CHAPTER 12 MULTIPLE MULTIPLE CHOICE
c
1. When an audit auditor or select selectss a sample sample of items items from from the the vouche vouchers rs payab payable le registe registerr for for the last month month of the period audited and traces the items to underlying documents, the auditor is gathering evidence primarily in support of the assertion that a. Record Recorded ed obliga obligatio tions ns were were paid. paid. b. Incurred obligations obligations were recorded in the correct period. c. Record Recorded ed obliga obligatio tions ns were were vali valid. d. d. Cash disbursements we were recorded as in incurred ob obligations. (AICA A!A"#!$
a
%. a. b. c. d.
An audito auditorr usua usually lly e&ami e&amines nes receiv receiving ing report reportss to to supp suppor ortt entr entries ies in the 'oucher register register and sales sales return returnss ournal ournal.. )ales ournal and sales returns returns ournal. 'oucher ucher regi registe sterr and sale saless ourna ournal. l. Chec* register and sales ournal.
(AICA A!A"#!$
a
+. nreco nrecorde rded d liabil liabiliti ities es are are most most li*ely li*ely to to be found found duri during ng the the revie review w of which which of of the fol follow lowing ing documentsa. npaid bi bills. b. )hipping records. c. il ills of lad ladin ing g. d. nmatched sales invoices. (AICA A!A"#!$
b
/. a. b. c. d.
An e&amination of the the balance in the accounts payable account is ordinarily ordinarily not designed designed to !etect !etect accounts accounts payable payable that that are substant substantially ially past due. 'erify 'erify that accounts payable payable were properly authori0ed. Ascertain Ascertain the reaso reasonable nableness ness of record recorded ed liabi liabiliti lities. es. !etermine !etermine that that all e&istin e&isting g liabilitie liabilitiess at the balance balance sheet sheet date date have been recorde recorded. d. (AICA A!A"#!$
c
. a. b. c. d.
Conf Confir irm matio ation n of of acc accou ount ntss pay payab able le bala balanc nces es Is usually usually performed performed at at interim interim dates dates rather rather than than at year2end. year2end. Is not effective in testing testing for unrecorded liabilities. liabilities. Is particular particularly ly useful useful when the auditor auditor suspects suspects liabili liabilities ties may be material materially ly understat understated. ed. Is re3uired re3uired by general generally ly accepted accepted auditing auditing standards. standards.
a
4. In order order to eff effici icient ently ly estab establis lish h the corre correctn ctness ess of of the accou accounts nts pay payabl ablee cutoff cutoff,, the audit auditor or will will be most li*ely to a. Coordinat Coordinatee cutoff cutoff tests tests with with physi physical cal invento inventory ry observat observation. ion. b. Compare cutoff reports with purchase orders. c. Compare Compare vendo vendors5 rs5 invoices invoices with vendors5 vendors5 statem statements. ents. d. Coordinate mailing of confirmations with cutoff tests. (AICA A!A"#!$
6
a
7. A client5s purchasing system ends with the assumption of a liability and the eventual payment of the liability. Which of the following best describes the auditor5s primary concern with respect to liabilities resulting from the purchasing systema. Accounts payable are not materially understated. b. Authority to incur liabilities is restricted to one designated person. c. Ac3uisition of materials is not made from one vendor or one group of vendors. d. Commitments for all purchases are made only after established competitive bidding procedures are followed. (AICA A!A"#!$
d
6. Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because a. "here is a duplication of cutoff tests. b. Accounts payable balances at the balance sheet date may not be paid before the audit is completed. c. Correspondence with the audit client5s attorney will reveal all legal action by vendors for nonpayment. d. "here is li*ely to be other reliable e&ternal evidence available to support the balances. (AICA A!A"#!$
d
8. 9nly one of the following four statements, which compare confirmation of accounts payable with suppliers and confirmation of accounts receivable with debtors, is true. "he true statement is that a. Confirmation of accounts payable with suppliers is a more widely accepted auditing procedure than is confirmation of accounts receivable with debtors. b. As compared to the confirmation of accounts payable, the confirmation of accounts receivable will tend to emphasi0e accounts with 0ero balances at the balance sheet date. c. )tatistical sampling techni3ues are more widely accepted in the confirmation accounts payable than in the confirmation of accounts receivable. d. It is less li*ely that the confirmation re3uest sent to the supplier will show the amount owed than that the re3uest sent to the debtor will show the amount due. (AICA A!A"#!$
c
1:. In connection with a review of the prepaid insurance account, which of the following procedures does the auditor generally not performa. Recompute the portion of the premium that e&pired during the year. b. repare e&cerpts of insurance policies for audit wor*ing papers. c. Confirm premium rates with an independent insurance bro*er. d. #&amine support for premium payments. (AICA A!A"#!$
b
11. An auditor reviews the %:: prepaid insurance ledger and balances the total to the general ledger account. Which bad practice;error will most li*ely be detected by this procedurea. "he client5s e&cess liability coverage, which e&pired !ecember +1, %::/, was not renewed in %::. b. A premium refund for a three2year policy e&piring in %::+ was credited to the account and not amorti0ed. c. "he client has not recogni0ed the probable loss associated with a damage suit that is only partially covered by insurance. d. An insurer improperly computed the amount of a premium paid by the client. (AICA A!A"#!$
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a
1%. "he audit procedures used to verify accrued liabilities differ from those used to verify accounts payable because a. Accrued liabilities usually pertain to services of a continuing nature, while accounts payable are the result of completed transactions. b. Accrued liability balances are less material than accounts payable balances. c. #vidence supporting accrued liabilities is none&istent, while evidence supporting accounts payable is readily available. d. Accrued liabilities at year2end will become accounts payable during the following year. (AICA A!A"#!$
a
1+. In substantive tests of purchases and accounts payable, which of the following audit procedures is most appropriate for addressing the assertions of e&istence or occurrencea. "est cutoff. b. 'erify accounts payable trial balance. c. "est for unrecorded liabilities. d. erform analytical procedures.
d
1/. Which of the following audit procedures is not appropriate for addressing the assertion of valuationa. 'erify accounts payable trial balance. b. Confirm with creditors. c. "est for unrecorded liabilities. d. erform analytical procedures.
c
1. a. b. c.
c
14. a. b. c. d.
a
17. Which of the following is not used to test overstatements and understatements of accounts payablea. Cash receipts records. b. Cash disbursement records. c. Canceled voucher pac*ages. d. nmatched receiving reports.
c
16. In testing prepaid insurance, controls over which of the following are not of concern to the auditora. "he ac3uisition of new insurance policies. b. "he disbursement of cash for premiums. c. "he physical custody of the assets insured. d. "he recording of e&pense and premium disbursements.
Which of the following is true about the audit procedure of confirming accounts payableayables confirmation are most appropriate when the auditor e&pects understatement errors. It is not productive to mail second re3uests. "he auditor is not re3uired by current professional pronouncements to ustify his or her opinion on financial statements when payables are not confirmed. d. ayables are usually confirmed as of an interim date. Which of the following would not li*ely be included in an accounts payable confirmationAn itemi0ed statement of amounts owed. An itemi0ed statement of merchandise consigned. An itemi0ed statement of cash paid near the balance sheet date. An itemi0ed list of any notes or other obligations.
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c
18. a. b. c. d.
Companies may be held liable for all of the following e&cept< =oncompliance with environmental laws and regulations. Remedial cleanup of ha0ardous waste sites. 9wners and operators before ha0ardous waste was disposed. ersonal inury or damage caused by ha0ardous waste.
SHORT ANSWER
1. =ame the four basic sources that are used to search for unrecorded payables. Answer:
a. b. c. d.
A year2end accounts payable trial balance "he cash disbursements ournal Canceled (paid$ voucher pac*age "he file of unmatched receiving reports (filed in an unpaid vouchers file$
%. =ame the three basic sources that are used to test for overstated payables. Answer:
a. A year2end accounts payable trial balance b. "he cash disbursements ournal c. Canceled (paid$ voucher pac*ages +. What is the role of analytical procedures in testing of payablesAnswer:
Analytical procedures can be used to identify accounts that appear reasonable in relation to other accounts and therefore do not re3uire additional substantive testing, or accounts that appear unusual or unreasonable and therefore do re3uire additional substantive testing. /. In the audit of property ta&es, an auditor is concerned with an entity>s controls over what three activitiesAnswer:
Recognition of accrued ta&es Recording of e&pense for ta&es owed !isbursement of cash for ta&es
. In the audit of prepaid insurance, an auditor is concerned with three predominant controls. ?ist these three controls. Answer:
"he ac3uisition of new insurance policies "he disbursement of cash for premiums "he recording of e&pense and premium disbursements
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PROBLEMS
1. ?ist the related financial statement assertions with the audit procedure used to substantiate the urchase or Accounts ayable account balance. Answer: ASSERTION
AUDIT PROCEDURE
#&istence or occurrence #&istence or occurrence Completeness Completeness Completeness Rights and obligations Rights and obligations 'aluation or allocation 'aluation or allocation 'aluation or allocation resentation and disclosure
Confirm balances with creditors "est cutoff "est for unrecorded liabilities erform analytical procedures "est cutoff Confirm with creditors "est for unrecorded liabilities 'erify accounts payable trial balance Confirm with creditors "est for unrecorded liabilities Compare statement presentation and disclosure with those re3uired by @AA
%. ou have been engaged by B Company to audit the financial statements for year2ended 1%;+1;:. Confirmation letters are sent to each of the company>s A; vendors to substantiate Accounts ayable balances. lease issue a sample confirmation re3uest to one of B Company>s vendors based upon the following information. "he date of the confirmation will be 1;7;:4. Vendor Information Doneses )upply Company 1: ?owend )treet Anytown, "B 77444
Audit Client Information B Company 88 Figh )treet Anytown, "B 77444 Controller< Carol Farris
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Audit Firm Information CA Eirm, ??
Answer:
B Company 88 Figh )treet Anytown, "B 77444 Danuary 7, %::4 Doneses )upply Company 1: ?owend )treet Anytown, "B 77444 9ur auditors, CA Eirm, ??, are auditing our financial statements for %::. Will you please furnish them with the following information as of !ecember +1, %::<
An itemi0ed statement of amounts that we owe you. An itemi0ed statement of any merchandise that you have cosigned to us. An itemi0ed list of any notes, acceptances, or other obligations that we owe you.
lease reply directly to our auditors. An envelope addressed to our auditors is enclosed.
Carol Farris Controller B Com an
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