Audit Practice II

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Questions and Answers

What is the primary objective of auditing the acquisition and payment cycle?

To verify that all purchase requisitions are authorized

To ensure that goods are received in a timely manner

To evaluate whether the accounts affected are fairly presented according to standards (correct)

To assess the efficiency of the purchasing process

Which document typically initiates the acquisition and payment cycle?

Purchase Order

Vendor's invoice

Receiving report

Purchase Requisition (correct)

Which class of transactions does NOT belong to the acquisition and payment cycle?

Purchase returns and allowances

Cash disbursements

Acquisitions of goods and services

Inventory valuation adjustments (correct)

Which document is used specifically to verify received goods and services against orders?

Receiving report Signup and view all the answers

What ensures that purchase requisitions are automatically initiated in some companies?

Specified reorder points guided by computer systems Signup and view all the answers

Which of the following best describes a purchase order?

A formal document issued to vendors to order goods and services Signup and view all the answers

In the acquisition and payment cycle, which file typically includes details of all transactions related to cash disbursements?

Cash disbursements transaction file Signup and view all the answers

What is the primary reason for verifying current year acquisitions during an equipment audit?

To assess the impact on the income statement until depreciation is completed Signup and view all the answers

Which of the following best describes the consequence of failing to properly account for disposals of equipment?

Net book value will be overstated until the asset is fully depreciated Signup and view all the answers

When auditing the ending balance in the equipment accounts, which of the following objectives is NOT explicitly mentioned?

All equipment has been depreciated correctly Signup and view all the answers

What is considered an essential control when designing audit tests for equipment?

Incorporation of identification numbers for each plant asset Signup and view all the answers

What information is included in a vendor’s statement?

Beginning balance, acquisitions, returns and allowances, payments, and ending balance Signup and view all the answers

Which statement regarding internal controls over equipment is accurate?

Monthly reconciliations by accounting personnel are considered vital Signup and view all the answers

Which document is primarily used to authorize payment for acquisitions due?

Check Signup and view all the answers

How should signed checks be handled after being prepared?

They should be mailed by the authorized signer or someone under their control Signup and view all the answers

What type of report is generated from the cash disbursements transaction file?

Cash Disbursements Journal or Listing Signup and view all the answers

Which financial accounts are typically time-consuming for auditors to verify during substantive tests?

Accounts Receivable, Inventory, Fixed Assets, Accounts Payable, and Expense Accounts Signup and view all the answers

What is a characteristic of a Cash Disbursements Transaction File?

It includes all cash disbursements transactions processed during a determined period Signup and view all the answers

What role does the cash disbursement process play in financial accounts?

Reduces balances in liability accounts, particularly accounts payable Signup and view all the answers

What should match between the client's accounts payable master file and the vendor’s statement?

All transactions except disputed amounts and timing differences Signup and view all the answers

Which of the following is NOT typically included in the records examined by auditors during cash disbursement audits?

Sales Invoices Signup and view all the answers

What does a receiving report contain?

Description of goods, quantity, date received Signup and view all the answers

Why is it important to recognize the liability for received goods promptly?

It ensures accurate cash disbursement records Signup and view all the answers

Which document indicates a decrease in the amount owed to a vendor?

Debit memo Signup and view all the answers

How does electronic data interchange (EDI) affect the vendor's invoice?

It allows for paperless transaction processing Signup and view all the answers

What essential factor must companies examine when receiving goods?

Condition of the goods Signup and view all the answers

What role does a voucher play in acquisitions?

It establishes a method for recording acquisitions Signup and view all the answers

What information is typically found on a vendor’s invoice?

Description, quantity, price, and terms Signup and view all the answers

Which of the following is NOT a common document related to purchase orders?

Sales invoice Signup and view all the answers

Which statement regarding acquisition transactions is correct?

All acquisitions must be recorded regardless of their amounts. Signup and view all the answers

What is typically the reason auditors reduce the tolerable exception rate for the accuracy attribute?

Due to the materiality of individual transactions. Signup and view all the answers

How do auditors typically handle large and unusual items in transaction cycles?

They segregate and test them using 100 percent basis. Signup and view all the answers

Which of the following is true regarding the tests of details of balances for accounts payable?

Materiality of accounts payable leads to some level of testing regardless of control effectiveness. Signup and view all the answers

What aspect of liability accounts makes out-of-period liability tests significant?

They address concerns about understatements in liability accounts. Signup and view all the answers

What is a key difference between a vendor's statement and a confirmation of accounts payable?

A confirmation is prepared by an independent third party. Signup and view all the answers

Why do auditors treat property, plant, and equipment differently from current asset accounts?

There are usually fewer acquisitions each period. Signup and view all the answers

What is a reason why auditors give special attention to the dollar amounts of equipment acquisitions?

Each acquisition tends to be material. Signup and view all the answers

Which characteristic distinctly classifies property, plant, and equipment from prepaid expenses or investments?

They have intended use for normal operations and last more than a year. Signup and view all the answers

What is a potential consequence of vendors’ statements being in the client's possession during audit?

It could allow the client to manipulate the statement. Signup and view all the answers

Which factor influences the extent of tests for unrecorded accounts payable?

Assessed control risk and materiality of the potential balance. Signup and view all the answers

Study Notes

Audit Practice and Procedures II - Week Ten

Topic: Auditing the Capital Acquisition and Repayment, Cash Balances
Objective: Evaluate whether accounts affected by acquisitions of goods and services, and cash disbursements for those acquisitions, are fairly presented according to accounting standards.
Transaction Classes: Acquisitions of goods and services, cash disbursements, purchase returns and allowances, and purchase discounts.

Recap of Last Class

No specific information on the previous class is available.

Accounts and Classes of Transactions in the Acquisition and Payment Cycle

Objective: Determine if the accounts affected by acquisitions are fairly presented according to accounting standards.
Transaction Classes: Acquisitions of goods and services, cash disbursements, purchase returns and allowances, and purchase discounts.

The acquisition and payment cycle starts with an authorized employee's purchase requisition and ends with payment on accounts payable.
Key documents include purchase requisitions, purchase orders, receiving reports, vendor's invoices, debit memos, vouchers, acquisition transaction files, journals, master files, trial balances, vendor statements, checks, electronic payments, and disbursement journals.

Details of accounts, business functions, and documents used in Acquisitions and Cash Disbursements.

Documents Included in Acquisitions

Purchase requisition, purchase order, receiving report, vendor's invoice, debit memo, voucher, acquisitions transaction file, acquisition journal or listing, accounts payable master file, accounts payable trial balance, vendor's statement, check or electronic payment, cash disbursement transaction file, cash disbursement journal or listing.

Business Function - Processing Purchase Orders

Purchase requisition, employee requests for goods/services.
Purchase order, formal document to vendor for goods/services, indicating quantity, items, and prices required.
Often electronically transmitted.

Receiving Goods and Services

Critical step for recognizing acquisition and related liability on company records.
Receiving report (paper or electronic) documents goods received: description, quantity, date received, and other data.

Business Function - Recognizing the Liability

Vendor's invoice, document from vendor stating amount owed.
Includes description, quantity, billing date, prices, total amount.
Debit memo, document reducing amount owed to vendor (due to returned goods or allowance).
Similar form to a vendor's invoice but supports reductions, rather than increases, in accounts payable.

Voucher

Standard accounting document for recording acquisitions.
Includes a cover sheet to organize documents like purchase orders, and vendor invoices.
Sequentially numbered.

Acquisitions Transaction File

Computer-generated file containing all acquisition transactions recorded over a designated period (e.g., day, week, month.)
Includes vendor names, dates, amounts, account classifications, description of goods or services.

Acquisitions Journal or Listing

Generated from the acquisitions transaction file.
Includes vendor name, date, amount, and account classification for each transaction.
Includes information on cash or accounts payable transactions.

Accounts Payable Master File

Lists acquisitions, cash disbursements, and returns and allowances for each vendor.
Updated from acquisition, returns, and allowances, and cash disbursement computer files.
Vendor-specific records of beginning balance, transactions, and ending balance in accounts payable.

Accounts Payable Trial Balance

Provides a summary of amounts owed to each vendor (or for each invoice) at a specific point in time.
Derived directly from the Accounts Payable master file

Vendor's Statement

Vendor-prepared document detailing beginning balance, acquisitions, returns/allowances, payment to vendor, and ending balance.
Important difference from confirmation: it's prepared before the auditor examines it.

Business Function: Processing and Recording Cash Disbursements

Check: used for cash payments. Computer-generated and documented in a multi-copy format.
Cash Disbursements Transaction File: Computer file to record all cash disbursement transactions by date, week, or month.
Cash Disbursements Journal or Listing: Period report of cash disbursement transactions recorded in the transactions file.

Methodology for Designing Tests of Controls and Substantive Tests of Transactions

Tests of controls and substantive tests of transactions for acquisition and payment cycle are categorized into tests of acquisitions and payment.
The cycle's accounts (receivables, inventory, fixed assets, payables, and expenses) are frequently time-consuming to verify directly by substantive tests of detail. Effective internal controls for the acquisition and payment process may allow the auditor to reduce substantive testing.

Methodology for Designing Tests of Details of Balances for Accounts Payable

Understand client business risks affecting accounts payable.
Set performance materiality.
Assess control risks for the acquisition and payment cycle.
Design and perform tests of controls, substantive tests of transactions for the acquisition and payment cycle.
Design and perform analytical procedures for accounts payable.
Design tests of details of accounts payable to meet balance-related objectives.

Out-of-Period Liability Tests

Auditors emphasis on understatements in accounts payable.
Focus on unrecorded amounts in liability transactions.
These tests use the same procedures as tests for accuracy.

Difference Between Vendor Statements and Confirmations

Vendor Statement provided by the vendor and is in the client's possession when the auditor reviews it—the vendor can alter these statements.
Confirmation: independent third party confirmation of accounts.

Audit of Property, Plant, and Equipment

Property/plant/equipment are assets with a useful life of more than one year, used in the operating business, and not for resale.

Table 19-1: Accounts Typically Associated with the Acquisition and Payment Cycle

Listing of assets, income, and expenses that are usually included in accounts payable transactions.

Auditors Verify Equipment Differently from Current Asset Accounts

Less current period equipment acquisitions, especially large equipment used in manufacturing.
Larger acquisition amount.
Typically kept in accounting records for years.

Perform analytical procedures to verify current year acquisitions, current disposals, ending balances of asset and accumulated depreciation accounts.

Table 19-3: Analytical Procedures for Equipment

Analytical procedures for equipment, including comparing depreciation expense, accumulated depreciation, and other related expense accounts over time.

Verify Current Year Acquisitions

Companies must record current additions to assets accurately as these assets have long-term effects on financial statements and balances.
Errors in asset recording affect the balance sheet and income statement.
Disposal recording must be accurate as well.

Verify Current Year Disposals

Company internal controls should formalize methods for reporting sales, trade-ins, abandonment, and theft of equipment to management. Failure to record disposals leads to overstatement of equipment cost and thus underestimated net book value until asset is fully depreciated.

Verify Ending Balance in Asset Account

Confirm all recorded equipment physically exists and all equipment is recorded correctly.

Verify Depreciation Expense

Depreciation expense involves internal calculations and may need more significant tests for accuracy than other expense types.
Accuracy of a client's depreciation policy needs to be confirmed.

Verify Ending Balance in Accumulated Depreciation

Accumulated Depreciation balance in the master file should agree with the balance on the general ledger.
Test the accuracy of accumulated depreciation in the master file versus total accumulated depreciation on the general ledger.

See Chapter 19

Contains information on the audit of prepaid expenses, accrued liabilities, and income/expense accounts.

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Description

In this quiz, you'll explore the auditing of capital acquisition and repayment as well as cash balances. Focus on evaluating accounts related to acquisitions of goods and services, cash disbursements, and ensuring compliance with accounting standards. Test your knowledge on transaction classes such as purchase returns and allowances.

Audit Practice II - Week 10

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