CHAPTER 12

MULTIPLE CHOICE
c 1. When an auditor selects a sample of items from the vouchers payable register for the last 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. Recorded obligations were paid.
b. Incurred obligations were recorded in the correct period.
c. Recorded obligations were valid.
d. Cash disbursements were recorded as incurred obligations. (AICA A!A"#!$
a %. An auditor usually e&amines receiving reports to support entries in the
a. 'oucher register and sales returns (ournal.
b. )ales (ournal and sales returns (ournal.
c. 'oucher register and sales (ournal.
d. Chec* register and sales (ournal. (AICA A!A"#!$
a +. ,nrecorded liabilities are most li*ely to be found during the review of which of the following
documents-
a. ,npaid bills.
b. )hipping records.
c. .ills of lading.
d. ,nmatched sales invoices. (AICA A!A"#!$
b /. An e&amination of the balance in the accounts payable account is ordinarily not designed to
a. !etect accounts payable that are substantially past due.
b. 'erify that accounts payable were properly authori0ed.
c. Ascertain the reasonableness of recorded liabilities.
d. !etermine that all e&isting liabilities at the balance sheet date have been recorded.
(AICA A!A"#!$
c 1. Confirmation of accounts payable balances
a. Is usually performed at interim dates rather than at year2end.
b. Is not effective in testing for unrecorded liabilities.
c. Is particularly useful when the auditor suspects liabilities may be materially understated.
d. Is re3uired by generally accepted auditing standards.
a 4. In order to efficiently establish the correctness of the accounts payable cutoff, the auditor will be
most li*ely to
a. Coordinate cutoff tests with physical inventory observation.
b. Compare cutoff reports with purchase orders.
c. Compare vendors5 invoices with vendors5 statements.
d. Coordinate mailing of confirmations with cutoff tests. (AICA A!A"#!$
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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 system-
a. 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 perform-
a. 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 %::1 prepaid insurance ledger and balances the total to the general ledger
account. Which bad practice;error will most li*ely be detected by this procedure-
a. "he client5s e&cess liability coverage, which e&pired !ecember +1, %::/, was not renewed in
%::1.
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 occurrence-
a. "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
valuation-
a. 'erify accounts payable trial balance.
b. Confirm with creditors.
c. "est for unrecorded liabilities.
d. erform analytical procedures.
c 11. Which of the following is true about the audit procedure of confirming accounts payable-
a. ayables confirmation are most appropriate when the auditor e&pects understatement errors.
b. It is not productive to mail second re3uests.
c. "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.
c 14. Which of the following would not li*ely be included in an accounts payable confirmation-
a. An itemi0ed statement of amounts owed.
b. An itemi0ed statement of merchandise consigned.
c. An itemi0ed statement of cash paid near the balance sheet date.
d. An itemi0ed list of any notes or other obligations.
a 17. Which of the following is not used to test overstatements and understatements of accounts
payable-
a. 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
auditor-
a. "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.
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c 18. Companies may be held liable for all of the following e&cept<
a. =oncompliance with environmental laws and regulations.
b. Remedial cleanup of ha0ardous waste sites.
c. 9wners and operators before ha0ardous waste was disposed.
d. ersonal in(ury or damage caused by ha0ardous waste.
SHORT ANSWER
1. =ame the four basic sources that are used to search for unrecorded payables.
Answer:
a. A year2end accounts payable trial balance
b. "he cash disbursements (ournal
c. Canceled (paid$ voucher pac*age
d. "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 payables-
Answer:
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
activities-
Answer:
Recognition of accrued ta&es
Recording of e&pense for ta&es owed
!isbursement of cash for ta&es
1. 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
66
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 Confirm balances with creditors
#&istence or occurrence "est cutoff
Completeness "est for unrecorded liabilities
Completeness erform analytical procedures
Completeness "est cutoff
Rights and obligations Confirm with creditors
Rights and obligations "est for unrecorded liabilities
'aluation or allocation 'erify accounts payable trial balance
'aluation or allocation Confirm with creditors
'aluation or allocation "est for unrecorded liabilities
resentation and disclosure Compare statement presentation and disclosure
with those re3uired by @AA
%. Aou have been engaged by BAC Company to audit the financial statements for year2ended
1%;+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 BAC
Company>s vendors based upon the following information. "he date of the confirmation will be
1;7;:4.
Vendor Information Audit Client Information Audit Firm Information
Doneses )upply Company BAC Company CA Eirm, ??
1: ?owend )treet 88 Figh )treet
Anytown, "B 77444 Anytown, "B 77444
Controller< Carol Farris
68
Answer:
8:
BAC 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 %::1. Will you please furnish them with the following
information as of !ecember +1, %::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
BAC Company