Auditing Control Activities Quiz
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Questions and Answers

What is the primary purpose of obtaining an understanding of control activities?

  • To document transactions for future reference
  • To determine the client's financial status
  • To perform substantive tests only
  • To assess the effectiveness of the control activities (correct)

    • Inquiry is one of the means by which an auditor obtains an understanding of control activities.

    True (A)

    What document serves as a written request by an employee to the purchasing department?

    Purchase requisition

    A _____ report is prepared on the receipts of goods showing the kinds and quantities received from vendors.

    <p>Receiving</p> Signup and view all the answers

    Which of the following statements about tests of controls is true?

    <p>They provide means for ascertaining the effectiveness of controls. (C)</p> Signup and view all the answers

    Match the documents with their purposes:

    <p>Purchase requisition = Request for goods and services Receiving report = Verification of received goods Voucher = Authorization for payment Purchases transactions files = Data storage for approved purchases</p> Signup and view all the answers

    The extent of tests of controls increases as the auditor's planned level of control risk decreases.

    <p>False (B)</p> Signup and view all the answers

    What must be collected to make a final assessment of control risk?

    <p>Evidence from procedures to obtain an understanding.</p> Signup and view all the answers

    Which of the following is NOT included in the safeguarding measures for fixed assets?

    <p>Providing financial incentives to employees (A)</p> Signup and view all the answers

    It is necessary for an organization to maintain a record of assets that are leased or owned by others.

    <p>True (A)</p> Signup and view all the answers

    What is the purpose of having a system for identifying and reporting damaged, obsolete, and idle fixed assets?

    <p>To ensure proper management and accountability of resources.</p> Signup and view all the answers

    The auditor verifies the additions made during the year from the approval of ___ authority.

    <p>appropriate</p> Signup and view all the answers

    Match the following auditing procedures with their descriptions:

    <p>Examination of records = Verifying financial data from past statements Physical verification = Confirming existence of assets Internal audit = Assessing effectiveness of asset management Insurance check = Ensuring adequate coverage for assets</p> Signup and view all the answers

    What should an auditor check regarding the insurance of fixed assets?

    <p>Adequacy of the insurance coverage and the time period (C)</p> Signup and view all the answers

    Which of the following responsibilities does the auditor have regarding fixed assets?

    <p>Execution of transactions for the acquisition and disposal (D)</p> Signup and view all the answers

    The discrepancies between record books and physical verifications should not be followed up.

    <p>False (B)</p> Signup and view all the answers

    It is necessary for the auditor to look at whether there is a proper segregation of duties relating to fixed assets.

    <p>True (A)</p> Signup and view all the answers

    What is the auditor required to examine regarding the internal audit for fixed assets?

    <p>The scope of the work and the effectiveness of internal controls.</p> Signup and view all the answers

    What should be verified before accepting the receipt of fixed assets?

    <p>Technical specifications of the assets should be verified with the purchase orders.</p> Signup and view all the answers

    The auditor must check that the purchases of fixed assets are made based on ______.

    <p>competitive bids</p> Signup and view all the answers

    Match the following roles related to the acquisition of fixed assets with their responsibilities:

    <p>Top Management = Approves capital expenditures Auditor = Checks internal controls Department Head = Communicates approved budget Procurement Officer = Invites quotations from suppliers</p> Signup and view all the answers

    What should be included in the budget for fixed asset acquisition according to internal controls?

    <p>Written authorization from a senior-level manager (D)</p> Signup and view all the answers

    Adequate controls for the disposal of fixed assets include proper documentation and authorization.

    <p>True (A)</p> Signup and view all the answers

    What must be done if there is a deviation from the capital expenditure budget?

    <p>Approval from the competent authority must be received.</p> Signup and view all the answers

    What is one common sign of unrecorded accounts payable?

    <p>An increase in accounts payable turnover ratio (B)</p> Signup and view all the answers

    The auditor does not need to verify the mathematical accuracy of the listing of amounts owed.

    <p>False (B)</p> Signup and view all the answers

    What are the two sources from which the listing of amounts owed can be prepared?

    <p>Unpaid voucher file or accounts payable subsidiary ledger</p> Signup and view all the answers

    The cash disbursements cutoff test may be performed by __________ and review of internal documentation.

    <p>personal observation</p> Signup and view all the answers

    Match the following tests of accounts payable with their descriptions:

    <p>Vouch Recorded Payables = Verify entries against supporting documents Perform Purchases Cutoff Test = Ensure transactions are recorded in the correct period Perform Cash Disbursements Test = Evaluate cash outflow documentation Analytical Procedures = Assess numerical relationships of accounts</p> Signup and view all the answers

    Which assertion is primarily addressed by the purchases cutoff test?

    <p>Existence or Occurrence (C)</p> Signup and view all the answers

    Goods shipped FOB destination point are included in the buyer's inventory and A/P.

    <p>False (B)</p> Signup and view all the answers

    How many business days before and after the balance sheet date does the purchases cutoff test typically cover?

    <p>5 to 10 business days</p> Signup and view all the answers

    What is the primary purpose of performing tests of control by auditors?

    <p>To assess the effectiveness of internal controls (C)</p> Signup and view all the answers

    Auditors ignore the reassessment of control risk after the initial analysis.

    <p>False (B)</p> Signup and view all the answers

    What do auditors perform to support their planned assessed levels of control risk?

    <p>Additional tests of controls</p> Signup and view all the answers

    The final step in the auditor’s consideration of internal control involves a reassessment of __________ risk.

    <p>control</p> Signup and view all the answers

    Match the substantive testing procedures with their audit objectives:

    <p>Obtain a summary analysis of changes in property = Clerical accuracy Review depreciation transactions = Asset valuation Confirm existence of property = Existence of assets Test for authorization of purchases = Control over transactions</p> Signup and view all the answers

    Which financial statement assertion requires auditors to examine the authorization of purchases of plant and equipment?

    <p>Authorization (C)</p> Signup and view all the answers

    Substantive tests should be modified only if the tests of control indicate failure in effectiveness.

    <p>True (A)</p> Signup and view all the answers

    What should the summary analysis of changes in property reconcile to?

    <p>Ledgers</p> Signup and view all the answers

    Which approach do auditors NOT typically use when evaluating the reasonableness of depreciation estimates?

    <p>Develop a detailed financial plan (D)</p> Signup and view all the answers

    Auditors should only perform tests on the most recent year's accumulated depreciation to assess reasonableness.

    <p>False (B)</p> Signup and view all the answers

    What is the primary purpose of reviewing depreciation policies in auditing?

    <p>To ensure methods allocate costs systematically over service lives</p> Signup and view all the answers

    Auditors compare the _____ amounts from last year to ensure consistency in accounting.

    <p>beginning balances</p> Signup and view all the answers

    Match the following tests to their corresponding objectives in auditing depreciation.

    <p>Test depreciation provisions = Ensure accuracy in computations Review subsequent events = Evaluate external factors affecting estimates Compare credits to accumulated depreciation = Check for consistency in entries Review depreciation policies = Assess systematic allocation of costs</p> Signup and view all the answers

    Which of the following could prompt auditors to adjust normal depreciation rates?

    <p>Extra working shifts (A)</p> Signup and view all the answers

    Excessive depreciation on fully depreciated assets is a concern auditors should investigate.

    <p>True (A)</p> Signup and view all the answers

    What do auditors check when testing deductions from accumulated depreciation?

    <p>They trace deductions to the working paper analyzing retirements of assets.</p> Signup and view all the answers

    Study Notes

    Expenditure Cycle

    • The expenditure cycle encompasses activities related to acquiring and paying for plant assets and goods/services.
    • Three key transaction classes are involved:
      • Acquisition of goods/services
      • Cash disbursements
      • Purchase returns, allowances, and discounts

    Accounts in the Acquisition and Payment Cycle

    • Cash in Bank: Used for cash disbursements.
    • Accounts Payable: Records amounts owed to vendors. Details include cash acquisitions, cash disbursements for goods and services, purchase returns and allowances, and purchase discounts.
    • Raw Material Purchases: Purchase of raw materials used in production.
    • Property, Plant and Equipment: Assets such as buildings and machinery.
    • Prepaid Expenses: Expenses paid in advance.
    • Manufacturing Expense Control Account: Tracks expenses related to the manufacturing process. This includes subsidiary accounts like repair and maintenance, taxes, supplies, freight, and utilities.
    • Selling Expense Control Account: Tracks expenses related to sales, including subsidiary accounts for commissions, travel, delivery, repairs, and advertising.
    • Administrative Expense Control Account: Tracks administrative expenses, including subsidiary accounts for supplies, officer travel, legal fees, and auditing fees and taxes.
    • Accounts Payable: Includes acquisitions of goods and services.

    Consideration of Internal Controls

    • Integrity and ethics are critical due to high potential for fraud in purchase and cash disbursements.
    • Client firm organizational structures and assignment of authority/responsibility for different parts of the expenditure cycle should be clearly stated.
    • Auditors should be aware of feedback from clients' suppliers regarding payment or delivery issues, and external audit feedback regarding weaknesses in internal controls or reportable conditions.

    Obtaining Understanding and Assessing Control Risk

    • Prior experience, inquiry, observation, and document inspection are crucial to understanding control activities for purchase transactions.
    • Tests of controls assess the effectiveness of existing controls. Control risk decreases as tests of controls increase.
    • The scope of control tests varies inversely with the planned level of control risk. The direction of testing should match the objective—vouching for existence/occurrence, and tracing for completeness.
    • Dual purpose tests combine tasks (preparing payment voucher and recording liabilities).

    Controls and Substantive Tests of Transactions for Acquisitions

    • Recorded acquisitions are for goods and services received (occurrence). Existing acquisitions are recorded (completeness).
    • Acquisitions are accurately recorded (accuracy).
    • Acquisitions are correctly included in master files (posting/summarization). Acquisitions are correctly classified (classification). Acquisitions are recorded on correct dates (timing).

    Various Common Documents and Records

    • Purchase requisition: Employee request for item purchase.
    • Receiving report: Vendor goods receipt form.
    • Voucher: Indicates vendor, amount, payment date for purchases (authorization for recording/paying a liability).
    • Purchase transactions files: Computer file for authorized purchase vouchers, used to update A/P, inventory, and general ledger.

    Business Functions in the Cycle

    • Requisitioning: Goods and services request; this usually requires capital expenditure or lease contracts approval.
    • Preparing purchase orders: Prenumbered, signed by authorized agents.
    • Receiving goods: Prenumbered receiving reports document goods received. Receiving reports provide a link to purchase orders.
    • Storing received goods: Obtaining initials on receiving reports documents received goods.
    • Preparing payment vouchers: Ensure agreement of invoice details with receiving reports/purchase orders and ensure mathematical accuracy of vendor invoices.
    • Recording liabilities: Updating A/P, inventory, and G/L using purchase transaction files.

    Substantive Tests of Accounts Payable Balances

    • Accounts payable are highly susceptible to misstatements due to high volume.
    • Tests emphasize completeness assertion of A/P, as well as existence or occurrence.
    • Initial procedures involve tracing the beginning A/P balance from prior year's working papers.
    • Tests include vouching recorded payables to documents; performing purchases cutoff tests; performing cash disbursement tests; and searching for unrecorded payables.
    • Property, plant, and equipment are tangible assets used beyond one year. Subgroups include land, buildings, machinery, equipment, and improvements.
    • Natural resources (wasting assets) include oil, coal, and timber.
    • Internal controls for fixed assets cover segregation and rotation of duties, authorization, maintenance of records, accountability, and independent checks.

    Auditor's Objectives in Auditing Property, Plant, and Equipment

    • Consider internal control.
    • Determine existence.
    • Establish completeness.
    • Establish ownership rights.
    • Establish clerical accuracy.
    • Evaluate valuation or allocation and disclosures.
    • Determine that disclosure of depreciation methods is appropriate.
    • Obtain evidence about related depreciation expenses, accumulated depreciation, and repair/maintenance expenses.

    Substantive Procedures for Fixed Assets

    • Examining records and documents (opening balances, additions, repairs, disposal, ownership).
    • Reviewing or observing second verification.
    • Examining valuation and disclosures (depreciation, impairment).
    • Analytical procedures (comparing current year additions/disposals to budgeted figures, ratios of depreciation to average book value, and ratio of actual capacity utilization to installed capacity).
    • Obtaining management’s representation regarding fixed assets.
    • Testing depreciation calculations.
    • Evaluating depreciation methods and provisions.

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    Chapter 4: Audit of Acquisition & Payment Cycle PDF

    Description

    This quiz assesses your understanding of control activities in auditing. It covers various topics, including inquiry methods, test controls, and asset management. Challenge yourself to determine correct procedures and document purposes in auditing scenarios.

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