Auditing and Assurance Services, 17e (Arens/Elder/Beasley)

Chapter 18 Audit of the Acquisition and Payment Cycle: Tests of Controls,

Substantive Tests of Transactions, and Accounts Payable

18.1 Learning Objective 18-1

1) The overall objective in the audit of the acquisition and payment cycle is
A) to ensure the reliability of the affected accounts.
B) to ensure the accuracy of the affected accounts.
C) to evaluate whether the affected accounts are fairly presented in accordance with accounting
standards.
D) to evaluate whether fraudulent payments were made.
Answer: C
Terms: Overall objective of audit of acquisition and payment cycle
Difficulty: Easy
Objective: LO 18-1
AACSB: Reflective thinking

2) Which of the following accounts is not part of the acquisition and payment cycle?
A) prepaid expenses
B) accounts payable
C) sales returns and allowances
D) property, plant, and equipment
Answer: C
Terms: Overall objective of audit of acquisition and payment cycle
Difficulty: Easy
Objective: LO 18-1
AACSB: Reflective thinking

3) Which of the following is not one of the classes of transactions in the acquisition and payment
cycle?
A) acquisition of common stock
B) acquisition of goods and services
C) cash disbursements
D) purchase returns and allowances and purchase discounts
Answer: A
Terms: Acquisition and payment cycle and class of transactions
Difficulty: Easy
Objective: LO 18-1
AACSB: Reflective thinking

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4) Which of the following accounts is not included in the acquisitions class of transactions?
A) inventory
B) prepaid expenses
C) sales discounts
D) accounts payable
Answer: C
Terms: Account not included in acquisition class of transactions
Difficulty: Easy
Objective: LO 18-1
AACSB: Reflective thinking

5) The acquisition and payment cycle consists of one class of transactions.

Answer: FALSE
Terms: Acquisition and payment cycle and class of transactions
Difficulty: Easy
Objective: LO 18-1
AACSB: Reflective thinking

6) The cash account is not part of the acquisitions and payment cycle.
Answer: FALSE
Terms: Cash account and acquisitions and payment cycle
Difficulty: Easy
Objective: LO 18-1
AACSB: Reflective thinking

7) Auditing the acquisition and payment cycle often takes more time than any other cycle.
Answer: FALSE
Terms: Acquisition and payment cycle
Difficulty: Easy
Objective: LO 18-1
AACSB: Reflective thinking

8) Inadequate controls over purchases and accounts payable can result in opportunities to
embezzle from the organization.
Answer: TRUE
Terms: Acquisition and payment cycle
Difficulty: Easy
Objective: LO 18-1
AACSB: Reflective thinking

9) Companies may deliberately understate accounts payable to overstate financial performance.

Answer: TRUE
Terms: Acquisition and payment cycle
Difficulty: Easy
Objective: LO 18-1
AACSB: Reflective thinking

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18.2 Learning Objective 18-2

1) What typically initiates the acquisitions and payment cycle?

A) issuance of a purchase requisition or request for purchase of goods or services
B) issuance of payment to vendor
C) approval of a new vendor
D) purchase requisition
Answer: A
Terms: Initiates acquisition and payment cycle
Difficulty: Easy
Objective: LO 18-2
AACSB: Reflective thinking

2) What typically ends the acquisitions and payment cycle?

A) issuance of a purchase requisition or request for purchase of goods/services
B) issuance of a payment on accounts payable
C) approval of a new vendor
D) purchase requisition
Answer: B
Terms: Ends acquisition and payment cycle
Difficulty: Easy
Objective: LO 18-2
AACSB: Reflective thinking

3) A document indicating a reduction in the amount owed to a vendor because of returned goods
is
A) a debit memo.
B) a credit memo.
C) a receiving report.
D) a contractual adjustment form.
Answer: A
Terms: Document indicating a reduction in the amount owed to a vendor for returned goods
Difficulty: Easy
Objective: LO 18-2
AACSB: Reflective thinking

4) A document used by organizations to establish a formal means of recording and controlling

acquisitions which usually contains a package of documents about the acquisition is the
A) voucher.
B) purchase order.
C) receiving report.
D) purchase requisition.
Answer: A
Terms: Document used to establish formal means of recording and controlling acquisitions
Difficulty: Easy
Objective: LO 18-2
AACSB: Reflective thinking
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5) The computer-generated file which records acquisitions, disbursements and allowances for
each vendor is the
A) accounts payable master file.
B) cash disbursements file.
C) acquisitions transaction file.
D) purchase approval file.
Answer: A
Terms: Computer-generated file which records acquisitions, disbursements and allowances for
vendor
Difficulty: Easy
Objective: LO 18-2
AACSB: Reflective thinking

6) Which of the following business functions is not considered to be part of the acquisitions class
of transactions?
A) processing purchase orders
B) recognizing liabilities
C) receiving goods and services
D) processing cash disbursements
Answer: D
Terms: Business function not a part of acquisitions class of transactions
Difficulty: Moderate
Objective: LO 18-2
AACSB: Reflective thinking

7) Smaller privately held companies may not maintain an accounts payable master file by
vendor. These companies pay on the basis of
A) vendors' monthly statements.
B) individual vendors' invoices.
C) the accounts payable account in the general ledger.
D) dunning letters.
Answer: B
Terms: Accounts payable master file and small companies
Difficulty: Moderate
Objective: LO 18-2
AACSB: Reflective thinking

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8) After a purchase requisition is approved, a ________ must be initiated to purchase the goods
or services.
A) purchase order
B) vendor order
C) call order
D) vendor invoice
Answer: A
Terms: Purchase requisition
Difficulty: Easy
Objective: LO 18-2
AACSB: Reflective thinking

9) A document generally received from the vendor which indicates a reduction in the amount
owed due to the company granting an allowance is a
A) vendor invoice.
B) debit memo.
C) credit adjustment form.
D) credit memo.
Answer: B
Terms: Document received from vendor which indicates a reduction of amount owed
Difficulty: Moderate
Objective: LO 18-2
AACSB: Reflective thinking

10) Absent disputed amounts and minor timing differences, the vendor's statements should
reconcile to the
A) acquisition journal.
B) accounts payable master file.
C) cash disbursements amount for purchases.
D) vouchers payable amount for vendors.
Answer: B
Terms: Vendor's statements and accounts payable master file
Difficulty: Moderate
Objective: LO 18-2
AACSB: Reflective thinking

11) At what point in the acquisition and payment cycle do most companies first recognize the
acquisition and related liability on their records?
A) when the purchase requisition is received by the accounting department
B) when the purchase order is prepared
C) when the company receives the invoice from the vendor
D) when the company receives the goods or services from the vendor
Answer: D
Terms: Recognize acquisition and liability
Difficulty: Moderate
Objective: LO 18-2
AACSB: Reflective thinking
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12) In the processing and recording of cash disbursements,
A) after a check includes the signature of an authorized person, it is a liability.
B) when a check cashed by the vendor has cleared the bank, it is called an outstanding check.
C) in many cases, the company submits payment to the vendor electronically through an
electronic funds transfer (EFT) between the company's bank and the vendor's bank.
D) the accounts payable master file is a computer-generated file that includes all cash
disbursement transaction processed by the accounting system for a period.
Answer: C
Terms: Process which requires calculation of an interval
Difficulty: Moderate
Objective: LO 18-2
AACSB: Reflective thinking

13) List the following documents or records in the order they are typically processed with
regards to purchase order processing:
a. Purchase requisition
b. Purchase order
c. Receiving Report
A) c, b, a
B) a, b, c
C) b, a, c
D) c, a, b
Answer: B
Terms: Order of processing purchase order processing related documents in the acquisition and
payment cycle
Difficulty: Easy
Objective: LO 18-2
AACSB: Reflective thinking

14) The acquisition and payment cycle typically begins with the initiation of a purchase
requisition for goods and services from an authorized individual.
Answer: TRUE
Terms: Acquisition and payment cycle
Difficulty: Moderate
Objective: LO 18-2
AACSB: Reflective thinking

15) A vendor invoice is normally prepared at the time tangible goods are received and indicates
the description of goods, the quantity received, the date received, and other relevant data.
Answer: FALSE
Terms: Vendor invoice
Difficulty: Moderate
Objective: LO 18-2
AACSB: Reflective thinking

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16) A document received from the vendor indicating such things as the description and quantity
of goods and services received, price including freight, cash discount terms, and date of billing is
called the voucher.
Answer: FALSE
Terms: Voucher
Difficulty: Moderate
Objective: LO 18-2
AACSB: Reflective thinking

17) An acquisitions transaction file is a computer-generated file that includes all information
entered into the system regarding acquisition transactions.
Answer: TRUE
Terms: Acquisition transaction file
Difficulty: Moderate
Objective: LO 18-2
AACSB: Reflective thinking

18) The acquisition and payment cycle ends with the receiving of the goods or services.
Answer: FALSE
Terms: Acquisition and payment cycle
Difficulty: Easy
Objective: LO 18-2
AACSB: Reflective thinking

19) Purchase returns and allowances and purchase discounts business functions are also part of
the acquisition and payment cycle.
Answer: TRUE
Terms: Acquisition and payment cycle
Difficulty: Easy
Objective: LO 18-2
AACSB: Reflective thinking

20) Purchase returns and allowances and purchase discounts business functions are generally not
significant in amount for most companies.
Answer: TRUE
Terms: Acquisition and payment cycle
Difficulty: Easy
Objective: LO 18-2
AACSB: Reflective thinking

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21) For companies using Electronic Data Interface (EDI), the invoice is transmitted from the
supplier electronically. EDI affects how the auditor evaluates audit evidence in this transaction
cycle.
Answer: TRUE
Terms: Acquisition and payment cycle
Difficulty: Easy
Objective: LO 18-2
AACSB: Reflective thinking

22) The total of the unpaid individual account balances in the accounts payable master file
should equal the total accounts payable balance in the general ledger.
Answer: TRUE
Terms: Acquisition and payment cycle
Difficulty: Easy
Objective: LO 18-2
AACSB: Reflective thinking

23) Most companies maintain an accounts payable master file by vendor.

Answer: FALSE
Terms: Acquisition and payment cycle
Difficulty: Easy
Objective: LO 18-2
AACSB: Reflective thinking

24) It is possible to use Electronic Data Interface (EDI) to process payments to vendors
electronically using Electronic Funds Transfer (EFT) between the company's bank and the
vendor's bank.
Answer: TRUE
Terms: Acquisition and payment cycle
Difficulty: Easy
Objective: LO 18-2
AACSB: Reflective thinking

25) After a check prepared for payment to a vendor includes the signature of an authorized
person, the check is now a liability.
Answer: FALSE
Terms: Acquisition and payment cycle
Difficulty: Easy
Objective: LO 18-2
AACSB: Reflective thinking

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26) After a check is cashed by a vendor and clear's the vendors and the client's bank, the check is
now a cancelled check and is no longer a liability, but now is a document.
Answer: FALSE
Terms: Acquisition and payment cycle
Difficulty: Easy
Objective: LO 18-2
AACSB: Reflective thinking

27) List the four business functions in the acquisition and payment cycle.
Answer:
1. processing purchase orders
2. receiving goods and services
3. recognizing the liability
4. processing and recording cash disbursements
Terms: Functions in acquisition and payment cycle
Difficulty: Moderate
Objective: LO 18-2
AACSB: Reflective thinking

28) Discuss each of the four business functions that comprise the acquisition and payment cycle.
Answer: The four business functions that comprise the acquisition and payment cycle are:
• Processing purchase orders. This function involves the preparation of a purchase requisition
and a purchase order to acquire goods and services.
• Receiving goods and services. When goods are received, a receiving report is prepared that
indicates the description of goods, the quantity received, the date received, and other relevant
data.
• Recognizing the liability. In most companies, the liability for acquisitions is recognized when
the goods and services are received. The initial recording affects the financial statements and the
actual cash disbursement; therefore, companies must take care to include all acquisition
transactions, only acquisitions that occurred, and at the correct amount.
• Processing and recording cash disbursements. This function involves the signing and mailing
of the check for payment of the acquisition and recording of the cash disbursement in the cash
disbursements journal.
Terms: Business functions of the acquisition and payment cycle
Difficulty: Moderate
Objective: LO 18-2
AACSB: Reflective thinking

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29) Describe purchase requisitions and purchase orders. What is a key difference between the
two documents?
Answer: Purchase requisitions represent requests for goods and services by an authorized
employee. Requisitions may originate from any authorized company employee such as a
storeroom supervisor or manufacturing manager. Purchase orders are documents that are used to
order goods and services from vendors. It includes the description, quantity, and other related
information for goods or services that the company intends to purchase and is often used to
indicate authorization of the acquisition. Unlike requisitions, purchase orders are directed to
specific vendors. The purchase order is often used to indicate authorization of the acquisition.
Terms: Purchase requisitions and purchase orders
Difficulty: Moderate
Objective: LO 18-2
AACSB: Reflective thinking

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30) Match seven of the terms for documents and records (a-m) used in the acquisitions and cash
disbursement cycle with the descriptions provided below (1-7).

a. purchase requisition
b. purchase order
c. receiving report
d. acquisitions journal
e. summary acquisitions report
f. vendor's invoice
g. debit memo
h. voucher
i. accounts payable master file
j. accounts payable trial balance
k. vendor's statement
l. check
m. cash disbursements journal

________ 1. a document indicating a reduction in the amount owed to a vendor because of

returned goods or an allowance granted

________ 2. a document received from the vendor which shows the amount owed for an
acquisition

________ 3. a document prepared by the purchasing department indicating the description,

quantity, and related information for goods and services that the company intends to purchase

________ 4. a listing of the amount owed to each vendor at a point in time

________ 5. a document used to establish a formal means of recording and controlling

acquisitions; it includes a cover sheet and a package of relevant documents

________ 6. a document used to request goods and services by an authorized employee

________ 7. the listing or report that includes all cash payments for a given period

Answer: 1. g, 2. f, 3. b, 4. j, 5. h, 6. a, 7. m
Terms: Purchase requisition; Purchase order; Vendor's invoice; Debit memo; Voucher;
Accounts payable trial balance; Cash disbursements journal
Difficulty: Moderate
Objective: LO 18-2
AACSB: Reflective thinking

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18.3 Learning Objective 18-3

1) You have been assigned to the accounts payable transaction cycle as part of your auditing
responsibilities. You have decided to vouch a sample of entries in the accounts payable master
file to supporting documents. Which assertion is this test of controls most likely to support?
A) accuracy
B) classification
C) completeness
D) occurrence
Answer: D
Terms: Assertion for test of controls
Difficulty: Easy
Objective: LO 18-3
AACSB: Reflective thinking

2) An auditor is gathering evidence on the completeness assertion. To do so, she performs a test
to verify that all goods received by the company have been recorded properly. The document
population for this test would consist of all
A) vendor invoices.
B) purchase orders.
C) receiving reports.
D) cash disbursements for accounts payable.
Answer: C
Terms: Evidence on completeness assertion to verify all goods received are recorded properly
Difficulty: Easy
Objective: LO 18-3
AACSB: Reflective thinking

3) Which of the following is not an accurate statement regarding the acquisition and payment
cycle?
A) The personnel in the receiving department should be independent of the storeroom personnel.
B) Goods received should be physically controlled from the time of their receipt until their use or
disposal.
C) Accounting records should transfer responsibility for the goods each time they are moved.
D) The accounting department should be responsible for receiving goods and preparing the
receiving report.
Answer: D
Terms: Internal control test to detect erroneous recording of purchase
Difficulty: Easy
Objective: LO 18-3
AACSB: Reflective thinking

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4) When reviewing the controls and procedures in the acquisition and payment cycle,
A) companies cannot record the liability for the acquisition until the invoice is received from the
vendor.
B) the purchasing department has the responsibility for verifying for appropriateness of the
acquisition.
C) personnel who record the acquisitions should not have access to cash or other assets.
D) the accounts payable department should account for all receiving reports to assure that the
occurrence objective is satisfied.
Answer: C
Terms: Tests of controls for cash disbursement system; Audit procedures
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

5) A written purchase order is a contractual document that is

A) an offer to buy goods or services.
B) not enforceable if it is not in writing.
C) prepared by the receiving department.
D) an acceptance of a vendor's catalog offer to sell.
Answer: A
Terms: Written purchase order is a legal contractual document
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

6) Which one of the following duties should not be assigned to the purchasing department?
A) finding the lowest cost vendor
B) reviewing vendors' catalog descriptions and prices for standardized items
C) designing the purchase order form
D) authorizing the acquisition of goods
Answer: D
Terms: Duties not to be assigned to the purchases department
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

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7) The accounts payable department usually has responsibility for approving acquisitions for
payment by comparing the details on the
A) vendor's invoice and the receiving report.
B) vendor's invoice and the purchase requisition.
C) purchase order, receiving report, and vendor's invoice.
D) purchase requisition, purchase order, and receiving report.
Answer: C
Terms: Accounts payable department responsibility for approving acquisitions for payment by
comparing details
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

8) A substantive test of transactions for acquisitions that would be used to provide evidence
regarding the occurrence assertion would be to
A) compare the classification with the chart of accounts by referring to vendors' invoices.
B) recompute the clerical accuracy on the vendors' invoices.
C) review the acquisitions journal for large or unusual amounts.
D) trace from a file of receiving reports to the acquisition journal.
Answer: C
Terms: Substantive test of accounts payable to provide evidence regarding occurrence assertion
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

9) When testing the controls for the completeness transaction-related audit objectives,
A) failure to record the acquisition of goods or services will generally understate net income.
B) failure to record the acquisition of goods or services has no impact on the balance sheet.
C) it is generally easy for the auditor to determine whether unrecorded transactions exist.
D) the audit time for accounts payable can be reduced if the client has effective internal controls
and the auditor properly tests those controls.
Answer: D
Terms: Acquisition and payment cycle
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

10) Which of the following is not a key control in the acquisition and payment cycle?
A) authorization of purchases
B) authorization of credit
C) timely recording and independent review of transactions
D) authorization of payments
Answer: B
Terms: Not a key control in acquisition and payment cycle
Difficulty: Easy
Objective: LO 18-3
AACSB: Reflective thinking
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11) A key internal control over the acquisition cycle is to ensure that the company requires
recording transactions as soon as possible after the goods and services have been received. This
satisfies the transaction-related audit objective of
A) accuracy.
B) completeness.
C) timing.
D) occurrence.
Answer: C
Terms: Controls over acquisition cycle; timing
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

12) When a client uses perpetual inventory records, the tests of details of balances for inventory
can be significantly reduced if the auditor believes the records are accurate. The controls over the
acquisitions included in the records are normally tested as a part of the
A) tests of controls for acquisitions.
B) tests of controls and substantive tests of transactions for acquisitions.
C) tests of details of balances for acquisitions.
D) analytical procedures and tests of controls for acquisitions.
Answer: B
Terms: Tests of details of balances for inventory
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

13) The auditor's internal control objective to determine that "recorded acquisitions are for goods
and services received" satisfies the audit objective of
A) accuracy.
B) occurrence.
C) authorization.
D) completeness.
Answer: B
Terms: Internal control objective that recorded acquisitions are for goods and services received
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

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14) Failure to record the acquisition of goods is a violation of which audit objective?
A) accuracy
B) occurrence
C) authorization
D) completeness
Answer: D
Terms: Failure to record acquisition is violation of which audit objective
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

15) The internal control that requires that "checks are prenumbered and accounted for" satisfies
the objective of
A) accuracy.
B) existence.
C) completeness.
D) posting and summarization.
Answer: C
Terms: Internal control that requires that checks are prenumbered and accounted for
Difficulty: Easy
Objective: LO 18-3
AACSB: Reflective thinking

16) Because of the importance of tests of controls and substantive tests of transactions for
acquisitions and cash disbursements, it is common in this audit area to use
A) block sampling.
B) variables sampling.
C) attributes sampling.
D) probability proportional to size sampling.
Answer: C
Terms: Tests of controls and substantive tests of transactions for acquisitions and cash
disbursements
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

17) Which of the following tests of controls is least useful in assessing the transaction-related
audit objective related to occurrence?
A) Examine documents in voucher package for occurrence.
B) Examine supporting documents for indication of approval.
C) Account for sequence of vouchers.
D) Attempt to input transactions with valid and invalid vendors.
Answer: C
Terms: Tests of controls for transaction-related audit objectives related to occurrence
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking
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18) You are performing the audit of Jenkins and Company. Your tests of controls and tests of
transactions for accounts payable demonstrate that the controls are operating effectively. This
would normally allow you to
A) eliminate the need for substantive testing of balances for accounts payable.
B) reduce the need for substantive testing of balances for accounts payable.
C) reduce control tests in other transactions cycles.
D) increase the need for substantive testing of balances for accounts payable.
Answer: B
Terms: Tests of controls and tests of transactions demonstrate controls are operating effectively
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

19) An auditor is using audit sampling to test transactions in the acquisition and payment cycle.
She would normally set the tolerable exception rate at what level?
A) Low
B) Medium
C) High
D) Indeterminate
Answer: A
Terms: Test of transactions in the acquisition and payment cycle; Tolerable exception
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

20) Which of the following is the most effective control procedure to detect vouchers that were
prepared for the payment of goods that were not received?
A) Count goods upon receipt in storeroom.
B) Match purchase order, receiving report, and vendor's invoice for each voucher in accounts
payable department.
C) Compare goods received with goods requisitioned in receiving department.
D) Verify vouchers for accuracy and approval in internal audit department.
Answer: B
Terms: Most effective control procedure to detect vouchers that were prepared, and payment for
goods not received
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

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21) Which of the following should sign checks under conditions of effective internal control?
A) treasurer
B) purchasing agent
C) accounts payable clerk
D) person preparing the checks
Answer: A
Terms: Effective internal controls; Responsible for signing checks
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

22) Which of the following is a key internal control for the posting and summarization
transaction-related audit objective?
A) Batch totals are compared with computer summary reports.
B) Documents are canceled.
C) Dates are internally verified.
D) The accounts payable master file contents are internally verified.
Answer: D
Terms: Posting and summarization transaction-related audit objective
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

23) The test of transactions which requires one to "reconcile recorded cash disbursements with
the cash disbursements on the bank statement" satisfies the objective of
A) occurrence.
B) completeness.
C) accuracy.
D) posting and summarization.
Answer: B
Terms: Test of transactions to reconcile recorded cash disbursement with those on bank
statement
Difficulty: Challenging
Objective: LO 18-3
AACSB: Reflective thinking

24) For effective internal control purposes, the accounts payable department generally should
A) approve the purchase order.
B) have the authority to sign the checks.
C) establish the agreement of the vendor's invoice with the receiving report and purchase order.
D) supervise the preparation of the receiving report.
Answer: C
Terms: Effective internal control, vouchers payable department
Difficulty: Challenging
Objective: LO 18-3
AACSB: Reflective thinking

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25) An auditor performs a test to determine whether all merchandise for which the client was
billed was received. The population for this test consists of all
A) merchandise received.
B) vendors' invoices.
C) canceled checks.
D) receiving reports.
Answer: B
Terms: Auditor performs test to determine whether all merchandise for which client was billed
was received
Difficulty: Challenging
Objective: LO 18-3
AACSB: Reflective thinking

26) Matching the supplier's invoice, the purchase order, and the receiving report prior to
preparing the voucher would normally be the responsibility of the
A) warehouse receiving function.
B) purchasing function.
C) general accounting function.
D) treasury function.
Answer: C
Terms: Responsibility for matching supplier's invoice with the purchase order and receiving
report
Difficulty: Challenging
Objective: LO 18-3
AACSB: Reflective thinking

27) A CPA learns that his client has paid a vendor twice for the same shipment, once based upon
the original invoice and once based upon the monthly statement. A control procedure that should
have prevented this duplicate payment is the
A) attachment of the receiving report to the disbursement report.
B) prenumbering of disbursement vouchers.
C) use of a limit or reasonableness test.
D) prenumbering of receiving reports.
Answer: A
Terms: Control procedure that prevents duplicate payment on invoice
Difficulty: Challenging
Objective: LO 18-3
AACSB: Reflective thinking

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28) With respect to a small company's system of purchasing supplies, an auditor's primary
concern should be to obtain satisfaction that supplies ordered and paid for have been
A) requested by and approved by the same individual.
B) used in the course of business and solely for business purposes during the year under audit.
C) received, counted, and checked to quantities and amounts on purchase orders and invoices.
D) properly recorded as assets and systematically amortized over the estimated useful life of the
supplies.
Answer: C
Terms: Auditor's primary concern in system of purchasing supplies for supplies ordered and
paid for
Difficulty: Challenging
Objective: LO 18-3
AACSB: Analytic thinking

29) Internal controls that are likely to prevent the client from including as a business expense
those transactions that primarily benefit management or other employees rather that the entity
being audited satisfy the control objective that
A) acquisitions are correctly valued.
B) existing acquisitions are recorded.
C) acquisitions are correctly classified.
D) recorded acquisitions are for goods and services received.
Answer: D
Terms: Internal controls for asset acquisitions
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

30) Significant audit efficiencies can be achieved on many audits when controls are operating
effectively.
Answer: TRUE
Terms: Audit efficiency and internal controls
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

31) Failure to record the acquisition of goods and services received overstates both accounts
payable and net income.
Answer: FALSE
Terms: Failure to record acquisition of goods
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

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32) The controls over acquisitions included in the perpetual inventory records are normally
tested as a part of the test of controls and substantive tests of transactions for the sales and
collection cycle.
Answer: FALSE
Terms: Tests of controls and substantive tests of transactions
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

33) Because of the importance of tests of controls and substantive tests of transactions for
acquisitions and cash disbursements, attributes sampling is commonly used when testing the
acquisitions and cash disbursements cycle.
Answer: TRUE
Terms: Importance of tests of controls and substantive tests of transactions; Attributes sampling
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

34) A substantive test of transactions commonly used to test the completeness objective for
acquisitions is "Trace from a file of receiving reports to the acquisitions journal."
Answer: TRUE
Terms: Substantive test of transactions to test completeness objective for acquisitions
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

35) The audit procedure "Test clerical accuracy by footing the journals and tracing postings to
general ledger and to accounts payable and inventory master files" is used to test the posting and
summarization objective for acquisitions.
Answer: TRUE
Terms: Audit procedure to test clerical accuracy to test posting and summarization objective
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

36) Auditors are normally more concerned about violations of the completeness objective for
acquisitions than about violations of the occurrence objective for acquisitions.
Answer: TRUE
Terms: Auditor more concerned with violation of completeness objective than occurrence
objective for acquisitions
Difficulty: Challenging
Objective: LO 18-3
AACSB: Reflective thinking

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37) Checks should be prenumbered to make it easier to account for all checks.
Answer: TRUE
Terms: Acquisition and payment cycle
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

38) Since there are a large number of accounts involved in the acquisition and payment cycle,
there is the potential for classification misstatements, some of which are likely to affect income.
Answer: TRUE
Terms: Acquisition and payment cycle
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

39) The audit procedure "Examine canceled check for authorized signature, proper endorsement,
and cancellation by the bank" is used to test the occurrence objective for cash disbursements.
Answer: TRUE
Terms: Audit procedure for occurrence objective for cash disbursements
Difficulty: Challenging
Objective: LO 18-3
AACSB: Reflective thinking

40) Auditors typically perform the acquisitions and cash disbursements tests at different times.
Answer: FALSE
Terms: Acquisition and payment cycle
Difficulty: Easy
Objective: LO 18-3
AACSB: Reflective thinking

41) One of important internal controls over cash disbursements should include not only the
physical signing of checks, but also the approval of electronic funds transfers by individuals with
proper authority.
Answer: TRUE
Terms: Acquisition and payment cycle
Difficulty: Easy
Objective: LO 18-3
AACSB: Reflective thinking

42) A key internal control in the acquisition and payment cycle is someone matching the key
information contained on the purchase requisition, the purchase order, the receiving report, and
the vendor's invoice to the payment voucher.
Answer: TRUE
Terms: Key controls in acquisition and payment cycle
Difficulty: Easy
Objective: LO 18-3
AACSB: Reflective thinking
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43) Auditors must also take into consideration the identification of material contracts,
commitments, and related party transactions which require disclosure in the financial statements
and/or the footnotes to the financial statements.
Answer: TRUE
Terms: Acquisition and payment cycle
Difficulty: Easy
Objective: LO 18-3
AACSB: Reflective thinking

44) What are the three most important controls over cash disbursements?
Answer:
• signing of checks by an individual with proper authority.
• separation of responsibilities for signing checks and performing the
accounts payable function.
• careful examination of supporting documents by the check signer
at the time the check is signed.
Terms: Important controls over cash disbursements
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

45) Discuss the key internal controls that should be present in the processing purchase orders
function in the acquisitions and payment cycle.
Answer: Proper authorization for acquisitions ensures that the goods and services acquired are
for authorized company purposes, and it avoids the acquisition of excessive or unnecessary
items. Most companies require different levels of authorization for different types of acquisitions
or dollar amounts. For effective internal control, the purchasing department should be separate
from those who authorize the acquisition or receive the goods. Purchase orders should be
prenumbered to permit easier accounting for all outstanding purchase orders and should be
designed to minimize the likelihood of unintentional omissions on the form when goods are
ordered.
Terms: Key internal controls for processing purchase orders in the acquisitions and payment
cycle
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

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46) Discuss the key internal controls that should be present in the receiving goods and services
function in the acquisitions and payment cycle.
Answer: For good internal control over the receiving goods and services function, most
companies require that the receiving department initiate a receiving report as evidence of the
receipt and examination of the goods. One copy of the report is sent to the raw materials
storeroom and another to the accounts payable department for their information needs. To
prevent theft and misuse, it is important that the goods be physically controlled from the time of
their receipt until their disposal. The personnel in the receiving department should be
independent of the storeroom personnel and the accounting department. In addition, the
accounting records should transfer responsibility for the goods as they are transferred from
receiving to storage and from storage to manufacturing.
Terms: Key internal controls in receiving goods and services in the acquisitions and payment
cycle
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

47) How do auditors determine the extent of testing of internal controls in the acquisition and
payment cycle?
Answer: When auditors intend to rely on controls to support a preliminary control risk
assessment below maximum, the auditor performs tests of controls to obtain evidence that
controls are operating effectively. As the operating effectiveness of controls improves and is
supported by additional tests of controls, the auditor is able to reduce substantive tests. If the
company is an accelerated filer public company, then the auditor must document and test
controls sufficiently to issue an opinion on internal control over financial reporting.
Terms: Extent of testing of internal controls in the acquisitions and payment cycle
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

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48) Listed below are some management assertions made for the acquisition and payment cycle.
For each one, give an example of how the auditor, by using the documents normally found in the
process, can apply an auditing procedure to test the assertion.
completeness
timing
accuracy
Answer: (may vary based on student response)
completeness:
Trace from a file of receiving reports to the acquisitions journal.
Trace from a file of vendors' invoices to the acquisition journal.

timing:
Compare dates of receiving reports and vendors' invoices with dates in the acquisitions journal.

accuracy:
Compare recorded transactions in the acquisitions journal with the vendor's invoice, receiving
report, and other supporting documentation.
Recompute the clerical accuracy on the vendor's invoice, including discounts and freight.
Terms: Tests for management assertions for acquisition and payment cycle
Difficulty: Moderate
Objective: LO 18-3
AACSB: Reflective thinking

18.4 Learning Objective 18-4

1) A liability is properly accounted for as an account payable if

A) the amount is known and owed as of the balance sheet date.
B) the amount can be estimated and is owed at the balance sheet date.
C) the amount is known at the balance sheet date and owed by the end of the next fiscal year.
D) the amount is estimated and owed within 90 days of the balance sheet date.
Answer: A
Terms: Liability is properly accounted for as accounts payable
Difficulty: Moderate
Objective: LO 18-4
AACSB: Reflective thinking

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2) When determining the methodology for designing tests of details of balances for accounts
payable,
A) the focus by many companies on improving their supply-chain management activities has led
to numerous changes in the design of systems used to initiate and record acquisition and payment
activities.
B) it is relatively inexpensive to audit accounts payable.
C) performance materiality for accounts payable is set relatively low.
D) inherent risk is often set at low.
Answer: A
Terms: Risk and accounts payable
Difficulty: Moderate
Objective: LO 18-4
AACSB: Reflective thinking

3) Auditors are especially concerned about the ________ and ________ balance-related audit
objectives because of the potential for understatements in the account balance.
A) completeness; cutoff
B) completeness; accuracy
C) classification; realizable value
D) classification; cutoff
Answer: A
Terms: Balance-related audit objectives for accounts payable
Difficulty: Moderate
Objective: LO 18-4
AACSB: Reflective thinking

4) The auditors' ultimate substantive tests depend on the relative effectiveness of internal
controls related to accounts payable.
Answer: TRUE
Terms: Substantive tests for accounts payable
Difficulty: Easy
Objective: LO 18-4
AACSB: Reflective thinking

5) Auditors typically set performance materiality for accounts payable relatively low.
Answer: FALSE
Terms: Performance materiality
Difficulty: Easy
Objective: LO 18-4
AACSB: Reflective thinking

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6) Most accrued liabilities can be identified by the existence of vendors' invoices for the
obligation.
Answer: FALSE
Terms: Accounts payable and accrued liabilities
Difficulty: Easy
Objective: LO 18-4
AACSB: Reflective thinking

7) Once the auditor concludes that internal controls are operating effectively in the acquisition
and the payment cycle, the verification of accounts payable should require little audit effort.
Answer: TRUE
Terms: Audit of accounts payable
Difficulty: Easy
Objective: LO 18-4
AACSB: Reflective thinking

8) Examples of a client not using prenumbered receiving reports, a client not recording
acquisitions until cash disbursements are actually made, and because of cash shortages paying
bills several months after their due date generally force the auditor to perform more extensive
substantive testing of the details of accounts payable.
Answer: TRUE
Terms: Accounts payable and accrued liabilities
Difficulty: Easy
Objective: LO 18-4
AACSB: Reflective thinking

9) Describe the methodology for designing tests of details of balances for accounts payable.
Answer: The methodology for designing tests of accounts payable consists of:
1. Identify significant risks and assess risk of material misstatement for accounts payable.
2. Set performance materiality for accounts payable.
3. Assess control risk for the acquisition and payment cycle.
4. Design and perform tests of controls and substantive tests of transactions
for the acquisition and payment cycle.
5. Design and perform analytical procedures for accounts payable.
6. Design tests of details of accounts payable to satisfy balance-related audit
objectives. Decide audit procedures to perform, sample size, items to select,
and timing of tests.
Terms: Methodology for designing tests of details of balances for accounts payable
Difficulty: Moderate
Objective: LO 18-4
AACSB: Reflective thinking

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18.5 Learning Objective 18-5

1) Which substantive analytical procedure would help determine if there are unrecorded or
nonexistent accounts?
A) Review the list of accounts payable for unusual items.
B) Compare acquisition-related expense account balances with prior years.
C) Calculate ratios, such as accounts payable divided by current liabilities.
D) Calculate ratios, such as sales divided by gross profit.
Answer: C
Terms: Substantive analytical procedures
Difficulty: Moderate
Objective: LO 18-5
AACSB: Reflective thinking

2) A misstatement of an expense account usually also results in an equal misstatement of

accounts receivable.
Answer: FALSE
Terms: Substantive analytical procedures
Difficulty: Easy
Objective: LO 18-5
AACSB: Reflective thinking

3) Because of double-entry accounting, misstatement of an expense account usually also results

in an equal misstatement of accounts payable.
Answer: TRUE
Terms: Substantive analytical procedures
Difficulty: Moderate
Objective: LO 18-5
AACSB: Reflective thinking

4) Explain why auditors should compare current year expense totals with prior year expense
totals as an analytical procedure for accounts payable.
Answer: Auditors should compare current year expense totals with prior years to uncover
misstatements in accounts payable as well as in the expense accounts. Because of double-entry
accounting, a misstatement of an expense account usually also results in an equal misstatement
of accounts payable. Therefore, comparing current expenses such as rent, utilities, and other
regularly scheduled bills with prior years is an effective procedure for analyzing accounts
payable when expenses from year to year are expected to be relatively stable.
Terms: Substantive analytical procedures
Difficulty: Moderate
Objective: LO 18-5
AACSB: Reflective thinking

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18.6 Learning Objective 18-6

1) At what point do most companies recognize liabilities in the acquisition and payment cycle
when the goods are shipped FOB destination?
A) when the purchase order is issued
B) when the vendor acknowledges receipt of the order
C) when the goods or services are received
D) when the vendor invoice is received
Answer: C
Terms: Companies recognize liabilities in acquisition and payment cycle; FOB destination
Difficulty: Easy
Objective: LO 18-6
AACSB: Reflective thinking

2) Cutoff procedures for inventory purchased should be designed by companies to assure that
A) inventory owned by the company has been received.
B) inventory included in the year-end inventory count has been paid.
C) inventory received before year-end was recorded before year-end.
D) inventory was correctly valued at year-end.
Answer: C
Terms: Cutoff procedures for inventory purchased
Difficulty: Moderate
Objective: LO 18-6
AACSB: Reflective thinking

3) You are the in-charge auditor and are designing audit procedures for accounts payable. Which
of the following management assertions would you normally be most concerned about?
A) occurrence
B) accuracy
C) completeness
D) existence
Answer: C
Terms: Audit procedures for accounts payable; Management assertions
Difficulty: Moderate
Objective: LO 18-6
AACSB: Reflective thinking

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4) The main focus taken by the auditor in verifying liability balances is on the discovery of
I. understated liabilities.
II. omitted liabilities.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
Terms: Main focus in verifying liability balances
Difficulty: Moderate
Objective: LO 18-6
AACSB: Reflective thinking

5) By tracing receiving reports issued at and before year-end to vendors' invoices and making
sure they are included in accounts payable, the auditor is testing for
A) theft of merchandise by employees.
B) unrecorded obligations.
C) lapping.
D) kiting.
Answer: B
Terms: Tracing receiving reports issued at and before year-end to vendors' invoices
Difficulty: Moderate
Objective: LO 18-6
AACSB: Reflective thinking

6) The extent of a search for unrecorded liabilities largely depends on

A) materiality and inherent risk.
B) materiality and control risk.
C) materiality only.
D) inherent risk only.
Answer: B
Terms: Unrecorded liabilities
Difficulty: Moderate
Objective: LO 18-6
AACSB: Reflective thinking

7) A document review of which of the following is most likely to yield evidence of any
unrecorded liabilities?
A) debit memos
B) vendor memos
C) unpaid accounts payable
D) sales invoices out of sequence
Answer: C
Terms: Document review for unrecorded liabilities
Difficulty: Moderate
Objective: LO 18-6
AACSB: Reflective thinking
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8) When the client's physical inventory occurs before the last day of the year, it is still necessary
to perform an accounts payable cutoff at the time of the count. In addition, the auditor must
verify whether all acquisitions taking place between the count and the end of the year were added
to
A) the physical inventory.
B) accounts payable.
C) accounts payable and cost of goods sold.
D) the physical inventory and accounts payable.
Answer: D
Terms: Accounts payable cutoff; Physical inventory before last day of year
Difficulty: Moderate
Objective: LO 18-6
AACSB: Reflective thinking

9) Peprah Company pays its accounts payable 45 days after receipt of the goods or services. In
this case, which audit procedure should be used to detect any unrecorded liabilities?
A) Examine cash disbursements for several weeks after the balance sheet date.
B) Reconcile purchase orders to requisition orders.
C) Reconcile purchase orders to receiving reports.
D) Reconcile purchase orders to vendor invoices.
Answer: A
Terms: Audit procedure for unrecorded liabilities
Difficulty: Moderate
Objective: LO 18-6
AACSB: Reflective thinking

10) Cutoff information for inventory acquisitions should be obtained during

A) the interim period prior to year-end.
B) the interim period immediately following year-end.
C) the physical observation of inventory.
D) either the interim period prior to or immediately following year-end.
Answer: C
Terms: Cutoff information for inventory acquisitions
Difficulty: Moderate
Objective: LO 18-6
AACSB: Reflective thinking

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11) Which of the following is not a typical audit procedure performed as part of the out-of-
period liability tests?
A) Examine underlying documentation for cash disbursements made during the last month of the
year.
B) Examine underlying documentation for bills not paid several weeks after the year-end.
C) Trace receiving reports issued before year-end to related vendors' invoices.
D) All of the above are correct.
Answer: A
Terms: Out-of-period liability tests
Difficulty: Moderate
Objective: LO 18-6
AACSB: Reflective thinking

12) In searching for unrecorded liabilities, the purpose of the audit procedure to "examine
underlying documentation for subsequent cash disbursements" is to
A) uncover liabilities on the balance sheet which should not have been recorded until a
subsequent period.
B) find the documentation relating to a cash disbursement.
C) uncover payments made in a subsequent accounting period for liabilities that existed at the
balance sheet date.
D) uncover cash disbursements recorded in a subsequent accounting period which should be
recorded in this period.
Answer: C
Terms: Unrecorded liabilities
Difficulty: Challenging
Objective: LO 18-6
AACSB: Reflective thinking

13) To test for cutoff errors which overstate liabilities, the auditor should trace the receiving
reports issued ________ to vendors' invoices.
A) after year-end
B) before year-end
C) the last day of the fiscal year
D) both before and after year-end
Answer: A
Terms: Test for cutoff errors which overstate liabilities
Difficulty: Challenging
Objective: LO 18-6
AACSB: Reflective thinking

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14) In determining that the accounts payable cutoff is correct, it is essential that the cutoff tests
be coordinated with the
A) confirmation of payables.
B) tests of long-term liabilities.
C) observation of inventory.
D) cash count.
Answer: C
Terms: Accounts payable cutoff test coordinated with
Difficulty: Moderate
Objective: LO 18-6
AACSB: Reflective thinking

15) An inventory acquisition is received late in the afternoon of December 31 after the physical
inventory is completed. If the acquisition is included in accounts payable and purchases, but
excluded from inventory, the result
A) is an understatement of net earnings.
B) is an overstatement of net earnings.
C) is an overstatement of working capital.
D) is an overstatement of owner's equity.
Answer: A
Terms: Inventory acquisition received after year-end, but included in accounts payable and
purchases
Difficulty: Challenging
Objective: LO 18-6
AACSB: Analytic thinking

16) When an acquisition is on an FOB origin basis, the inventory and related accounts payable
must be recorded in the current period if the goods were
A) received prior to the balance sheet date.
B) shipped on or before the balance sheet date.
C) both shipped and received prior to the balance sheet date.
D) paid for in advance.
Answer: B
Terms: Acquisition of inventory on FOB basis
Difficulty: Moderate
Objective: LO 18-6
AACSB: Reflective thinking

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17) When assets are being verified, auditors focus much of their attention on making sure that
the accounts are not overstated. Alternatively, auditors focus their efforts on understatement
when auditing liabilities. What is the primary reason for this difference in focus?
A) auditors' legal liability
B) GAAP
C) GAAS requirements
D) all of the above
Answer: A
Terms: Basis for testing of asset accounts for overstatement and testing of liabilities for
understatement
Difficulty: Challenging
Objective: LO 18-3 and LO 18-6
AACSB: Reflective thinking

18) A company recorded an acquisition of merchandise and its related liability, but failed to
include the merchandise in ending inventory. The effect on the financial statements was to
A) understate liabilities.
B) understate net income.
C) overstate net income.
D) have no impact on the financial statements since the errors cancel each other out.
Answer: B
Terms: Effect on financial statements of inventory cutoff
Difficulty: Challenging
Objective: LO 18-6
AACSB: Analytic thinking

19) The overall objective in the audit of accounts payable is to determine whether accounts
payable
A) are fairly stated and properly disclosed.
B) are overstated.
C) are understated.
D) are accurately stated.
Answer: A
Terms: Liabilities and balance-related audit objectives
Difficulty: Easy
Objective: LO 18-6
AACSB: Reflective thinking

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20) ________ is a balance-related audit objective that is not applicable to liabilities.
A) Existence
B) Accuracy
C) Detail tie-in
D) Realizable value
Answer: D
Terms: Liabilities and balance-related audit objectives
Difficulty: Easy
Objective: LO 18-6
AACSB: Reflective thinking

21) The balance-related audit objective realizable value is not applicable when auditing accounts
payable.
Answer: TRUE
Terms: Balance-related audit objective of realizable value
Difficulty: Moderate
Objective: LO 18-6
AACSB: Reflective thinking

22) When auditing accounts payable, the auditor is more concerned about the possibility of
understatements than overstatements.
Answer: TRUE
Terms: Auditing accounts payable, auditor concerned with understatement
Difficulty: Moderate
Objective: LO 18-6
AACSB: Reflective thinking

23) To test for overstatement cutoff amounts when auditing accounts payable, the auditor should
trace receiving reports issued before year-end to related vendors' invoices to make sure they are
not recorded as accounts payable.
Answer: FALSE
Terms: Test for overstatement cutoff amounts in Accounts Payable
Difficulty: Challenging
Objective: LO 18-6
AACSB: Reflective thinking

24) The "rights "aspect of the "rights and obligations" objective is not applicable to liabilities.
Answer: TRUE
Terms: Rights and obligations; accounts payable
Difficulty: Moderate
Objective: LO 18-6
AACSB: Reflective thinking

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25) Auditors primarily emphasize the understatement of liabilities in the audit of accounts
payable because they are concerned about potential legal liability.
Answer: TRUE
Terms: Auditors emphasize understatement of liabilities because of potential legal liability
Difficulty: Moderate
Objective: LO 18-6
AACSB: Reflective thinking

26) Auditors examine supporting documentation for cash disbursements subsequent to the
balance sheet date in order to determine whether the cash disbursement was for a current period
liability.
Describe at least two audit procedures the auditor would perform to provide evidence that the
cash disbursement was made for a current period liability.
Answer:
1. Trace vendor invoice to accounts payable subsidiary ledger and to the trial balance.
2. Trace receiving report to vendor invoice and to accounts payable subsidiary ledger.
3. Examine vendor invoices for inclusion in the proper period.
4. Examine cash disbursements for several weeks after the company's year-end.
Terms: Audit procedures for cash disbursements
Difficulty: Challenging
Objective: LO 18-6
AACSB: Reflective thinking

27) Describe the audit procedures typically used to test for out-of-period liabilities (also referred
to as the search for unrecorded accounts payable).
Answer: The audit procedures typically used to test for out-of-period liabilities are:
• Examine underlying documentation for subsequent cash disbursements.
• Examine underlying documentation for bills not paid several weeks after the year-end.
• Trace receiving reports issued before year-end to related vendors' invoices.
• Trace vendors' statements that show a balance due to the accounts payable trial balance.
• Send confirmations to vendors with which the client does business, including zero balance
confirmations.
Terms: Audit procedures for out-of-period liabilities
Difficulty: Challenging
Objective: LO 18-6
AACSB: Reflective thinking

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18.7 Learning Objective 18-7

1) The documents typically used to reconcile the balance on the accounts payable list with the
confirmation or vendors' statements include all of the following except for
A) receiving reports.
B) vendors' invoices.
C) sales invoices.
D) cancelled checks.
Answer: C
Terms: Account payable reconciliation
Difficulty: Moderate
Objective: LO 18-7
AACSB: Reflective thinking

2) Which of the following is most reliable for verifying the correct balance of accounts payable?
A) vendors' invoices
B) vendors' statements
C) confirmations
D) bills of lading
Answer: C
Terms: Most reliable for verifying correct balance of accounts payable
Difficulty: Moderate
Objective: LO 18-7
AACSB: Reflective thinking

3) Vendors' statements and vendors' invoices are both relatively reliable evidence because they
A) come directly to the auditor without being in client's possession.
B) originate from a third party.
C) validate the effectiveness of the control system.
D) are compared to and reconciled with sales invoices.
Answer: B
Terms: Reliable evidence; Vendors' statements and vendors' invoices
Difficulty: Moderate
Objective: LO 18-7
AACSB: Reflective thinking

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4) The auditor is performing tests of transactions for individual accounts payable transactions
with vendors. Which document provides more reliable information about individual transactions
with vendors?
A) receiving report
B) vendors' invoices
C) vendors' statements
D) purchase orders
Answer: B
Terms: Tests of transactions for accounts payable; Reliable evidence
Difficulty: Moderate
Objective: LO 18-7
AACSB: Reflective thinking

5) Auditor confirmation of accounts payable balances at the balance sheet date may not need to
be performed by the auditor because
A) this is a duplication of cutoff tests.
B) there is likely to be other reliable external evidence available to support the balances.
C) accounts payable balances at the balance sheet date may not be paid before the audit is
completed.
D) correspondence with the audit client's attorney will reveal all legal action by vendors for
nonpayment.
Answer: B
Terms: Confirmation of accounts payable
Difficulty: Moderate
Objective: LO 18-7
AACSB: Reflective thinking

6) Under which of the following circumstances would it be advisable for the auditor to confirm
accounts payable with creditors?
A) The internal accounting control over accounts payable is effective, and there is sufficient
evidence on hand to minimize the risk of a material misstatement.
B) The confirmation response is expected to be favorable, and accounts payable balances are of
immaterial amounts.
C) The creditor statements are not available and internal control over payables is deficient.
D) The majority of accounts payable balances are with associated companies.
Answer: C
Terms: Confirm accounts payable with creditors
Difficulty: Moderate
Objective: LO 18-7
AACSB: Reflective thinking

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7) The auditor is performing substantive tests of balances for accounts payable. What
documentation would provide the best evidence for the ending balance?
A) vendors' invoices
B) vendors' statements
C) receiving reports
D) purchase orders
Answer: B
Terms: Best evidence for substantive tests of balances for accounts payable
Difficulty: Moderate
Objective: LO 18-7
AACSB: Reflective thinking

8) The auditor gets highly reliable evidence about individual transactions by examining
A) vendors' invoices.
B) vendors' statements.
C) confirmations of accounts payable balances.
D) detailed inventory counting instructions.
Answer: A
Terms: Auditor gets highly reliable evidence about individual transactions
Difficulty: Challenging
Objective: LO 18-7
AACSB: Reflective thinking

9) When determining sample sizes for accounts payable tests,

A) sample sizes rarely vary from audit to audit.
B) auditors must try to ensure that the population includes all potential payables.
C) defining the population is a simple procedure.
D) all of the above are correct.
Answer: B
Terms: Sample size and accounts payable tests
Difficulty: Challenging
Objective: LO 18-7
AACSB: Reflective thinking

10) When auditors examine vendors' statements or receive confirmations, there must be a
reconciliation of the statement or confirmation with the
A) accounts payable list.
B) vendors' invoices.
C) purchase orders.
D) receiving reports.
Answer: A
Terms: Substantive tests of balances with vendor statements or vendor confirmations
Difficulty: Moderate
Objective: LO 18-7
AACSB: Reflective thinking

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11) You are performing an audit of Hawk Company. In evaluating the accounts payable balance
you are concerned with the completeness assertion. Which of the following audit procedures best
satisfies your concern?
A) Send confirmations to only vendors with large balances.
B) Send confirmations to vendors with large, active, zero balance accounts and a representative
sample of all others.
C) Send confirmations to vendors chosen from sample stratified by the dollar balance.
D) Send confirmations to all vendors.
Answer: B
Terms: Accounts payable and completeness assertion
Difficulty: Moderate
Objective: LO 18-7
AACSB: Reflective thinking

12) A vendor's statement is unreliable and auditors rarely use it.

Answer: FALSE
Terms: Vendor's statement reliability
Difficulty: Easy
Objective: LO 18-7
AACSB: Reflective thinking

13) When verifying the correct balance in accounts payable, vendors' invoices are more useful
than vendors' statements.
Answer: FALSE
Terms: Vendors' invoices more useful than vendors' statements
Difficulty: Moderate
Objective: LO 18-7
AACSB: Reflective thinking

14) A company purchasing goods from a vendor on a FOB origin basis must record the liability
when the goods are received at the company's receiving dock.
Answer: FALSE
Terms: Vendors' invoices more useful than vendors' statements
Difficulty: Moderate
Objective: LO 18-7
AACSB: Reflective thinking

15) Typically, a company can determine whether inventory has been acquired FOB destination
or origin by examining the vendor's invoice.
Answer: TRUE
Terms: Vendors' invoices more useful than vendors' statements
Difficulty: Moderate
Objective: LO 18-7
AACSB: Reflective thinking

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16) If the client counts inventory at year end, it is essential that cutoff tests be coordinated with
the physical observation of inventory.
Answer: TRUE
Terms: Relationship of cutoff to physical observation of inventory
Difficulty: Moderate
Objective: LO 18-7
AACSB: Reflective thinking

17) Knowledge of the client's business is essential for tests related to reviewing the accounts
payable listing and master file for related parties and debit balances.
Answer: TRUE
Terms: Accounts payable are correctly classified and disclosed in the financial statements
Difficulty: Moderate
Objective: LO 18-7
AACSB: Reflective thinking

18) In an audit with a December 31 year-end, the audit needs to only examine supporting
documentation for disbursements paid through January 31 of the following month.
Answer: FALSE
Terms: Examining documentation for invoices not paid several weeks after the year-end
Difficulty: Moderate
Objective: LO 18-7
AACSB: Reflective thinking

19) Discuss the circumstances in which it is desirable to send confirmation requests to the client's
vendors.
Answer: It is desirable to send confirmation requests to the client's vendors when the client's
internal controls are deficient, when vendors' statements are not available, or when the auditor
questions the client's integrity.
Terms: Confirmations
Difficulty: Moderate
Objective: LO 18-7
AACSB: Reflective thinking

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