statement date.
________________________________________
110 ___________________________________ and
.
___________________________________ can cause "unmatched" invoices
and related "unmatched" receiving reports to be unnoticed.
________________________________________
111 A _____________________________ is a cover sheet containing all
.
supporting documentation for an acquisition.
________________________________________
112 A list of all purchases might exist only in a
.
____________________________________ file rather than a
_____________________________________.
________________________________________
113 Assessment of _____________________________ of
.
__________________________________ is important because it governs the
nature, timing, and extent of substantive procedures that will be
applied in the audit of account balances in the acquisition cycle.
________________________________________
114 Vendor invoices should be compared to _______________________________
.
and ________________________________ to determine that the vendor is
charging the approved price and for quantity received.
________________________________________
115 ____________________________________ consist of (1) identification of data
.
population for audit and (2) an expression of the action to be taken to
produce relevant audit evidence.
________________________________________
116 When considering assertions and obtaining evidence about accounts

.
payable, auditors must put emphasis on the
_____________________________ assertion.
________________________________________
117 The ________________________________________ is a set of procedures
.
designed to yield audit evidence of liabilities that were not recorded in
the reporting period.
________________________________________
118 The five functional responsibilities of a payroll cycle are
.
____________________________, ____________________________,
____________________________, and ________________________________.
________________________________________
119 The __________________________________ has transaction initiation
.
authority to add new employees and delete terminated employees.
________________________________________
120 A personnel file should establish the reality of a person's
.
_______________________ and ____________________________.
________________________________________
121 The ____________________________________ is the primary original record
.
for payroll accounting.
________________________________________
Short Answer Questions
122 The internal control questionnaire for purchases and accounts payable
.
includes the following questions. Next to each of the questions,
indicate the letter of the related transaction assertion.
A. Occurrence
B. Completeness
C. Accuracy
D. Classification
E. Cutoff
Essay Questions
123 Explain why auditors must put more emphasis on the completeness
.
and obligation assertion when auditing payables and contrast this with
the audit of asset accounts.
124 F. Jack, CPA, is the auditor of Jill Corporation. Jack plans to follow last
.
year's work papers in selecting accounts payable to be confirmed.
Confirmations were mailed to 50 of Jill's 200 suppliers. The sample was
designed to select accounts with the largest balances. Jack and Jill
spent a lot of time reconciling minor differences between the
confirmation amounts and the accounts payable trial balance.
Required:
Do you believe Jack should use the same sample design for accounts
payable confirmations this year? If not, what suggestions can you give
to improve the design?
125 After checks are signed for vendor invoices, why should vouchers be
.
marked PAID or otherwise mutilated?
126 This question requires knowledge of specific account balance

.
assertions, general audit procedures, and trade accounts payable.
You are assigned to audit the accounts payable of Green Corporation
whose business is wholesale and retail trade. The company purchases
products from 1,002,000 manufacturers ("vendors") and sells the
products to its retail and wholesale customers. The general ledger
shows the Accounts Payable control balance as of the balance-sheet
date in the amount of $42 million (which is 70 percent of current
liabilities, 50 percent of total liabilities, and 35 percent of total
liabilities and owners' equity). Green's management accountants post
the summary entries from the purchases journal and from the cash
disbursements journal each month to the Accounts Payable control
account. The accounts payable manager gave you a detailed trial
balance that lists all recorded unpaid invoices (recording date, vendor
name, vendor invoice number, invoice date, and amount) subtotaled
by vendor.
Other members of the audit team have already decided to assess
control risk at the maximum for the accounts payable work. The
engagement manager gave you last year's audit working papers but
said the audit plan was missing (!). Thus, the first part of your
assignment is to write the audit plan for audit of the Green Corporation
trade accounts payable.
Required:
For each of the balance assertions (existence, completeness, and
valuation or and allocation), write two or more specific audit
procedures designed to produce evidence related to the accounts
payable balance of $42 million.
(Hints: [1] For each of the three balance assertions, think about a
specific assertion before you write a procedure to gather evidence. [2]
Write specific procedures as adaptations of the general audit
procedures: recalculation, observation, confirmation, document
examination, inquiry, scanning, analytical procedures. [3] Most
procedures are two-part statements: "Select a sample of... [identify the
population]...and "do something"... [specify an action].)
127 When performing procedures in a search of unrecorded liabilities,

.
auditors can utilize various sources of evidence/information (e.g.,
documents, files, management and clerical personnel).
Required:
List at least five, but not more than seven, sources of
evidence/information for the search for unrecorded liabilities.
(Do not write procedures. Do not take time to write about particular
evidence that can be obtained or reasons for using the sources.)
128 The test of controls for purchases, cash disbursements, and accounts
.
payable include the following audit procedures. Next to each of the
procedures, indicate the related transaction assertion.
129 The test of controls for payroll includes the following audit procedures.
.
Next to each of the procedures, indicate the related management
assertion about transactions.
Chapter 08 Acquisition and Expenditure Cycle Answer Key
True / False Questions

1.
The basic acquisition and expenditure activities are (1) purchasing

goods and services, (2) receiving the goods or services, (3) recording
the asset or expense and related liability, and (4) paying the
vendors.
TRUE
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-02 Describe the acquisition and expenditure cycle; including typical source documents
and controls.
Topic: Acquisition and Expenditure Cycle: Typical Activities
2.
Purchases are ordered by a purchasing department that seeks the

best prices and quality.
TRUE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
and controls.
3.
Checks are signed by the accounts payable department after

assembling the invoice, purchase order, and receiving report.
FALSE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
and controls.
4.
Purchase orders are "open" from the time they are issued until the
goods are received.
TRUE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
and controls.
5.
Normally, liabilities should be recorded on the date the goods are

received and accepted.
TRUE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
and controls.
6.
Auditors' "search for unrecorded liabilities" should emphasize the

large balances, especially for regular vendors.
FALSE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
Learning Objective: 08-04 Explain the importance of the completeness assertion for the audit of accounts
payable and list some procedures for a search for unrecorded liabilities.
Topic: Substantive Procedures in the Acquisition and Expenditure Cycle
7.
Auditors can inspect the "unmatched invoice file" and compare it to

the "unmatched receiving report" file to determine whether liabilities
are unrecorded.
FALSE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
and controls.
8.
Proper separation of duties involves authorization of purchases by

persons who do not have custody, recording, or reconciliation duties.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Understand
Learning Objective: 08-03 Give examples of tests of controls over purchases of inventory and services.
Topic: Control Risk Assessment
9.
If personnel in the organization are not performing their control

activities very well, auditors will need to design substantive
procedures to try to detect whether control failures have produced
misleading financial statement account balances.
TRUE
Blooms: Understand
10.
If the risk of material misstatement is assessed as very low, it is likely

that additional substantive procedures will be required.
FALSE
Blooms: Understand
11.
The emphasis is on the existence assertion because financial

statement users tend to be more concerned about understated
expenses and liabilities than overstated.
FALSE
AACSB: Analytic
AICPA BB: Industry

Blooms: Understand
12.
Evidence is much easier to obtain to verify the completeness

assertion for liabilities than the existence assertion for assets.
FALSE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
13.
The search for unrecorded liabilities should normally be performed up

to the last day of fieldwork in the period following the audit client's
balance sheet date.
TRUE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
14.
The principal goal of the physical inspection of property, plant, and

equipment is to determine actual existence and condition of
property.
TRUE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
Learning Objective: 08-05 Discuss audit procedures for other accounts affected by the acquisition and
expenditure cycle.
15.
All pay base data (hours, job number, absences, etc.) should be
approved by an employee's immediate supervisor.
TRUE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Topic: Audit Issues in the Expense and Acquisition Cycle
16.
The main feature of custody in the payroll cycle is the possession of

the payroll checks.
TRUE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
[Appendix 8C]
17.
Persons in charge of authorization and custody payroll functions

should not prepare the payroll.
TRUE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
[Appendix 8C]
18.
The payroll bank account cannot be reconciled like the other bank
accounts.
FALSE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
[Appendix 8C]
19.
Record keeping is performed by payroll and cost accounting

personnel who do not make authorizations or distribute pay.
TRUE
AACSB: Analytic
AICPA BB: Industry
Blooms: Understand
[Appendix 8C]
Multiple Choice Questions

20.
When confirming accounts payable, emphasis should be put on what

kind of accounts?
A. Accounts with small or zero balances.

B. All accounts should be equally emphasized.
C.
Accounts with large balances.
D. Accounts listed in the accounts payable subsidiary.
AACSB: Analytic
Blooms: Apply
Source: Original
Topic: Expenditure Assertions
21.
"Recorded vouchers (accounts payable entries) in the voucher

register (e.g., purchases journal) supported by completed voucher
documentation" is a specific example of which management
assertion?
A.
B.
C.
D.
Classification.
Occurrence.
Completeness.
Cutoff.
AACSB: Analytic
AICPA BB: Legal
Blooms: Apply
Source: Original
Topic: Expenditure Controls
22.
"All purchase orders are supported by requisitions from proper

persons" is a specific example of which management assertion?
A.
B.
C.
D.
Occurrence.
Completeness.
Cutoff.
Classification.
AACSB: Analytic
AICPA BB: Legal
Blooms: Apply
and controls.
Source: Original
Topic: Expenditure Cycle
23.
Cash disbursements are authorized by
A.
B.
C.
D.
Purchase orders.
Invoices.
Receiving reports.
A complete voucher package.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Source: Original
24.
For the copy of the purchase order that goes to the receiving
department, it is best to
A. Leave off the description of the goods ordered.

B. Leave off the quantity of the goods ordered.
C.
Leave off the name of the vendor.
D. Have the receiving department forward all copies of the purchase
order to accounts payable.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Source: Original
25.
Vouchers should be stamped PAID to
A.
Prevent duplicate payment.
B.
Generate a new purchase order.
C. Indicate posting in the voucher register.
D. Facilitate preparation of the bank reconciliation.
AACSB: Analytic
Blooms: Apply
Source: Original
26.
A voucher package is used to
A.
Document receipt of inventory.
B.
Document completion of services.
C.
Document a purchase contract.
D. Provide a source document for recording the purchase of a good or
service.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Understand
and controls.
Source: Original
27.
An auditor traced a sample of purchase orders and the related

receiving reports to the purchases journal. The purpose of this
substantive audit procedure most likely was to
A. Identify usually large purchases that should be investigated

further.
B. Verify that cash disbursements were for goods actually received.
C. Determine that purchases were properly recorded.
D. Test whether payments were for goods actually ordered.
AACSB: Analytic
Blooms: Apply
Source: AICPA
28.
The usual source for journal entries posted to the general ledger to
record the purchase of inventory is
A. Sales invoices updated with cost data from the inventory records
department.
B. Purchase invoices updated with cost data from the inventory
records department.
C. Receiving reports updated with cost data from the accounts
payable department.
D. Vouchers payable journal from the accounts payable department.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Understand
Source: Original
29.
Which of the following would detect the understatement of a

purchase discount?
A. Verify the arithmetic accuracy of the purchases journal.

B. Compare purchase disbursement records and checks with invoice
terms.
C. Compare approved purchase orders to receiving reports.
D. Verify the receipt of items ordered and invoiced.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
expenditure cycle.
Source: Original
Topic: Expenditure Substantive Testing
30.
Which of the following situations indicates a potential material

weakness in internal control over acquisition and expenditure?
A. Purchase orders are not prepared for services acquired directly

under authorization of department heads.
B. The same person authorizes voucher packages and signs checks.
C. Unacceptable goods are not scheduled on receiving reports.
D. The same person signs checks and stamps vouchers PAID.
AACSB: Analytic
Blooms: Apply
Source: Original
31.
Which of the following client control activities is not usually

performed in the vouchers payable (accounts payable) department?
A. Determining the mathematical accuracy of the vendors' invoices.

B. Writing checks for the treasurer's signature to take advantage of
purchase discounts.
C. Controlling the mailing of the check and remittance advice.
D. Checking the prices on the vendor's invoice.
AACSB: Analytic
Blooms: Apply
and controls.
Source: Original
32.
When auditing merchandise inventory at year-end, the auditor

performs a purchase cutoff test to obtain evidence that
A. All goods purchased before year-end are received before the

physical inventory count.
B. No goods held on consignment for customers are included in the
inventory balance.
C. No goods observed during the physical count are pledged or sold.
D. All goods owned at year-end are included in the inventory balance.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Source: Original
33.
Auditors may conclude that depreciation charges are too small by

noting
A. Insured values much larger than book values.

B. Large numbers of fully depreciated assets.
C. Frequent trade-ins of relatively new assets.
D. Large and frequent losses on assets retired.
AACSB: Analytic
Blooms: Apply
Learning Objective: 08-07 Describe some common errors and frauds in the acquisition and expenditure cycle
and design some audit and investigation procedures for detecting them.
Source: Original
Topic: Expenditure Error and Fraud Detection
34.
The auditor decided to test accounts payable by sending open-ended

(blank) confirmations to selected vendors. The auditor's best
approach in selecting the vendor accounts to confirm is to
A. Select vendor accounts with large balances.

B. Select vendor accounts at random in order to apply a statistical
sampling procedure.
C. Select vendor accounts based on the number of purchases from
vendors during the year.
D. Select vendor accounts that are past due.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Source: Original
35.
What evidence is appropriate to determine whether recorded

purchase transactions are valid and the vendors charged the correct
prices?
A. Purchase requisitions and accounts payable entries.

B. Receiving reports and purchase orders.
C. Purchase requisitions and purchases orders.
D.
Purchase orders and bid quotes.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
and controls.
Source: Original
36.
Purchase cutoff procedures should be designed to produce evidence

of whether merchandise is included in the inventory of the client
company if the company
A.
Has paid for the merchandise.
B. Has physical possession of the merchandise.
C.
Holds legal title to the merchandise.
D. Holds the shipping documents for the merchandise issued in the
company's name.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Source: Original
37.
Which of the following accounts would most likely be reviewed by the

auditor to gain reasonable assurance that additions to the equipment
account are not understated?
A.
B.
C.
D.
Depreciation expense.
Gain on disposal of equipment.
Accounts payable.
Repairs and maintenance expense.
AACSB: Analytic
Blooms: Apply
expenditure cycle.
Source: Original
Topic: Expenditure Audit Procedures
38.
Which of the following would not be included in the supporting

documents for a voucher?
A.
B.
C.
D.
Purchase order.
Vendor invoice.
Receiving report.
Blank check.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
and controls.
Source: Original
39.
A voucher would typically contain
A. A purchase requisition, purchase order, vendor invoice, receiving

B. A purchase requisition, purchase order, sales invoice, receiving
C. A purchase requisition, sales order, sales invoice, receiving report,
and check copy.
D. A purchase requisition, sales order, vendor invoice, receiving
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
and controls.
Source: Original
40.
When using confirmations to provide evidence about the

completeness assertion for accounts payable, the appropriate
population most likely would be
A.
B.
C.
D.
Vendors with whom the entity has previously done business.

Amounts recorded in the accounts payable subsidiary ledger.
Payees of checks drawn in the month after the year-end.
Invoices filed in the entity's open invoice file.
AACSB: Analytic
Blooms: Apply
Source: AICPA
41.
Which of the following procedures would an auditor most likely

perform in searching for unrecorded payables?
A. Reconcile receiving reports with related cash payments made just

prior to year-end.
B. Contrast the ratio of accounts payable to purchases with the prior
year's ratio.
C. Vouch a sample of creditor balances to supporting invoices,
receiving reports, and purchase orders.
D. Compare cash payments occurring after the balance sheet date
with the accounts payable trial balance.
AACSB: Analytic
Blooms: Apply
Source: AICPA
42.
An entity's internal control structure requires for every check request

that there be an approved voucher, supported by a prenumbered
purchase order and a prenumbered receiving report. To determine
whether checks are being issued for unauthorized expenditures, an
auditor most likely would select items for testing from the population
of all
A.
B.
C.
D.
Purchase orders.
Canceled checks.
Receiving reports.
Approved vouchers.
AACSB: Analytic
Blooms: Apply
Source: AICPA
43.
An auditor wishes to perform tests of controls on a client's purchasing

procedures. If the control activities leave no audit trail of
documentary evidence, the auditor most likely will test the
procedures by
A.
B.
C.
D.
Confirmation and observation.

Observation and inquiry.
Analytical procedures and confirmation.
Inquiry and analytical procedures.
AACSB: Analytic
Blooms: Apply
Source: AICPA
44.
Which of the following audit procedures is best for identifying

unrecorded accounts payable?
A. Reviewing cash disbursements recorded subsequent to the

balance sheet date to determine whether the related payables
apply to the prior period.
B. Investigating payables recorded just prior to and just subsequent
to the balance sheet date to determine whether they are
supported by receiving reports.
C. Examining unusual relationships between monthly accounts
payable balances and recorded cash payments.
D. Reconciling vendors' statements to the file of receiving reports to
identify items received just prior to the balance sheet date.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Source: AICPA
45.
To provide assurance that each voucher is submitted and paid only

once, an auditor most likely would examine a sample of paid
vouchers and determine whether each voucher is
A.
B.
C.
D.
Supported by a vendor's invoice.

Stamped "paid" by the check signer.
Prenumbered and accounted for.
Approved for authorized purchases.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Source: AICPA
46.
Cutoff tests designed to detect purchases made before the end of the
year that have been recorded in the subsequent year most likely
would provide assurance about management's assertion of
A.
B.
C.
D.
Valuation or allocation.
Existence or occurrence.
Completeness.
AACSB: Analytic
Blooms: Apply
Source: AICPA
47.
When auditing PP&E, the auditor's approach is generally to
A. Examine evidence supporting the amounts in the ending balance.

B. Examine evidence supporting additions during the year.
C. Follow a reliance strategy, testing internal controls and analytical
procedures.
D. Concentrate on finding unrecorded assets.
AACSB: Analytic
Blooms: Apply
expenditure cycle.
Source: Original
Topic: Expenditure fraud
48.
Which of the following procedures would an auditor most likely

perform in searching for unrecorded liabilities?
A. Trace a sample of accounts payable entries recorded just before

year-end to the unmatched receiving report file.
B. Compare a sample of purchase orders issued just after year-end
with the year-end accounts payable trial balance.
C. Vouch a sample of cash disbursements recorded just after year-end
to receiving reports and vendor invoices.
D. Scan the cash disbursements entries recorded just before year-end
for indications of unusual transactions.
AACSB: Analytic
Blooms: Apply
Source: AICPA
49.
In performing a search for unrecorded retirements of fixed assets, an

auditor most likely would
A. Inspect the property ledger and the insurance and tax records, and
then tour the client's facilities.
B. Tour the client's facilities, and then inspect the property ledger,
and the insurance and tax records.
C. Analyze the repair and maintenance account, and then tour the
client's facilities.
D. Tour the client's facilities, and then analyze the repair and
maintenance account.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
expenditure cycle.
Source: AICPA
50.
A weakness in internal control over recording retirements of

equipment may cause an auditor to
A. Inspect certain items of equipment in the plant and trace those

items to the accounting records.
B. Review the subsidiary ledger to ascertain whether depreciation
was taken on each item of equipment during the year.
C. Trace additions to the "other assets" account to search for
equipment that is still on hand but no longer being used.
D. Select certain items of equipment from the accounting records and
locate them in the plant.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
expenditure cycle.
Source: AICPA
51.
Failure to record a liability generally results in
A.
B.
C.
D.
An understatement of profit.
An understatement of current ratio.
An overstatement of profit.
An overstatement of assets.
AACSB: Analytic
Blooms: Apply
Learning Objective: 08-01 Identify significant inherent risks in the acquisition and expenditure cycle.
Source: Original
Topic: Expenditure risks
52.
Improperly capitalizing an expense item results in.
A. Understatement of profit in the current year and overstatement in

future years.
B. Understatement of profit in the current year and in future years.
C. Overstatement of profit in the current year and understatement in
future years.
D. Overstatement of profit in the current year and in future years.
AACSB: Analytic
Blooms: Apply
and controls.
Source: Original
53.
A liability for a long-term purchase contract should generally be

recognized when
A.
B.
C.
D.
The contract is signed.

The goods are shipped.
The goods are received.
The goods are sold to match the cost.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Understand
and controls.
Source: Original
54.
Which of the following expense accounts would not normally be

tested by listing all debits and examining any significant items?
A.
B.
C.
D.
Legal expense.
Miscellaneous expense.
Repairs and Maintenance.
Payroll expense.
AACSB: Analytic
Blooms: Apply
expenditure cycle.
Source: Original
55.
Which of the following would be an indicator of potential fraud?
A. Photocopies of invoices in the voucher file.

B.
Vendor invoices in numerical order.
C. Vendors with only post office box addresses.
D. All of the above indicate potential fraud.
AACSB: Analytic
Blooms: Apply
Source: Original
56.
Which of the following fraud detection steps could not be performed

by CAATs?
A. Look for photocopies in invoice files.

B. Look for vendor invoices in numerical order.
C. Look for vendor invoices slightly below the approval threshold.
D.
Look for duplicate vendor numbers.
AACSB: Technology
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 08-06 Specify some ways fraud can be found in accounts payable and cash disbursements.
Source: Original
57.
Tracing a sample of time clock cards to payroll registers (journals) is a

procedure designed to obtain evidence about the transaction
assertion(s) of
A.
B.
C.
D.
Occurrence only.
Occurrence and accuracy only.
Completeness only.
Accuracy only.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
[Appendix 8C]
Source: Original
Topic: Payroll
58.
The permanent reference files (master files) in a personnel and

payroll database ordinarily do not include which of the following?
A.
B.
C.
D.
Deduction table.
Payroll master.
Compensation table.
Employee earning record.
AACSB: Technology

Blooms: Apply
Difficulty: 3 Hard
[Appendix 8C]
Source: Original
Topic: Payroll
59.
Which of the following situations represents an internal control

weakness in the payroll department?
A. Payroll department personnel are rotated in their duties.

B. Paychecks are distributed by the employees' immediate
supervisor.
C. Payroll records are reconciled with quarterly tax reports.
D. The timekeeping function is independent of the payroll
department.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
[Appendix 8C]
Source: Original
Topic: Payroll
60.
Which of the following personnel department procedures reduces the

risk of payroll fraud and represents an appropriate responsibility for
the department?
A.
Distributing paychecks.
B.
Authorizing overtime hours.
C. Authorizing the addition or deletion of employees from the payroll.
D. Collecting and retaining unclaimed paychecks.
AACSB: Analytic
Blooms: Apply
[Appendix 8C]
Source: Original
Topic: Payroll
61.
To test the transaction assertion of occurrence in the area of payroll,

the auditor most likely would
A. Select a sample of personnel files and trace the pay rate to union
contracts or other rate rights and obligations.
B. Select a sample of personnel files and trace the pay rate to payroll
department files used in payroll preparation.
C. Select a sample of payroll register entries and recalculate gross
pay, deductions, and net pay.
D. Select a sample of payroll register entries and vouch hours worked
to clock time cards.
AACSB: Analytic
Blooms: Apply
[Appendix 8C]
Source: Original
Topic: Payroll
62.
Small Corporation uses a Wages Clearing Account for its payroll

disbursements. At the end of February, a reasonably large debit
balance remained in this account. The most likely reason for this is
that
A. More labor cost had been assigned to the expense accounts than
had been paid.
B. Some labor cost had not been properly classified in the expense
accounts.
C. Some employees had not yet cashed their checks.
D. Not enough cash had been transferred to the bank account.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
[Appendix 8C]
Source: Original
Topic: Payroll
63.
Which of the following is not a major control risk in the payroll cycle?
A.
B.
C.
D.
Paying fictitious "employees."

Overpaying for time or production.
Losing employees to competitors.
Incorrect accounting for costs or expenses.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
[Appendix 8C]
Source: Original
Topic: Payroll
64.
The sampling unit in a test of controls pertaining to the existence or

occurrence of payroll transactions ordinarily is a(an)
A.
B.
C.
D.
Clock card or time ticket.

Employee Form W-2.
Employee personnel record.
Payroll register (journal) entry.
AACSB: Analytic
Blooms: Apply
[Appendix 8C]
Source: AICPA
Topic: Payroll
65.
The purpose of segregating the duties of hiring personnel and

distributing payroll checks is to separate the
A.
B.
C.
D.
Human resources function from the controllership function.

Administrative controls from the internal accounting controls.
Authorization of transactions from the custody of related assets.
Operational responsibility from the record keeping responsibility.
AACSB: Analytic
Blooms: Apply
[Appendix 8C]
Source: AICPA
Topic: Payroll
66.
An auditor most likely would assess control risk at the maximum if

the payroll department supervisor is responsible for
A. Examining authorization forms for new employees.

B. Comparing payroll registers with original batch transmittal data.
C. Distribute payroll checks to all employees.
D. Hiring all subordinate payroll department employees.
AACSB: Analytic
Blooms: Apply
[Appendix 8C]
Source: AICPA
Topic: Payroll
67.
An auditor most likely would extend substantive tests of payroll

when
A.
B.
C.
D.
Payroll is extensively audited by the state government.

Payroll expense is substantially higher than in the prior year.
Overpayments are discovered in performing tests of controls.
Employees complain to management about too much overtime.
AACSB: Analytic
Blooms: Apply
[Appendix 8C]
Source: AICPA
Topic: Payroll
68.
An auditor most likely would perform substantive procedures on

payroll transactions and balances when
A. Cutoff tests indicate a substantial amount of accrued payroll

expense.
B. The assessed level of control risk relative to payroll transactions is
low.
C. Analytical procedures indicate unusual fluctuations in recurring
payroll entries.
D. Accrued payroll expense consists primarily of unpaid commissions.
AACSB: Analytic
Blooms: Apply
[Appendix 8C]
Source: AICPA
Topic: Payroll
69.
An auditor vouched data for a sample of employees in a payroll

register to approved clock card data to provide assurance that
A. Payments to employees are computed at authorized rates.

B. Employees work the number of hours for which they are paid.
C. Separation of duties exists between the preparation and
distribution of the payroll.
D. Internal controls relating to unclaimed payroll checks are operating
effectively.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
[Appendix 8C]
Source: AICPA
Topic: Payroll
70.
Substantive tests of account balances in the payroll cycle are likely to

include the following procedures except
A.
Analytical review procedures.
B.
Recalculation of accruals.
C. Comparison of accruals to subsequent payments.
D. Detail vouching of payroll expense entries.
AACSB: Analytic
Blooms: Apply
[Appendix 8C]
Source: Original
Topic: Payroll
71.
Which of the following accounts does not appear in the acquisition

and expenditure cycle?
A.
B.
C.
D.
Cash.
Purchases Returns.
Sales Returns.
Prepaid Insurance.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
and controls.
Source: Original
72.
For which of the following accounts would the matching concept be

the most appropriate?
A.
B.
C.
D.
Cost of Goods Sold.

Depreciation Expense.
Sales.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research

Blooms: Understand
Difficulty: 1 Easy
Source: Original
73.
Which of the following would not overstate current-period net

income?
A. Capitalizing an expenditure that should be expensed.

B. Failing to record a liability for an expenditure.
C. Failing to record a check paying an item in vouchers payable.
D. All of the above would overstate net income.
AACSB: Analytic
Blooms: Remember
Source: Original
74.
A client's purchasing system ends with the recording of a liability and

its eventual payment. Which of the following best describes auditors'
primary concern with respect to liabilities resulting from the
purchasing system?
A. Accounts payable are not materially understated.

B. Authority to incur liabilities is restricted to one designated person.
C. Acquisition of materials is not made from one vendor or one group
of vendors.
D. Commitments for all purchases are made only after established
competitive bidding procedures are followed.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Source: Original
75.
Which of the following is an internal control activity that could

prevent a paid disbursement voucher from being presented for
payment a second time?
A. Vouchers should be prepared by individuals who are responsible

for signing disbursement checks.
B. Disbursement 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.
D. The official who signs the check should compare the check with
the voucher and should stamp PAID on the voucher documents.
AACSB: Analytic
Blooms: Apply
Source: Original
76.
R. Budd, the purchasing agent of Lake Hardware Wholesalers, has a

relative who owns a retail hardware store. Budd arranged for
hardware to be delivered by manufacturers to the retail store on a
cash-on-delivery (COD) basis, thereby enabling his relative to buy at
Lake's wholesale prices. Budd was probably able to accomplish this
because of Lake's poor internal control over
A.
B.
C.
D.
Purchase requisitions.
Cash receipts.
Perpetual inventory records.
Purchase orders.
AACSB: Analytic
Blooms: Apply
Source: Original
77.
Which of the following is the best audit procedure for determining the
existence of unrecorded liabilities?
A. Examine confirmation requests returned by creditors whose

accounts are on a subsidiary trial balance of accounts payable.
B. Examine a sample of cash disbursements in the period subsequent
to year-end.
C. Examine a sample of invoices a few days prior to and subsequent
to year-end to ascertain whether they have been properly
recorded.
D. Examine unusual relationships between monthly accounts payable
and recorded purchases.
AACSB: Analytic
Blooms: Apply
Source: Original
78.
Which of the following procedures is least likely to be performed

before the balance-sheet date?
A.
Observation of inventory.
B. Review of internal control over cash disbursements.
C.
Search for unrecorded liabilities.
D.
Confirmation of receivables.
AACSB: Analytic
Blooms: Apply
Source: Original
79.
To determine whether accounts payable are complete, auditors

perform a test to verify that all merchandise received has been
recorded. The population for this test consists of all
A.
B.
C.
D.
Vendors' invoices.
Purchase orders.
Receiving reports.
Canceled checks.
AACSB: Analytic
Blooms: Apply
Source: AICPA
80.
When verifying debits to the perpetual inventory records of a

nonmanufacturing company, auditors would be most interested in
examining a sample of purchase
A.
B.
C.
D.
Approvals.
Requisitions.
Invoices.
Orders.
AACSB: Analytic
Blooms: Apply
Source: Original
81.
A furniture company ordered 84 tables from a supplier. The supplier

accidentally sent only 48 tables, but the receiving department at the
furniture company accepted the tables. The invoice was eventually
received but was for the 84 tables ordered. The furniture company
paid the entire amount. Which of the following controls would have
been least likely to have prevented this erroneous payment?
A. The copy of the purchase order sent to the furniture company's

receiving department should not have shown an expected
quantity.
B. Personnel in the furniture company's accounts payable department
should compare the receiving report to the purchase invoice before
creation of the voucher.
C. Personnel in the furniture company's cash disbursements
department should compare the check that is prepared to all of the
backup documentation.
D. Personnel in the furniture company's purchasing department
should compare the purchase requisition to the purchase order.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Source: Original
82.
L. Curtis, a maintenance supervisor, submitted maintenance invoices

from a phony repair company and received the checks at a post
office box. This should have been prevented by
A. Comparison of the company name to the approved vendor list by

the check signer.
B. Recognition of the excess maintenance costs by Curtis's
supervisor.
C. Refusal by the purchasing department to approve the vendor.
D.
All of the above.
AACSB: Analytic
Blooms: Apply
and controls.
Source: Original
83.
An audit team would most likely examine the detail support for which
of the following charges?
A.
B.
C.
D.
Payroll expense.
Cost of goods sold.
Supplies expense.
Legal expense.
AACSB: Analytic
Blooms: Apply
expenditure cycle.
Source: Original
84.
Which of the following accounts would most likely be audited in

connection with a related balance sheet account?
A.
B.
C.
D.
Property Tax Expense.

Payroll Expense.
Legal Expense.
AACSB: Analytic
Blooms: Apply
expenditure cycle.
Source: Original
85.
When auditing liabilities account balances, auditors are most

concerned with management' assertion about
A.
B.
C.
D.
Existence.
Completeness.
Valuation and allocation.
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Source: Original
86.
In a test of controls, auditors may trace receiving reports to vouchers

recorded in the voucher register. This is a test for
A.
B.
C.
D.
Occurrence.
Completeness.
Classification.
Cutoff.
AACSB: Analytic
Blooms: Apply
Source: Original
87.
An audit team most likely would assess control risk at the maximum
if the payroll department supervisor is responsible for
A.
B.
C.
D.
Examining authorization forms for new employees.

Comparing payroll registers with original batch transmittal data.
Authorizing payroll rate changes for all employees.
Hiring all subordinate payroll department employees.
AACSB: Analytic
Blooms: Apply
[Appendix 8C]
Source: AICPA
Topic: Payroll
88.
Which of the following departments most likely would approve

changes in pay rates and deductions from employee salaries?
A.
B.
C.
D.
Personnel.
Treasurer.
Controller.
Payroll.
AACSB: Analytic
Blooms: Apply
[Appendix 8C]
Source: AICPA
Topic: Payroll
89.
Matthew Corp. has changed from a system of recording time worked

on clock cards to a computerized payroll system in which employees
record time in and out with magnetic cards. The computerized
system automatically updates all payroll records. Because of this
change,
A. A generalized computer audit plan must be used.

B.
Part of the audit trail is altered.
C. The potential for payroll-related fraud is diminished.
D. Transactions must be processed in batches.
AACSB: Technology
Blooms: Apply
Difficulty: 3 Hard
[Appendix 8C]
Source: AICPA
Topic: Payroll
90.
Effective control over the cash payroll function would mandate which
of the following?
A. The payroll clerk should fill the envelopes with cash and include a
computation of the net wages.
B. The paymaster should be retain unclaimed payroll envelopes.
C. Each employee should be asked to sign a receipt for wages
received.
D. A separate checking account for payroll should be maintained.
AACSB: Analytic
Blooms: Apply
[Appendix 8C]
Source: AICPA
Topic: Payroll
91.
A large retail enterprise has established a policy that requires the

paymaster to deliver all unclaimed payroll checks to the internal
audit department at the end of each payroll distribution day. This
policy was most likely adopted to
A. Ensure that employees who were absent on a payroll distribution

day are not paid for that day.
B. Prevent the paymaster from cashing checks that are unclaimed for
several weeks.
C. Prevent a bona fide employee's check from being claimed by
another employee.
D. Detect any fictitious employee who may have been placed on the
payroll.
AACSB: Analytic
Blooms: Apply
[Appendix 8C]
Source: Original
Topic: Payroll
92.
Auditors ordinarily ascertain whether payroll checks are properly

endorsed during the audit of
A.
B.
C.
D.
Clock cards.
The voucher system.
Cash in bank.
Accrued payroll.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
[Appendix 8C]
Source: AICPA
Topic: Payroll
93.
In determining the effectiveness of an entity's policies and

procedures relating to the occurrence assertion for payroll
transactions, auditors most likely would inquire about and
A. Observe the separation of duties concerning personnel

responsibilities and payroll disbursement.
B. Inspect evidence of accounting for prenumbered payroll checks.
C. Recompute the payroll deductions for employee fringe benefits.
D. Verify the preparation of the monthly payroll account bank
reconciliation.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
[Appendix 8C]
Source: AICPA
Topic: Payroll
94.
Which of the following activities most likely would be considered a

weakness in an entity's internal control over payroll?
A. A voucher for the amount of the payroll is prepared in the general

accounting department based on the payroll department's payroll
summary.
B. Payroll checks are prepared by the accounts payable department
and signed by the treasurer.
C. The employee who distributes payroll checks returns unclaimed
payroll checks to the payroll department.
D. The personnel department sends employees' termination notices
to the payroll department.
AACSB: Analytic
Blooms: Apply
[Appendix 8C]
Source: AICPA
Topic: Payroll
95.
The transactions typically classified in the acquisition and

expenditure cycle flow do not include
A. Requesting goods, services, or assets.

B.
Placing the sales order.
C. Receiving, inspecting, and accepting the assets.
D.
Accounting for accounts payable.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
and controls.
Source: Original
96.
The review phase of the transaction flow in the acquisition and

expenditure cycle does not include
A.
B.
C.
D.
Interviews.
Observations.
Collecting sample documents.
Substantive procedures.

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Source: Original
97.
The internal control questionnaire for receipt of purchases

completeness objective would not include which of the following
questions?
A. Are the purchase order forms prenumbered and the numerical

B. Are receiving report forms prenumbered and the numerical
C. Are competitive bids received and reviewed for certain items?
D. Is the accounts payable department notified of goods returned to
vendors?
AACSB: Analytic
Blooms: Apply
Source: Original
98.
A voucher typically does not have attached to it a copy of which of

the following documents?
A.
B.
C.
D.
Requisition.
Purchase order.
Vendor's invoice.
Check register.

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
and controls.
Source: Original
99.
Computer controls that might be found in an advanced on-line

acquisition and expenditure system would not include
A. All vendor invoices are prenumbered and the numbers accounted

for.
B. Each terminal performs only designated functions.
C. An identification number and password are required to enter the
nonautomatic purchase orders.
D. The check signature is printed using a signature plate that is
installed on the computer printer only when checks are printed.
AACSB: Technology
Blooms: Apply
Difficulty: 3 Hard
Source: Original
100. Specific balance assertions typical of accounts payable would not

include
A. Recorded liabilities are obligations of the entity.

B. Estimated liabilities are properly valued.
C. Accounts payable are not pledged as collateral.
D. Payables are recorded in the proper period.
AACSB: Analytic
Blooms: Apply
Source: Original
101. The inherent risk that accounts payable may be omitted or otherwise
understated typically is
A.
B.
C.
D.
Low.
High.
Moderate.
Indeterminate.
AACSB: Analytic
Blooms: Apply
Source: Original
102. An audit plan for accounts payable would not include which of the
following procedures?
A. Obtaining a trial balance of recorded accounts payable.

B. Sending confirmation to accounts with zero balances.
C. Reviewing cash receipts for the period after year-end.
D. Obtaining written client representations about related-party
payables and pledges of assets as collateral for liabilities.
AACSB: Analytic
Blooms: Apply
Source: Original
103. Which of the following would not typically be a specific relevant

assertion about fixed asset accounts?
A. Fixed assets in the accounts exist and are in productive use.

B. Net carrying book values in the accounts are reflected at current
market values.
C. Depreciation has been calculated properly using accepted
methods and reasonable estimates of useful life and other factors.
D. Fixed assets are properly classified in the balance sheet under
appropriate descriptive captions.
AACSB: Analytic
Blooms: Apply
expenditure cycle.
Source: Original
104. The typical functions of the personnel and payroll cycle would not
include
A.
B.
C.
D.
Labor relations.
Report of attendance and work performed.
Allocation to cost of goods sold.
Payroll accounting.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
[Appendix 8C]
Source: Original
Topic: Payroll
105. An internal control questionnaire for payroll processing occurrence

assertion would not include which of the following questions?
A. Are names of terminated employees reported in writing to the

payroll department?
B. Is the payroll compared to personnel files periodically?
C. Are checks distributed by the employee's immediate supervisor?
D. Are all wage rates determined by contract or approved by a
personnel officer?
AACSB: Analytic
Blooms: Apply
[Appendix 8C]
Source: Original
Topic: Payroll
106. Which of the following functional responsibilities would not typically

relate to salaried employees?
A.
B.
C.
D.
Collecting timekeeping data.

Supervision.
Personnel or labor relations.
Payroll distribution.
AACSB: Analytic
Blooms: Apply
[Appendix 8C]
Source: Original
Topic: Payroll
Fill in the Blank Questions
107. The _____________________________________ inspects the goods received

for _____________________________ and _____________________________
and then puts them in the hands of other responsible persons.
receiving department; quantity; quality
108. When the _________________________________,
______________________________ and _________________________ are in
hand, the accountants can record the accounts payable.
purchase order; vendor's invoice; receiving report
109. Auditors can compare the ________________________________ file to the
_________________________________ to determine whether the company
has material unrecorded liabilities on the financial statement date.
unmatched receiving reports; payables listing
110. ___________________________________ and
___________________________________ can cause "unmatched" invoices
and related "unmatched" receiving reports to be unnoticed.
System failures; human coding errors
111. A _____________________________ is a cover sheet containing all

supporting documentation for an acquisition.
voucher
112. A list of all purchases might exist only in a
____________________________________ file rather than a
_____________________________________.
computer transaction; purchase journal
113. Assessment of _____________________________ of
__________________________________ is important because it governs the
nature, timing, and extent of substantive procedures that will be
applied in the audit of account balances in the acquisition cycle.
risk; material misstatement
114. Vendor invoices should be compared to
_______________________________ and ________________________________
to determine that the vendor is charging the approved price and for
quantity received.
purchase orders; receiving reports
115. ____________________________________ consist of (1) identification of

data population for audit and (2) an expression of the action to be
taken to produce relevant audit evidence.
Tests of controls
116. When considering assertions and obtaining evidence about accounts
payable, auditors must put emphasis on the
_____________________________ assertion.
completeness
117. The ________________________________________ is a set of procedures
designed to yield audit evidence of liabilities that were not recorded
in the reporting period.
search for unrecorded liabilities
118. The five functional responsibilities of a payroll cycle are
____________________________, ____________________________,
____________________________, and ________________________________.
personnel; supervision; timekeeping; record keeping; payroll
distribution
119. The __________________________________ has transaction initiation

authority to add new employees and delete terminated employees.
personnel department
120. A personnel file should establish the reality of a person's
_______________________ and ____________________________.
existence; employment
121. The ____________________________________ is the primary original record
for payroll accounting.
payroll register
Short Answer Questions
122. The internal control questionnaire for purchases and accounts

payable includes the following questions. Next to each of the
questions, indicate the letter of the related transaction assertion.
A. Occurrence
B. Completeness
C. Accuracy
D. Classification
E. Cutoff
1. C; 2. A; 3. B; 4. A; 5. C; 6. E; 7. A; 8. B
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Source: Original
Essay Questions
123. Explain why auditors must put more emphasis on the completeness
and obligation assertion when auditing payables and contrast this
with the audit of asset accounts.
The emphasis on completeness is rightly placed because companies

typically are less concerned about timely recording of expenses and
liabilities. Generally, they are more concerned with the timely
recording of revenues and assets. For asset accounts, the emphasis
therefore is on the existence and rights assertions. Ample evidence is
usually available to verify that an asset exists. However, less
evidence usually exists for unrecorded liabilities.
AACSB: Analytic
Blooms: Apply
Source: Original
124. F. Jack, CPA, is the auditor of Jill Corporation. Jack plans to follow last
year's work papers in selecting accounts payable to be confirmed.
Confirmations were mailed to 50 of Jill's 200 suppliers. The sample
was designed to select accounts with the largest balances. Jack and
Jill spent a lot of time reconciling minor differences between the
confirmation amounts and the accounts payable trial balance.
Required:
Do you believe Jack should use the same sample design for accounts
payable confirmations this year? If not, what suggestions can you
give to improve the design?
Because of the concern for understatement of liabilities, auditors are

more concerned with the completeness and valuation assertions for
accounts payable. Auditors emphasize accounts payable that are
more likely understated. Therefore, small and zero balances should
be included in the sample design. Also, vendors with high activity
during the year might be selected.
AACSB: Analytic
Blooms: Apply
Source: Original
125. After checks are signed for vendor invoices, why should vouchers be
marked PAID or otherwise mutilated?
To show they have been processed so they cannot be paid again.

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Source: Original
126. This question requires knowledge of specific account balance

assertions, general audit procedures, and trade accounts payable.
You are assigned to audit the accounts payable of Green Corporation
whose business is wholesale and retail trade. The company
purchases products from 1,002,000 manufacturers ("vendors") and
sells the products to its retail and wholesale customers. The general
ledger shows the Accounts Payable control balance as of the balancesheet date in the amount of $42 million (which is 70 percent of
current liabilities, 50 percent of total liabilities, and 35 percent of
total liabilities and owners' equity). Green's management
accountants post the summary entries from the purchases journal
and from the cash disbursements journal each month to the Accounts
Payable control account. The accounts payable manager gave you a
detailed trial balance that lists all recorded unpaid invoices (recording
date, vendor name, vendor invoice number, invoice date, and
amount) subtotaled by vendor.
Other members of the audit team have already decided to assess
control risk at the maximum for the accounts payable work. The
engagement manager gave you last year's audit working papers but
said the audit plan was missing (!). Thus, the first part of your
assignment is to write the audit plan for audit of the Green
Corporation trade accounts payable.
Required:
For each of the balance assertions (existence, completeness, and
valuation or and allocation), write two or more specific audit
procedures designed to produce evidence related to the accounts
payable balance of $42 million.
(Hints: [1] For each of the three balance assertions, think about a
specific assertion before you write a procedure to gather evidence.
[2] Write specific procedures as adaptations of the general audit
procedures: recalculation, observation, confirmation, document
examination, inquiry, scanning, analytical procedures. [3] Most
procedures are two-part statements: "Select a sample of... [identify
the population]...and "do something"... [specify an action].)
There may be other correct answers to this question

Existence
a. Select a sample of recorded accounts payable and send
confirmations to vendors.
b. Select a sample of recorded accounts payable and vouch them to
vendor statements received after the balance sheet date.
c. Other _______________________________________________
Completeness
a. Select a sample of small and zero account payable balances and
send confirmations to vendors.
b. Select a sample of (or scan) cash disbursements recorded after
year-end and determine whether they should have been recorded as
accounts payable at year-end.
c. List unmatched vendor invoices and determine when the good
were received. Review whether the invoices should have been
recorded at year-end.
d. Scan the open purchase order file for old orders that might have
been received. Trace to the purchases journal.
e. Study the accounts payable trial balance for indications of
untimely recording or omission of vendors' invoices.
f. Other _______________________________________________
Valuation or Allocation
a. Interview the accounts payable manager for information about
disputed accounts payable.
b. Audit the confirmations returned for evidence of disputed
balances.
c. Obtain written client representations on the payables total.
d. Study the attorney's response letter for indication of disputed
accounts payable.
e. Other _______________________________________________
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Source: Original
127. When performing procedures in a search of unrecorded liabilities,

auditors can utilize various sources of evidence/information (e.g.,
documents, files, management and clerical personnel).
Required:
List at least five, but not more than seven, sources of
evidence/information for the search for unrecorded liabilities.
(Do not write procedures. Do not take time to write about particular
evidence that can be obtained or reasons for using the sources.)
Inquiry of client personnel, open purchase order file, unmatched

vendor invoices listing, the unmatched receiving reports, and cash
disbursements from the accounting period following the balancesheet date. Other possible sources are vendor statements or
confirmations.
AACSB: Analytic
Blooms: Apply
expenditure cycle.
Source: Original
128. The test of controls for purchases, cash disbursements, and accounts
payable include the following audit procedures. Next to each of the
procedures, indicate the related transaction assertion.
1. completeness; 2. occurrence; 3. accuracy; 4. completeness; 5.

occurrence; 6. classification; 7. accuracy
Feedback: Reference: Question also found in study guide

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Source: Original
129. The test of controls for payroll includes the following audit
procedures. Next to each of the procedures, indicate the related
management assertion about transactions.
1. classification; 2. occurrence; 3. accuracy; 4. classification; 5.

accuracy; 6. occurrence; 7. completeness; 8. accuracy
Feedback: Reference: Question also found in study guide

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
[Appendix 8C]
Source: Original
Topic: Payroll

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Chapter 08

Acquisition and Expenditure Cycle

True / False Questions

2. Purchases are ordered by a purchasing department that seeks the best

3. Checks are signed by the accounts payable department after

5. Normally, liabilities should be recorded on the date the goods are

6. Auditors' "search for unrecorded liabilities" should emphasize the large

8. Proper separation of duties involves authorization of purchases by

9. If personnel in the organization are not performing their control

10 If the risk of material misstatement is assessed as very low, it is likely

11 The emphasis is on the existence assertion because financial statement

12 Evidence is much easier to obtain to verify the completeness assertion

13 The search for unrecorded liabilities should normally be performed up

14 The principal goal of the physical inspection of property, plant, and

17 Persons in charge of authorization and custody payroll functions should

19 Record keeping is performed by payroll and cost accounting personnel

Multiple Choice Questions

20 When confirming accounts payable, emphasis should be put on what

22 "All purchase orders are supported by requisitions from proper persons"

23 Cash disbursements are authorized by

A. Leave off the description of the goods ordered.

Identify usually large purchases that should be investigated further.

A. Verify the arithmetic accuracy of the purchases journal.

A. Determining the mathematical accuracy of the vendors' invoices.

32 When auditing merchandise inventory at year-end, the auditor performs

A. Insured values much larger than book values.

A. Select vendor accounts with large balances.

A. Purchase requisitions and accounts payable entries.

36 Purchase cutoff procedures should be designed to produce evidence of

38 Which of the following would not be included in the supporting

39 A voucher would typically contain

40 When using confirmations to provide evidence about the completeness

A. Vendors with whom the entity has previously done business.

A. Reconcile receiving reports with related cash payments made just

43 An auditor wishes to perform tests of controls on a client's purchasing

Confirmation and observation.

44 Which of the following audit procedures is best for identifying

A. Reviewing cash disbursements recorded subsequent to the balance

Supported by a vendor's invoice.

47 When auditing PP&E, the auditor's approach is generally to

49 In performing a search for unrecorded retirements of fixed assets, an

52 Improperly capitalizing an expense item results in.

The contract is signed.

54 Which of the following expense accounts would not normally be tested

55 Which of the following would be an indicator of potential fraud?

Photocopies of invoices in the voucher file.

56 Which of the following fraud detection steps could not be performed by

58 The permanent reference files (master files) in a personnel and payroll

59 Which of the following situations represents an internal control

Payroll department personnel are rotated in their duties.

60 Which of the following personnel department procedures reduces the

Paying fictitious "employees."

64 The sampling unit in a test of controls pertaining to the existence or

Clock card or time ticket.

65 The purpose of segregating the duties of hiring personnel and

Human resources function from the controllership function.

A. Examining authorization forms for new employees.

Payroll is extensively audited by the state government.

68 An auditor most likely would perform substantive procedures on payroll

A. Cutoff tests indicate a substantial amount of accrued payroll

A. Payments to employees are computed at authorized rates.

Cost of Goods Sold.

73 Which of the following would not overstate current-period net income?

A. Accounts payable are not materially understated.