would not result in the improper delivery.d.

CorrectNobody at Lake was reviewing purchase orders to notice the delivery and payment by another party (Budd s relative tore). This deviation caused nodirect loss to Lake, but it is a misuse of Lake s pri cing agreements with itsvendors and puts Lake at risk.8.29a.IncorrectIf the liab ility is unrecorded, it would not be on the trial balance. b.CorrectAuditors may be able to determine that cash disbursements in the subsequent period are payin g liabilities of the period under audit.c.IncorrectThis is a cut-off test. b is a more direct testd.IncorrectThis is only an indirect test. b is a more direct t est.8.30a.IncorrectThis is often performed before the balance sheet date. b.Inco rrectThis is often performed before the balance sheet date.c.CorrectThe search f or unrecorded liabilities generally depends upon using accountingrecords created in the period after the year end.d.IncorrectThis is often performed before the balance sheet date.8-5 Chapter 08 - Acquisition and Expenditure Cycle8.31a.IncorrectSome liabilities ma y be incurred but not invoiced by the vendor. b.IncorrectPurchase orders do not normally incur liabilities.c.CorrectThe receiving reports are the population tha t contains the record of all goodsreceived for which liabilities should be recor ded.d.IncorrectThe invoice or receiving report must be examined to determine whe n theliability occurred.8.32a.IncorrectApprovals do not necessarily result in de bits to the inventory. b.IncorrectPurchase requisitions may not represent the ac tual amount received.c.CorrectInvoices supply relevant information about the qua ntities purchased and the prices paid.d.IncorrectPurchase orders may not represe nt the actual amount received.8.33a.IncorrectThis would have insured a proper co unt of the tables. b.IncorrectThis would insure the invoice was for the amount r eceived.c.IncorrectThis would insure the check was for the amount received.d.Cor rectThe P. O. and requisition would both show 84 tables.8.34a.IncorrectThe check signer is probably not familiar with all the vendors. b.IncorrectThis is possib le, but the maintenance costs may not have been unusual (i.e., thecosts before t he fraud were below budget)c.CorrectVendors should be approved by an independent purchasing department.8.35a.IncorrectPayroll is generally audited by tests of c ontrols, analytical procedures andsubstantive tests of transactions. b.Incorrect Cost of goods sold is generally audited by tests of controls, analytical procedu res and substantive tests of transactions.c.IncorrectSupplies expense is general ly audited in connection with supplies inventory.d.CorrectThe auditor examines t he specific charges to determine potential litigation.8.36a.CorrectProperty tax expense is audited in conjunction with accrued property taxes. b.IncorrectPayrol l is generally audited by tests of controls, analytical procedures andsubstantiv e tests of transactions.c.IncorrectThere s no asset directly related to R&D.d.Incorr ectThe auditor examines the specific charges to determine potential litigation.8 .37c.CorrectCompleteness is the most important assertion in this cycle. Supplies expense isgenerally audited in connection with supplies inventory.8.38a.Incorre ctTesting occurrence would require vouching from the vouchers recorded in thevou cher register to receiving reports. b.CorrectThis test ensures that liabilities generated by the receipt of goods are recorded inthe voucher register.c.Incorrec tThis does not test classification, which would require examining the chart of a ccounts.d.IncorrectThis does not test cutoff, which would require comparing the date of thereceiving report to the date recorded.8-6 Chapter 08 - Acquisition and Expenditure Cycle SOLUTIONS FOR EXERCISES, PROBLEMS, AND SIMULATIONS 8.39 Payable ICQ Items: Assertions, Tests of Controls, and Possible Errors or Frauds 1.a.Purchases and accounts payable are authorized to assure compliance with comp any policy (accuracy). b.For a sample of cash disbursements, vouch to approval s ignatures on invoices, receivingreports and purchase orders.c.Costs and expenses might be incurred that are not properly supported.d.Select a sample of currentyear debits in accounts (e.g., inventory, fixed assets,expenses), and vouch them to supporting documents.2.a.Liabilities are recorded at the appropriate quantit y and description (accuracy) b.Select a sample of invoices and agree them to the

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receiving report. Observe receivingdepartment counting receipts.c.Vendors could bill for quantities greater than the amount actually shipped, overstatingcosts or expenses.d.Observe the client s inventory account and test the reconciliation of the count to the perpetual inventory.3.a.Liabilities are recorded for actual pur chases at the appropriate amounts (accuracy). b.Observe client personnel making comparisons. Examine initials for approval. Reviewcorrecting journal entries tha t result from the comparison.c.Purchases or other liabilities may be recorded fo r transactions that didn t exist or atincorrect amounts.d.Reperform comparison on a test basis.4.a.Journal entries are authorized and prepared in accordance with ge nerally acceptedaccounting principles (accuracy, classification). b. Examine ent ries for approval initials.c.The company might override controls to create fraud ulent entries.d.Select a sample of recorded journal entries and reperform calcul ations and review for appropriate accounts.8-7