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Chapter 08

Acquisition and Expenditure Cycle

True / False Questions


1. The basic acquisition and expenditure activities are (1) purchasing
goods and services, (2) receiving the goods or services, (3) recording
the asset or expense and related liability, and (4) paying the vendors.
True

False

2. Purchases are ordered by a purchasing department that seeks the best


prices and quality.
True

False

3. Checks are signed by the accounts payable department after


assembling the invoice, purchase order, and receiving report.
True

False

4. Purchase orders are "open" from the time they are issued until the
goods are received.
True

False

5. Normally, liabilities should be recorded on the date the goods are


received and accepted.
True

False

6. Auditors' "search for unrecorded liabilities" should emphasize the large


balances, especially for regular vendors.
True

False

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7. Auditors can inspect the "unmatched invoice file" and compare it to the
"unmatched receiving report" file to determine whether liabilities are
unrecorded.
True

False

8. Proper separation of duties involves authorization of purchases by


persons who do not have custody, recording, or reconciliation duties.
True

False

9. If personnel in the organization are not performing their control


activities very well, auditors will need to design substantive procedures
to try to detect whether control failures have produced misleading
financial statement account balances.
True

False

10 If the risk of material misstatement is assessed as very low, it is likely


. that additional substantive procedures will be required.
True

False

11 The emphasis is on the existence assertion because financial statement


. users tend to be more concerned about understated expenses and
liabilities than overstated.
True

False

12 Evidence is much easier to obtain to verify the completeness assertion


. for liabilities than the existence assertion for assets.
True

False

13 The search for unrecorded liabilities should normally be performed up


. to the last day of fieldwork in the period following the audit client's
balance sheet date.
True

False

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14 The principal goal of the physical inspection of property, plant, and


. equipment is to determine actual existence and condition of property.
True

False

15 All pay base data (hours, job number, absences, etc.) should be
. approved by an employee's immediate supervisor.
True

False

16 The main feature of custody in the payroll cycle is the possession of the
. payroll checks.
True

False

17 Persons in charge of authorization and custody payroll functions should


. not prepare the payroll.
True

False

18 The payroll bank account cannot be reconciled like the other bank
. accounts.
True

False

19 Record keeping is performed by payroll and cost accounting personnel


. who do not make authorizations or distribute pay.
True

False

Multiple Choice Questions

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
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20 When confirming accounts payable, emphasis should be put on what


. kind of accounts?

A.
Accounts with small or zero balances.
B. All accounts should be equally emphasized.
C.
Accounts with large balances.
D. Accounts listed in the accounts payable subsidiary.
21 "Recorded vouchers (accounts payable entries) in the voucher register
. (e.g., purchases journal) supported by completed voucher
documentation" is a specific example of which management assertion?

A.
B.
C.
D.

Classification.
Occurrence.
Completeness.
Cutoff.

22 "All purchase orders are supported by requisitions from proper persons"


. is a specific example of which management assertion?

A.
B.
C.
D.

Occurrence.
Completeness.
Cutoff.
Classification.

23 Cash disbursements are authorized by


.
A.
B.
C.
D.

Purchase orders.
Invoices.
Receiving reports.
A complete voucher package.

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24 For the copy of the purchase order that goes to the receiving
. department, it is best to

A. Leave off the description of the goods ordered.


B. Leave off the quantity of the goods ordered.
C.
Leave off the name of the vendor.
D. Have the receiving department forward all copies of the purchase
order to accounts payable.
25 Vouchers should be stamped PAID to
.
A.
Prevent duplicate payment.
B.
Generate a new purchase order.
C. Indicate posting in the voucher register.
D. Facilitate preparation of the bank reconciliation.
26 A voucher package is used to
.
A.
Document receipt of inventory.
B.
Document completion of services.
C.
Document a purchase contract.
D. Provide a source document for recording the purchase of a good or
service.
27 An auditor traced a sample of purchase orders and the related receiving
. reports to the purchases journal. The purpose of this substantive audit
procedure most likely was to

A.
B.
C.
D.

Identify usually large purchases that should be investigated further.


Verify that cash disbursements were for goods actually received.
Determine that purchases were properly recorded.
Test whether payments were for goods actually ordered.

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28 The usual source for journal entries posted to the general ledger to
. record the purchase of inventory is

A. Sales invoices updated with cost data from the inventory records
department.
B. Purchase invoices updated with cost data from the inventory records
department.
C. Receiving reports updated with cost data from the accounts payable
department.
D. Vouchers payable journal from the accounts payable department.
29 Which of the following would detect the understatement of a purchase
. discount?

A. Verify the arithmetic accuracy of the purchases journal.


B. Compare purchase disbursement records and checks with invoice
terms.
C. Compare approved purchase orders to receiving reports.
D. Verify the receipt of items ordered and invoiced.
30 Which of the following situations indicates a potential material
. weakness in internal control over acquisition and expenditure?

A. Purchase orders are not prepared for services acquired directly under
authorization of department heads.
B. The same person authorizes voucher packages and signs checks.
C. Unacceptable goods are not scheduled on receiving reports.
D. The same person signs checks and stamps vouchers PAID.
31 Which of the following client control activities is not usually performed
. in the vouchers payable (accounts payable) department?

A. Determining the mathematical accuracy of the vendors' invoices.


B. Writing checks for the treasurer's signature to take advantage of
purchase discounts.
C. Controlling the mailing of the check and remittance advice.
D. Checking the prices on the vendor's invoice.

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32 When auditing merchandise inventory at year-end, the auditor performs


. a purchase cutoff test to obtain evidence that

A. All goods purchased before year-end are received before the physical
inventory count.
B. No goods held on consignment for customers are included in the
inventory balance.
C. No goods observed during the physical count are pledged or sold.
D. All goods owned at year-end are included in the inventory balance.
33 Auditors may conclude that depreciation charges are too small by
. noting

A. Insured values much larger than book values.


B. Large numbers of fully depreciated assets.
C. Frequent trade-ins of relatively new assets.
D. Large and frequent losses on assets retired.
34 The auditor decided to test accounts payable by sending open-ended
. (blank) confirmations to selected vendors. The auditor's best approach
in selecting the vendor accounts to confirm is to

A. Select vendor accounts with large balances.


B. Select vendor accounts at random in order to apply a statistical
sampling procedure.
C. Select vendor accounts based on the number of purchases from
vendors during the year.
D. Select vendor accounts that are past due.
35 What evidence is appropriate to determine whether recorded purchase
. transactions are valid and the vendors charged the correct prices?

A. Purchase requisitions and accounts payable entries.


B. Receiving reports and purchase orders.
C. Purchase requisitions and purchases orders.
D.
Purchase orders and bid quotes.

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

36 Purchase cutoff procedures should be designed to produce evidence of


. whether merchandise is included in the inventory of the client company
if the company

A.
Has paid for the merchandise.
B. Has physical possession of the merchandise.
C.
Holds legal title to the merchandise.
D. Holds the shipping documents for the merchandise issued in the
company's name.
37 Which of the following accounts would most likely be reviewed by the
. auditor to gain reasonable assurance that additions to the equipment
account are not understated?

A.
B.
C.
D.

Depreciation expense.
Gain on disposal of equipment.
Accounts payable.
Repairs and maintenance expense.

38 Which of the following would not be included in the supporting


. documents for a voucher?

A.
B.
C.
D.

Purchase order.
Vendor invoice.
Receiving report.
Blank check.

39 A voucher would typically contain


.
A. A purchase requisition, purchase order, vendor invoice, receiving
report, and check copy.
B. A purchase requisition, purchase order, sales invoice, receiving
report, and check copy.
C. A purchase requisition, sales order, sales invoice, receiving report,
and check copy.
D. A purchase requisition, sales order, vendor invoice, receiving report,
and check copy.

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

40 When using confirmations to provide evidence about the completeness


. assertion for accounts payable, the appropriate population most likely
would be

A. Vendors with whom the entity has previously done business.


B. Amounts recorded in the accounts payable subsidiary ledger.
C. Payees of checks drawn in the month after the year-end.
D. Invoices filed in the entity's open invoice file.
41 Which of the following procedures would an auditor most likely perform
. in searching for unrecorded payables?

A. Reconcile receiving reports with related cash payments made just


prior to year-end.
B. Contrast the ratio of accounts payable to purchases with the prior
year's ratio.
C. Vouch a sample of creditor balances to supporting invoices, receiving
reports, and purchase orders.
D. Compare cash payments occurring after the balance sheet date with
the accounts payable trial balance.
42 An entity's internal control structure requires for every check request
. that there be an approved voucher, supported by a prenumbered
purchase order and a prenumbered receiving report. To determine
whether checks are being issued for unauthorized expenditures, an
auditor most likely would select items for testing from the population of
all

A.
B.
C.
D.

Purchase orders.
Canceled checks.
Receiving reports.
Approved vouchers.

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43 An auditor wishes to perform tests of controls on a client's purchasing


. procedures. If the control activities leave no audit trail of documentary
evidence, the auditor most likely will test the procedures by

A.
B.
C.
D.

Confirmation and observation.


Observation and inquiry.
Analytical procedures and confirmation.
Inquiry and analytical procedures.

44 Which of the following audit procedures is best for identifying


. unrecorded accounts payable?

A. Reviewing cash disbursements recorded subsequent to the balance


sheet date to determine whether the related payables apply to the
prior period.
B. Investigating payables recorded just prior to and just subsequent to
the balance sheet date to determine whether they are supported by
receiving reports.
C. Examining unusual relationships between monthly accounts payable
balances and recorded cash payments.
D. Reconciling vendors' statements to the file of receiving reports to
identify items received just prior to the balance sheet date.
45 To provide assurance that each voucher is submitted and paid only
. once, an auditor most likely would examine a sample of paid vouchers
and determine whether each voucher is

A.
B.
C.
D.

Supported by a vendor's invoice.


Stamped "paid" by the check signer.
Prenumbered and accounted for.
Approved for authorized purchases.

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46 Cutoff tests designed to detect purchases made before the end of the
. year that have been recorded in the subsequent year most likely would
provide assurance about management's assertion of

A.
B.
C.
D.

Valuation or allocation.
Existence or occurrence.
Completeness.
Rights and obligations.

47 When auditing PP&E, the auditor's approach is generally to


.
A. Examine evidence supporting the amounts in the ending balance.
B. Examine evidence supporting additions during the year.
C. Follow a reliance strategy, testing internal controls and analytical
procedures.
D. Concentrate on finding unrecorded assets.
48 Which of the following procedures would an auditor most likely perform
. in searching for unrecorded liabilities?

A. Trace a sample of accounts payable entries recorded just before yearend to the unmatched receiving report file.
B. Compare a sample of purchase orders issued just after year-end with
the year-end accounts payable trial balance.
C. Vouch a sample of cash disbursements recorded just after year-end
to receiving reports and vendor invoices.
D. Scan the cash disbursements entries recorded just before year-end
for indications of unusual transactions.

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

49 In performing a search for unrecorded retirements of fixed assets, an


. auditor most likely would

A. Inspect the property ledger and the insurance and tax records, and
then tour the client's facilities.
B. Tour the client's facilities, and then inspect the property ledger, and
the insurance and tax records.
C. Analyze the repair and maintenance account, and then tour the
client's facilities.
D. Tour the client's facilities, and then analyze the repair and
maintenance account.
50 A weakness in internal control over recording retirements of equipment
. may cause an auditor to

A. Inspect certain items of equipment in the plant and trace those items
to the accounting records.
B. Review the subsidiary ledger to ascertain whether depreciation was
taken on each item of equipment during the year.
C. Trace additions to the "other assets" account to search for equipment
that is still on hand but no longer being used.
D. Select certain items of equipment from the accounting records and
locate them in the plant.
51 Failure to record a liability generally results in
.
A.
B.
C.
D.

An understatement of profit.
An understatement of current ratio.
An overstatement of profit.
An overstatement of assets.

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

52 Improperly capitalizing an expense item results in.


.
A. Understatement of profit in the current year and overstatement in
future years.
B. Understatement of profit in the current year and in future years.
C. Overstatement of profit in the current year and understatement in
future years.
D. Overstatement of profit in the current year and in future years.
53 A liability for a long-term purchase contract should generally be
. recognized when

A.
B.
C.
D.

The contract is signed.


The goods are shipped.
The goods are received.
The goods are sold to match the cost.

54 Which of the following expense accounts would not normally be tested


. by listing all debits and examining any significant items?

A.
B.
C.
D.

Legal expense.
Miscellaneous expense.
Repairs and Maintenance.
Payroll expense.

55 Which of the following would be an indicator of potential fraud?


.
A.
B.
C.
D.

Photocopies of invoices in the voucher file.


Vendor invoices in numerical order.
Vendors with only post office box addresses.
All of the above indicate potential fraud.

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

56 Which of the following fraud detection steps could not be performed by


. CAATs?

A.
Look for photocopies in invoice files.
B. Look for vendor invoices in numerical order.
C. Look for vendor invoices slightly below the approval threshold.
D.
Look for duplicate vendor numbers.
57 Tracing a sample of time clock cards to payroll registers (journals) is a
. procedure designed to obtain evidence about the transaction
assertion(s) of

A.
B.
C.
D.

Occurrence only.
Occurrence and accuracy only.
Completeness only.
Accuracy only.

58 The permanent reference files (master files) in a personnel and payroll


. database ordinarily do not include which of the following?

A.
B.
C.
D.

Deduction table.
Payroll master.
Compensation table.
Employee earning record.

59 Which of the following situations represents an internal control


. weakness in the payroll department?

A.
B.
C.
D.

Payroll department personnel are rotated in their duties.


Paychecks are distributed by the employees' immediate supervisor.
Payroll records are reconciled with quarterly tax reports.
The timekeeping function is independent of the payroll department.

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60 Which of the following personnel department procedures reduces the


. risk of payroll fraud and represents an appropriate responsibility for the
department?

A.
Distributing paychecks.
B.
Authorizing overtime hours.
C. Authorizing the addition or deletion of employees from the payroll.
D. Collecting and retaining unclaimed paychecks.
61 To test the transaction assertion of occurrence in the area of payroll, the
. auditor most likely would

A. Select a sample of personnel files and trace the pay rate to union
contracts or other rate rights and obligations.
B. Select a sample of personnel files and trace the pay rate to payroll
department files used in payroll preparation.
C. Select a sample of payroll register entries and recalculate gross pay,
deductions, and net pay.
D. Select a sample of payroll register entries and vouch hours worked to
clock time cards.
62 Small Corporation uses a Wages Clearing Account for its payroll
. disbursements. At the end of February, a reasonably large debit
balance remained in this account. The most likely reason for this is that

A. More labor cost had been assigned to the expense accounts than had
been paid.
B. Some labor cost had not been properly classified in the expense
accounts.
C. Some employees had not yet cashed their checks.
D. Not enough cash had been transferred to the bank account.

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

63 Which of the following is not a major control risk in the payroll cycle?
.
A.
B.
C.
D.

Paying fictitious "employees."


Overpaying for time or production.
Losing employees to competitors.
Incorrect accounting for costs or expenses.

64 The sampling unit in a test of controls pertaining to the existence or


. occurrence of payroll transactions ordinarily is a(an)

A.
B.
C.
D.

Clock card or time ticket.


Employee Form W-2.
Employee personnel record.
Payroll register (journal) entry.

65 The purpose of segregating the duties of hiring personnel and


. distributing payroll checks is to separate the

A.
B.
C.
D.

Human resources function from the controllership function.


Administrative controls from the internal accounting controls.
Authorization of transactions from the custody of related assets.
Operational responsibility from the record keeping responsibility.

66 An auditor most likely would assess control risk at the maximum if the
. payroll department supervisor is responsible for

A. Examining authorization forms for new employees.


B. Comparing payroll registers with original batch transmittal data.
C. Distribute payroll checks to all employees.
D. Hiring all subordinate payroll department employees.
67 An auditor most likely would extend substantive tests of payroll when
.
A.
B.
C.
D.

Payroll is extensively audited by the state government.


Payroll expense is substantially higher than in the prior year.
Overpayments are discovered in performing tests of controls.
Employees complain to management about too much overtime.

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

68 An auditor most likely would perform substantive procedures on payroll


. transactions and balances when

A. Cutoff tests indicate a substantial amount of accrued payroll


expense.
B. The assessed level of control risk relative to payroll transactions is
low.
C. Analytical procedures indicate unusual fluctuations in recurring
payroll entries.
D. Accrued payroll expense consists primarily of unpaid commissions.
69 An auditor vouched data for a sample of employees in a payroll register
. to approved clock card data to provide assurance that

A. Payments to employees are computed at authorized rates.


B. Employees work the number of hours for which they are paid.
C. Separation of duties exists between the preparation and distribution
of the payroll.
D. Internal controls relating to unclaimed payroll checks are operating
effectively.
70 Substantive tests of account balances in the payroll cycle are likely to
. include the following procedures except

A.
Analytical review procedures.
B.
Recalculation of accruals.
C. Comparison of accruals to subsequent payments.
D. Detail vouching of payroll expense entries.
71 Which of the following accounts does not appear in the acquisition and
. expenditure cycle?

A.
B.
C.
D.

Cash.
Purchases Returns.
Sales Returns.
Prepaid Insurance.

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

72 For which of the following accounts would the matching concept be the
. most appropriate?

A.
B.
C.
D.

Cost of Goods Sold.


Research and Development.
Depreciation Expense.
Sales.

73 Which of the following would not overstate current-period net income?


.
A. Capitalizing an expenditure that should be expensed.
B. Failing to record a liability for an expenditure.
C. Failing to record a check paying an item in vouchers payable.
D. All of the above would overstate net income.
74 A client's purchasing system ends with the recording of a liability and
. its eventual payment. Which of the following best describes auditors'
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. Acquisition 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.

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

75 Which of the following is an internal control activity that could prevent a


. paid disbursement voucher from being presented for payment a second
time?

A. Vouchers should be prepared by individuals who are responsible for


signing disbursement checks.
B. Disbursement vouchers should be approved by at least two
responsible management officials.
C. The date on a disbursement voucher should be within a few days of
the date the voucher is presented for payment.
D. The official who signs the check should compare the check with the
voucher and should stamp PAID on the voucher documents.
76 R. Budd, the purchasing agent of Lake Hardware Wholesalers, has a
. relative who owns a retail hardware store. Budd arranged for hardware
to be delivered by manufacturers to the retail store on a cash-ondelivery (COD) basis, thereby enabling his relative to buy at Lake's
wholesale prices. Budd was probably able to accomplish this because of
Lake's poor internal control over

A.
B.
C.
D.

Purchase requisitions.
Cash receipts.
Perpetual inventory records.
Purchase orders.

77 Which of the following is the best audit procedure for determining the
. existence of unrecorded liabilities?

A. Examine confirmation requests returned by creditors whose accounts


are on a subsidiary trial balance of accounts payable.
B. Examine a sample of cash disbursements in the period subsequent to
year-end.
C. Examine a sample of invoices a few days prior to and subsequent to
year-end to ascertain whether they have been properly recorded.
D. Examine unusual relationships between monthly accounts payable
and recorded purchases.

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

78 Which of the following procedures is least likely to be performed before


. the balance-sheet date?

A.
Observation of inventory.
B. Review of internal control over cash disbursements.
C.
Search for unrecorded liabilities.
D.
Confirmation of receivables.
79 To determine whether accounts payable are complete, auditors perform
. a test to verify that all merchandise received has been recorded. The
population for this test consists of all

A.
B.
C.
D.

Vendors' invoices.
Purchase orders.
Receiving reports.
Canceled checks.

80 When verifying debits to the perpetual inventory records of a


. nonmanufacturing company, auditors would be most interested in
examining a sample of purchase

A.
B.
C.
D.

Approvals.
Requisitions.
Invoices.
Orders.

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

81 A furniture company ordered 84 tables from a supplier. The supplier


. accidentally sent only 48 tables, but the receiving department at the
furniture company accepted the tables. The invoice was eventually
received but was for the 84 tables ordered. The furniture company paid
the entire amount. Which of the following controls would have been
least likely to have prevented this erroneous payment?

A. The copy of the purchase order sent to the furniture company's


receiving department should not have shown an expected quantity.
B. Personnel in the furniture company's accounts payable department
should compare the receiving report to the purchase invoice before
creation of the voucher.
C. Personnel in the furniture company's cash disbursements department
should compare the check that is prepared to all of the backup
documentation.
D. Personnel in the furniture company's purchasing department should
compare the purchase requisition to the purchase order.
82 L. Curtis, a maintenance supervisor, submitted maintenance invoices
. from a phony repair company and received the checks at a post office
box. This should have been prevented by

A. Comparison of the company name to the approved vendor list by the


check signer.
B. Recognition of the excess maintenance costs by Curtis's supervisor.
C. Refusal by the purchasing department to approve the vendor.
D.
All of the above.
83 An audit team would most likely examine the detail support for which of
. the following charges?

A.
B.
C.
D.

Payroll expense.
Cost of goods sold.
Supplies expense.
Legal expense.

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

84 Which of the following accounts would most likely be audited in


. connection with a related balance sheet account?

A.
B.
C.
D.

Property Tax Expense.


Payroll Expense.
Research and Development.
Legal Expense.

85 When auditing liabilities account balances, auditors are most concerned


. with management' assertion about

A.
B.
C.
D.

Existence.
Rights and obligations.
Completeness.
Valuation and allocation.

86 In a test of controls, auditors may trace receiving reports to vouchers


. recorded in the voucher register. This is a test for

A.
B.
C.
D.

Occurrence.
Completeness.
Classification.
Cutoff.

87 An audit team most likely would assess control risk at the maximum if
. the payroll department supervisor is responsible for

A.
B.
C.
D.

Examining authorization forms for new employees.


Comparing payroll registers with original batch transmittal data.
Authorizing payroll rate changes for all employees.
Hiring all subordinate payroll department employees.

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88 Which of the following departments most likely would approve changes


. in pay rates and deductions from employee salaries?

A.
B.
C.
D.

Personnel.
Treasurer.
Controller.
Payroll.

89 Matthew Corp. has changed from a system of recording time worked on


. clock cards to a computerized payroll system in which employees
record time in and out with magnetic cards. The computerized system
automatically updates all payroll records. Because of this change,

A. A generalized computer audit plan must be used.


B.
Part of the audit trail is altered.
C. The potential for payroll-related fraud is diminished.
D. Transactions must be processed in batches.
90 Effective control over the cash payroll function would mandate which of
. the following?

A. The payroll clerk should fill the envelopes with cash and include a
computation of the net wages.
B. The paymaster should be retain unclaimed payroll envelopes.
C. Each employee should be asked to sign a receipt for wages received.
D. A separate checking account for payroll should be maintained.

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91 A large retail enterprise has established a policy that requires the


. paymaster to deliver all unclaimed payroll checks to the internal audit
department at the end of each payroll distribution day. This policy was
most likely adopted to

A. Ensure that employees who were absent on a payroll distribution day


are not paid for that day.
B. Prevent the paymaster from cashing checks that are unclaimed for
several weeks.
C. Prevent a bona fide employee's check from being claimed by another
employee.
D. Detect any fictitious employee who may have been placed on the
payroll.
92 Auditors ordinarily ascertain whether payroll checks are properly
. endorsed during the audit of

A.
B.
C.
D.

Clock cards.
The voucher system.
Cash in bank.
Accrued payroll.

93 In determining the effectiveness of an entity's policies and procedures


. relating to the occurrence assertion for payroll transactions, auditors
most likely would inquire about and

A. Observe the separation of duties concerning personnel


responsibilities and payroll disbursement.
B. Inspect evidence of accounting for prenumbered payroll checks.
C. Recompute the payroll deductions for employee fringe benefits.
D. Verify the preparation of the monthly payroll account bank
reconciliation.

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94 Which of the following activities most likely would be considered a


. weakness in an entity's internal control over payroll?

A. A voucher for the amount of the payroll is prepared in the general


accounting department based on the payroll department's payroll
summary.
B. Payroll checks are prepared by the accounts payable department and
signed by the treasurer.
C. The employee who distributes payroll checks returns unclaimed
payroll checks to the payroll department.
D. The personnel department sends employees' termination notices to
the payroll department.
95 The transactions typically classified in the acquisition and expenditure
. cycle flow do not include

A. Requesting goods, services, or assets.


B.
Placing the sales order.
C. Receiving, inspecting, and accepting the assets.
D.
Accounting for accounts payable.
96 The review phase of the transaction flow in the acquisition and
. expenditure cycle does not include

A.
B.
C.
D.

Interviews.
Observations.
Collecting sample documents.
Substantive procedures.

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97 The internal control questionnaire for receipt of purchases


. completeness objective would not include which of the following
questions?

A. Are the purchase order forms prenumbered and the numerical


sequence checked for missing documents?
B. Are receiving report forms prenumbered and the numerical sequence
checked for missing documents?
C. Are competitive bids received and reviewed for certain items?
D. Is the accounts payable department notified of goods returned to
vendors?
98 A voucher typically does not have attached to it a copy of which of the
. following documents?

A.
B.
C.
D.

Requisition.
Purchase order.
Vendor's invoice.
Check register.

99 Computer controls that might be found in an advanced on-line


. acquisition and expenditure system would not include

A. All vendor invoices are prenumbered and the numbers accounted for.
B. Each terminal performs only designated functions.
C. An identification number and password are required to enter the
nonautomatic purchase orders.
D. The check signature is printed using a signature plate that is
installed on the computer printer only when checks are printed.
100 Specific balance assertions typical of accounts payable would not
.
include

A. Recorded liabilities are obligations of the entity.


B. Estimated liabilities are properly valued.
C. Accounts payable are not pledged as collateral.
D. Payables are recorded in the proper period.

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101 The inherent risk that accounts payable may be omitted or otherwise
.
understated typically is

A.
B.
C.
D.

Low.
High.
Moderate.
Indeterminate.

102 An audit plan for accounts payable would not include which of the
.
following procedures?

A. Obtaining a trial balance of recorded accounts payable.


B. Sending confirmation to accounts with zero balances.
C. Reviewing cash receipts for the period after year-end.
D. Obtaining written client representations about related-party
payables and pledges of assets as collateral for liabilities.
103 Which of the following would not typically be a specific relevant
.
assertion about fixed asset accounts?

A. Fixed assets in the accounts exist and are in productive use.


B. Net carrying book values in the accounts are reflected at current
market values.
C. Depreciation has been calculated properly using accepted methods
and reasonable estimates of useful life and other factors.
D. Fixed assets are properly classified in the balance sheet under
appropriate descriptive captions.
104 The typical functions of the personnel and payroll cycle would not
.
include

A.
B.
C.
D.

Labor relations.
Report of attendance and work performed.
Allocation to cost of goods sold.
Payroll accounting.

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105 An internal control questionnaire for payroll processing occurrence


.
assertion would not include which of the following questions?

A. Are names of terminated employees reported in writing to the


payroll department?
B. Is the payroll compared to personnel files periodically?
C. Are checks distributed by the employee's immediate supervisor?
D. Are all wage rates determined by contract or approved by a
personnel officer?
106 Which of the following functional responsibilities would not typically
.
relate to salaried employees?

A.
B.
C.
D.

Collecting timekeeping data.


Supervision.
Personnel or labor relations.
Payroll distribution.

Fill in the Blank Questions


107 The _____________________________________ inspects the goods received
.
for _____________________________ and _____________________________ and
then puts them in the hands of other responsible persons.
________________________________________
108 When the _________________________________,
.
______________________________ and _________________________ are in
hand, the accountants can record the accounts payable.
________________________________________

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109 Auditors can compare the ________________________________ file to the


.
_________________________________ to determine whether the company
has material unrecorded liabilities on the financial statement date.
________________________________________
110 ___________________________________ and
.
___________________________________ can cause "unmatched" invoices
and related "unmatched" receiving reports to be unnoticed.
________________________________________
111 A _____________________________ is a cover sheet containing all
.
supporting documentation for an acquisition.
________________________________________
112 A list of all purchases might exist only in a
.
____________________________________ file rather than a
_____________________________________.
________________________________________
113 Assessment of _____________________________ of
.
__________________________________ is important because it governs the
nature, timing, and extent of substantive procedures that will be
applied in the audit of account balances in the acquisition cycle.
________________________________________
114 Vendor invoices should be compared to _______________________________
.
and ________________________________ to determine that the vendor is
charging the approved price and for quantity received.
________________________________________
115 ____________________________________ consist of (1) identification of data
.
population for audit and (2) an expression of the action to be taken to
produce relevant audit evidence.
________________________________________

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116 When considering assertions and obtaining evidence about accounts


.
payable, auditors must put emphasis on the
_____________________________ assertion.
________________________________________
117 The ________________________________________ is a set of procedures
.
designed to yield audit evidence of liabilities that were not recorded in
the reporting period.
________________________________________
118 The five functional responsibilities of a payroll cycle are
.
____________________________, ____________________________,
____________________________, and ________________________________.
________________________________________
119 The __________________________________ has transaction initiation
.
authority to add new employees and delete terminated employees.
________________________________________
120 A personnel file should establish the reality of a person's
.
_______________________ and ____________________________.
________________________________________
121 The ____________________________________ is the primary original record
.
for payroll accounting.
________________________________________

Short Answer Questions

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122 The internal control questionnaire for purchases and accounts payable
.
includes the following questions. Next to each of the questions,
indicate the letter of the related transaction assertion.
A. Occurrence
B. Completeness
C. Accuracy
D. Classification
E. Cutoff

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Essay Questions
123 Explain why auditors must put more emphasis on the completeness
.
and obligation assertion when auditing payables and contrast this with
the audit of asset accounts.

124 F. Jack, CPA, is the auditor of Jill Corporation. Jack plans to follow last
.
year's work papers in selecting accounts payable to be confirmed.
Confirmations were mailed to 50 of Jill's 200 suppliers. The sample was
designed to select accounts with the largest balances. Jack and Jill
spent a lot of time reconciling minor differences between the
confirmation amounts and the accounts payable trial balance.
Required:
Do you believe Jack should use the same sample design for accounts
payable confirmations this year? If not, what suggestions can you give
to improve the design?

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125 After checks are signed for vendor invoices, why should vouchers be
.
marked PAID or otherwise mutilated?

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126 This question requires knowledge of specific account balance


.
assertions, general audit procedures, and trade accounts payable.
You are assigned to audit the accounts payable of Green Corporation
whose business is wholesale and retail trade. The company purchases
products from 1,002,000 manufacturers ("vendors") and sells the
products to its retail and wholesale customers. The general ledger
shows the Accounts Payable control balance as of the balance-sheet
date in the amount of $42 million (which is 70 percent of current
liabilities, 50 percent of total liabilities, and 35 percent of total
liabilities and owners' equity). Green's management accountants post
the summary entries from the purchases journal and from the cash
disbursements journal each month to the Accounts Payable control
account. The accounts payable manager gave you a detailed trial
balance that lists all recorded unpaid invoices (recording date, vendor
name, vendor invoice number, invoice date, and amount) subtotaled
by vendor.
Other members of the audit team have already decided to assess
control risk at the maximum for the accounts payable work. The
engagement manager gave you last year's audit working papers but
said the audit plan was missing (!). Thus, the first part of your
assignment is to write the audit plan for audit of the Green Corporation
trade accounts payable.
Required:
For each of the balance assertions (existence, completeness, and
valuation or and allocation), write two or more specific audit
procedures designed to produce evidence related to the accounts
payable balance of $42 million.
(Hints: [1] For each of the three balance assertions, think about a
specific assertion before you write a procedure to gather evidence. [2]
Write specific procedures as adaptations of the general audit
procedures: recalculation, observation, confirmation, document
examination, inquiry, scanning, analytical procedures. [3] Most
procedures are two-part statements: "Select a sample of... [identify the
population]...and "do something"... [specify an action].)

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127 When performing procedures in a search of unrecorded liabilities,


.
auditors can utilize various sources of evidence/information (e.g.,
documents, files, management and clerical personnel).
Required:
List at least five, but not more than seven, sources of
evidence/information for the search for unrecorded liabilities.
(Do not write procedures. Do not take time to write about particular
evidence that can be obtained or reasons for using the sources.)

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128 The test of controls for purchases, cash disbursements, and accounts
.
payable include the following audit procedures. Next to each of the
procedures, indicate the related transaction assertion.

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129 The test of controls for payroll includes the following audit procedures.
.
Next to each of the procedures, indicate the related management
assertion about transactions.

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Chapter 08 Acquisition and Expenditure Cycle Answer Key

True / False Questions


1.

The basic acquisition and expenditure activities are (1) purchasing


goods and services, (2) receiving the goods or services, (3) recording
the asset or expense and related liability, and (4) paying the
vendors.
TRUE
Reference: Question also found in study guide

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-02 Describe the acquisition and expenditure cycle; including typical source documents
and controls.
Topic: Acquisition and Expenditure Cycle: Typical Activities

2.

Purchases are ordered by a purchasing department that seeks the


best prices and quality.
TRUE
Reference: Question also found in study guide

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-02 Describe the acquisition and expenditure cycle; including typical source documents
and controls.
Topic: Acquisition and Expenditure Cycle: Typical Activities

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

3.

Checks are signed by the accounts payable department after


assembling the invoice, purchase order, and receiving report.
FALSE
Reference: Question also found in study guide

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-02 Describe the acquisition and expenditure cycle; including typical source documents
and controls.
Topic: Acquisition and Expenditure Cycle: Typical Activities

4.

Purchase orders are "open" from the time they are issued until the
goods are received.
TRUE
Reference: Question also found in study guide

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-02 Describe the acquisition and expenditure cycle; including typical source documents
and controls.
Topic: Acquisition and Expenditure Cycle: Typical Activities

5.

Normally, liabilities should be recorded on the date the goods are


received and accepted.
TRUE
Reference: Question also found in study guide

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-02 Describe the acquisition and expenditure cycle; including typical source documents
and controls.
Topic: Acquisition and Expenditure Cycle: Typical Activities

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

6.

Auditors' "search for unrecorded liabilities" should emphasize the


large balances, especially for regular vendors.
FALSE
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-04 Explain the importance of the completeness assertion for the audit of accounts
payable and list some procedures for a search for unrecorded liabilities.
Topic: Substantive Procedures in the Acquisition and Expenditure Cycle

7.

Auditors can inspect the "unmatched invoice file" and compare it to


the "unmatched receiving report" file to determine whether liabilities
are unrecorded.
FALSE
Reference: Question also found in study guide

AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-02 Describe the acquisition and expenditure cycle; including typical source documents
and controls.
Topic: Acquisition and Expenditure Cycle: Typical Activities

8.

Proper separation of duties involves authorization of purchases by


persons who do not have custody, recording, or reconciliation duties.
TRUE
Reference: Question also found in study guide
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Understand
Difficulty: 2 Medium

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Learning Objective: 08-03 Give examples of tests of controls over purchases of inventory and services.
Topic: Control Risk Assessment

9.

If personnel in the organization are not performing their control


activities very well, auditors will need to design substantive
procedures to try to detect whether control failures have produced
misleading financial statement account balances.
TRUE
Reference: Question also found in study guide
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-03 Give examples of tests of controls over purchases of inventory and services.
Topic: Control Risk Assessment

10.

If the risk of material misstatement is assessed as very low, it is likely


that additional substantive procedures will be required.
FALSE
Reference: Question also found in study guide
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-03 Give examples of tests of controls over purchases of inventory and services.
Topic: Control Risk Assessment

11.

The emphasis is on the existence assertion because financial


statement users tend to be more concerned about understated
expenses and liabilities than overstated.
FALSE
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Industry

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AICPA FN: Decision Making


Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-04 Explain the importance of the completeness assertion for the audit of accounts
payable and list some procedures for a search for unrecorded liabilities.
Topic: Substantive Procedures in the Acquisition and Expenditure Cycle

12.

Evidence is much easier to obtain to verify the completeness


assertion for liabilities than the existence assertion for assets.
FALSE
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-04 Explain the importance of the completeness assertion for the audit of accounts
payable and list some procedures for a search for unrecorded liabilities.
Topic: Substantive Procedures in the Acquisition and Expenditure Cycle

13.

The search for unrecorded liabilities should normally be performed up


to the last day of fieldwork in the period following the audit client's
balance sheet date.
TRUE
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-04 Explain the importance of the completeness assertion for the audit of accounts
payable and list some procedures for a search for unrecorded liabilities.
Topic: Substantive Procedures in the Acquisition and Expenditure Cycle

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

14.

The principal goal of the physical inspection of property, plant, and


equipment is to determine actual existence and condition of
property.
TRUE
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-05 Discuss audit procedures for other accounts affected by the acquisition and
expenditure cycle.
Topic: Substantive Procedures in the Acquisition and Expenditure Cycle

15.

All pay base data (hours, job number, absences, etc.) should be
approved by an employee's immediate supervisor.
TRUE
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Topic: Audit Issues in the Expense and Acquisition Cycle

16.

The main feature of custody in the payroll cycle is the possession of


the payroll checks.
TRUE
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

[Appendix 8C]
Topic: Audit Issues in the Expense and Acquisition Cycle

17.

Persons in charge of authorization and custody payroll functions


should not prepare the payroll.
TRUE
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Topic: Audit Issues in the Expense and Acquisition Cycle

18.

The payroll bank account cannot be reconciled like the other bank
accounts.
FALSE
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Topic: Audit Issues in the Expense and Acquisition Cycle

19.

Record keeping is performed by payroll and cost accounting


personnel who do not make authorizations or distribute pay.
TRUE
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Topic: Audit Issues in the Expense and Acquisition Cycle

Multiple Choice Questions


20.

When confirming accounts payable, emphasis should be put on what


kind of accounts?

A. Accounts with small or zero balances.


B. All accounts should be equally emphasized.
C.
Accounts with large balances.
D. Accounts listed in the accounts payable subsidiary.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-04 Explain the importance of the completeness assertion for the audit of accounts
payable and list some procedures for a search for unrecorded liabilities.
Source: Original
Topic: Expenditure Assertions

21.

"Recorded vouchers (accounts payable entries) in the voucher


register (e.g., purchases journal) supported by completed voucher
documentation" is a specific example of which management
assertion?

A.
B.
C.
D.

Classification.
Occurrence.
Completeness.
Cutoff.

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-03 Give examples of tests of controls over purchases of inventory and services.
Source: Original
Topic: Expenditure Controls

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

22.

"All purchase orders are supported by requisitions from proper


persons" is a specific example of which management assertion?

A.
B.
C.
D.

Occurrence.
Completeness.
Cutoff.
Classification.

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-02 Describe the acquisition and expenditure cycle; including typical source documents
and controls.
Source: Original
Topic: Expenditure Cycle

23.

Cash disbursements are authorized by

A.
B.
C.
D.

Purchase orders.
Invoices.
Receiving reports.
A complete voucher package.

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-03 Give examples of tests of controls over purchases of inventory and services.
Source: Original
Topic: Expenditure Controls

24.

For the copy of the purchase order that goes to the receiving
department, it is best to

A. Leave off the description of the goods ordered.


B. Leave off the quantity of the goods ordered.
C.
Leave off the name of the vendor.
D. Have the receiving department forward all copies of the purchase
order to accounts payable.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-03 Give examples of tests of controls over purchases of inventory and services.
Source: Original
Topic: Expenditure Controls

25.

Vouchers should be stamped PAID to

A.
Prevent duplicate payment.
B.
Generate a new purchase order.
C. Indicate posting in the voucher register.
D. Facilitate preparation of the bank reconciliation.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-03 Give examples of tests of controls over purchases of inventory and services.
Source: Original
Topic: Expenditure Controls

26.

A voucher package is used to

A.
Document receipt of inventory.
B.
Document completion of services.
C.
Document a purchase contract.
D. Provide a source document for recording the purchase of a good or
service.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-02 Describe the acquisition and expenditure cycle; including typical source documents
and controls.
Source: Original
Topic: Expenditure Cycle

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

27.

An auditor traced a sample of purchase orders and the related


receiving reports to the purchases journal. The purpose of this
substantive audit procedure most likely was to

A. Identify usually large purchases that should be investigated


further.
B. Verify that cash disbursements were for goods actually received.
C. Determine that purchases were properly recorded.
D. Test whether payments were for goods actually ordered.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-03 Give examples of tests of controls over purchases of inventory and services.
Source: AICPA
Topic: Expenditure Controls

28.

The usual source for journal entries posted to the general ledger to
record the purchase of inventory is

A. Sales invoices updated with cost data from the inventory records
department.
B. Purchase invoices updated with cost data from the inventory
records department.
C. Receiving reports updated with cost data from the accounts
payable department.
D. Vouchers payable journal from the accounts payable department.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-03 Give examples of tests of controls over purchases of inventory and services.
Source: Original
Topic: Expenditure Controls

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

29.

Which of the following would detect the understatement of a


purchase discount?

A. Verify the arithmetic accuracy of the purchases journal.


B. Compare purchase disbursement records and checks with invoice
terms.
C. Compare approved purchase orders to receiving reports.
D. Verify the receipt of items ordered and invoiced.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-05 Discuss audit procedures for other accounts affected by the acquisition and
expenditure cycle.
Source: Original
Topic: Expenditure Substantive Testing

30.

Which of the following situations indicates a potential material


weakness in internal control over acquisition and expenditure?

A. Purchase orders are not prepared for services acquired directly


under authorization of department heads.
B. The same person authorizes voucher packages and signs checks.
C. Unacceptable goods are not scheduled on receiving reports.
D. The same person signs checks and stamps vouchers PAID.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-03 Give examples of tests of controls over purchases of inventory and services.
Source: Original
Topic: Expenditure Controls

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

31.

Which of the following client control activities is not usually


performed in the vouchers payable (accounts payable) department?

A. Determining the mathematical accuracy of the vendors' invoices.


B. Writing checks for the treasurer's signature to take advantage of
purchase discounts.
C. Controlling the mailing of the check and remittance advice.
D. Checking the prices on the vendor's invoice.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-02 Describe the acquisition and expenditure cycle; including typical source documents
and controls.
Source: Original
Topic: Expenditure Cycle

32.

When auditing merchandise inventory at year-end, the auditor


performs a purchase cutoff test to obtain evidence that

A. All goods purchased before year-end are received before the


physical inventory count.
B. No goods held on consignment for customers are included in the
inventory balance.
C. No goods observed during the physical count are pledged or sold.
D. All goods owned at year-end are included in the inventory balance.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-03 Give examples of tests of controls over purchases of inventory and services.
Source: Original
Topic: Expenditure Controls

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

33.

Auditors may conclude that depreciation charges are too small by


noting

A. Insured values much larger than book values.


B. Large numbers of fully depreciated assets.
C. Frequent trade-ins of relatively new assets.
D. Large and frequent losses on assets retired.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-07 Describe some common errors and frauds in the acquisition and expenditure cycle
and design some audit and investigation procedures for detecting them.
Source: Original
Topic: Expenditure Error and Fraud Detection

34.

The auditor decided to test accounts payable by sending open-ended


(blank) confirmations to selected vendors. The auditor's best
approach in selecting the vendor accounts to confirm is to

A. Select vendor accounts with large balances.


B. Select vendor accounts at random in order to apply a statistical
sampling procedure.
C. Select vendor accounts based on the number of purchases from
vendors during the year.
D. Select vendor accounts that are past due.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-03 Give examples of tests of controls over purchases of inventory and services.
Source: Original
Topic: Expenditure Controls

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

35.

What evidence is appropriate to determine whether recorded


purchase transactions are valid and the vendors charged the correct
prices?

A. Purchase requisitions and accounts payable entries.


B. Receiving reports and purchase orders.
C. Purchase requisitions and purchases orders.
D.
Purchase orders and bid quotes.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-02 Describe the acquisition and expenditure cycle; including typical source documents
and controls.
Source: Original
Topic: Expenditure Cycle

36.

Purchase cutoff procedures should be designed to produce evidence


of whether merchandise is included in the inventory of the client
company if the company

A.
Has paid for the merchandise.
B. Has physical possession of the merchandise.
C.
Holds legal title to the merchandise.
D. Holds the shipping documents for the merchandise issued in the
company's name.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-04 Explain the importance of the completeness assertion for the audit of accounts
payable and list some procedures for a search for unrecorded liabilities.
Source: Original
Topic: Expenditure Substantive Testing

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

37.

Which of the following accounts would most likely be reviewed by the


auditor to gain reasonable assurance that additions to the equipment
account are not understated?

A.
B.
C.
D.

Depreciation expense.
Gain on disposal of equipment.
Accounts payable.
Repairs and maintenance expense.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-05 Discuss audit procedures for other accounts affected by the acquisition and
expenditure cycle.
Source: Original
Topic: Expenditure Audit Procedures

38.

Which of the following would not be included in the supporting


documents for a voucher?

A.
B.
C.
D.

Purchase order.
Vendor invoice.
Receiving report.
Blank check.

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-02 Describe the acquisition and expenditure cycle; including typical source documents
and controls.
Source: Original
Topic: Expenditure Cycle

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

39.

A voucher would typically contain

A. A purchase requisition, purchase order, vendor invoice, receiving


report, and check copy.
B. A purchase requisition, purchase order, sales invoice, receiving
report, and check copy.
C. A purchase requisition, sales order, sales invoice, receiving report,
and check copy.
D. A purchase requisition, sales order, vendor invoice, receiving
report, and check copy.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-02 Describe the acquisition and expenditure cycle; including typical source documents
and controls.
Source: Original
Topic: Expenditure Cycle

40.

When using confirmations to provide evidence about the


completeness assertion for accounts payable, the appropriate
population most likely would be

A.
B.
C.
D.

Vendors with whom the entity has previously done business.


Amounts recorded in the accounts payable subsidiary ledger.
Payees of checks drawn in the month after the year-end.
Invoices filed in the entity's open invoice file.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-04 Explain the importance of the completeness assertion for the audit of accounts
payable and list some procedures for a search for unrecorded liabilities.
Source: AICPA
Topic: Expenditure Substantive Testing

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

41.

Which of the following procedures would an auditor most likely


perform in searching for unrecorded payables?

A. Reconcile receiving reports with related cash payments made just


prior to year-end.
B. Contrast the ratio of accounts payable to purchases with the prior
year's ratio.
C. Vouch a sample of creditor balances to supporting invoices,
receiving reports, and purchase orders.
D. Compare cash payments occurring after the balance sheet date
with the accounts payable trial balance.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-04 Explain the importance of the completeness assertion for the audit of accounts
payable and list some procedures for a search for unrecorded liabilities.
Source: AICPA
Topic: Expenditure Substantive Testing

42.

An entity's internal control structure requires for every check request


that there be an approved voucher, supported by a prenumbered
purchase order and a prenumbered receiving report. To determine
whether checks are being issued for unauthorized expenditures, an
auditor most likely would select items for testing from the population
of all

A.
B.
C.
D.

Purchase orders.
Canceled checks.
Receiving reports.
Approved vouchers.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-03 Give examples of tests of controls over purchases of inventory and services.
Source: AICPA
Topic: Expenditure Controls

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

43.

An auditor wishes to perform tests of controls on a client's purchasing


procedures. If the control activities leave no audit trail of
documentary evidence, the auditor most likely will test the
procedures by

A.
B.
C.
D.

Confirmation and observation.


Observation and inquiry.
Analytical procedures and confirmation.
Inquiry and analytical procedures.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-03 Give examples of tests of controls over purchases of inventory and services.
Source: AICPA
Topic: Expenditure Controls

44.

Which of the following audit procedures is best for identifying


unrecorded accounts payable?

A. Reviewing cash disbursements recorded subsequent to the


balance sheet date to determine whether the related payables
apply to the prior period.
B. Investigating payables recorded just prior to and just subsequent
to the balance sheet date to determine whether they are
supported by receiving reports.
C. Examining unusual relationships between monthly accounts
payable balances and recorded cash payments.
D. Reconciling vendors' statements to the file of receiving reports to
identify items received just prior to the balance sheet date.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-04 Explain the importance of the completeness assertion for the audit of accounts
payable and list some procedures for a search for unrecorded liabilities.
Source: AICPA
Topic: Expenditure Substantive Testing

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

45.

To provide assurance that each voucher is submitted and paid only


once, an auditor most likely would examine a sample of paid
vouchers and determine whether each voucher is

A.
B.
C.
D.

Supported by a vendor's invoice.


Stamped "paid" by the check signer.
Prenumbered and accounted for.
Approved for authorized purchases.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-03 Give examples of tests of controls over purchases of inventory and services.
Source: AICPA
Topic: Expenditure Controls

46.

Cutoff tests designed to detect purchases made before the end of the
year that have been recorded in the subsequent year most likely
would provide assurance about management's assertion of

A.
B.
C.
D.

Valuation or allocation.
Existence or occurrence.
Completeness.
Rights and obligations.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-04 Explain the importance of the completeness assertion for the audit of accounts
payable and list some procedures for a search for unrecorded liabilities.
Source: AICPA
Topic: Expenditure Substantive Testing

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

47.

When auditing PP&E, the auditor's approach is generally to

A. Examine evidence supporting the amounts in the ending balance.


B. Examine evidence supporting additions during the year.
C. Follow a reliance strategy, testing internal controls and analytical
procedures.
D. Concentrate on finding unrecorded assets.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-05 Discuss audit procedures for other accounts affected by the acquisition and
expenditure cycle.
Source: Original
Topic: Expenditure fraud

48.

Which of the following procedures would an auditor most likely


perform in searching for unrecorded liabilities?

A. Trace a sample of accounts payable entries recorded just before


year-end to the unmatched receiving report file.
B. Compare a sample of purchase orders issued just after year-end
with the year-end accounts payable trial balance.
C. Vouch a sample of cash disbursements recorded just after year-end
to receiving reports and vendor invoices.
D. Scan the cash disbursements entries recorded just before year-end
for indications of unusual transactions.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-04 Explain the importance of the completeness assertion for the audit of accounts
payable and list some procedures for a search for unrecorded liabilities.
Source: AICPA
Topic: Expenditure Substantive Testing

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

49.

In performing a search for unrecorded retirements of fixed assets, an


auditor most likely would

A. Inspect the property ledger and the insurance and tax records, and
then tour the client's facilities.
B. Tour the client's facilities, and then inspect the property ledger,
and the insurance and tax records.
C. Analyze the repair and maintenance account, and then tour the
client's facilities.
D. Tour the client's facilities, and then analyze the repair and
maintenance account.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-05 Discuss audit procedures for other accounts affected by the acquisition and
expenditure cycle.
Source: AICPA
Topic: Expenditure fraud

50.

A weakness in internal control over recording retirements of


equipment may cause an auditor to

A. Inspect certain items of equipment in the plant and trace those


items to the accounting records.
B. Review the subsidiary ledger to ascertain whether depreciation
was taken on each item of equipment during the year.
C. Trace additions to the "other assets" account to search for
equipment that is still on hand but no longer being used.
D. Select certain items of equipment from the accounting records and
locate them in the plant.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-05 Discuss audit procedures for other accounts affected by the acquisition and
expenditure cycle.
Source: AICPA
Topic: Expenditure fraud

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

51.

Failure to record a liability generally results in

A.
B.
C.
D.

An understatement of profit.
An understatement of current ratio.
An overstatement of profit.
An overstatement of assets.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-01 Identify significant inherent risks in the acquisition and expenditure cycle.
Source: Original
Topic: Expenditure risks

52.

Improperly capitalizing an expense item results in.

A. Understatement of profit in the current year and overstatement in


future years.
B. Understatement of profit in the current year and in future years.
C. Overstatement of profit in the current year and understatement in
future years.
D. Overstatement of profit in the current year and in future years.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-02 Describe the acquisition and expenditure cycle; including typical source documents
and controls.
Source: Original
Topic: Expenditure risks

53.

A liability for a long-term purchase contract should generally be


recognized when

A.
B.
C.
D.

The contract is signed.


The goods are shipped.
The goods are received.
The goods are sold to match the cost.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-02 Describe the acquisition and expenditure cycle; including typical source documents
and controls.
Source: Original
Topic: Expenditure Cycle

54.

Which of the following expense accounts would not normally be


tested by listing all debits and examining any significant items?

A.
B.
C.
D.

Legal expense.
Miscellaneous expense.
Repairs and Maintenance.
Payroll expense.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-05 Discuss audit procedures for other accounts affected by the acquisition and
expenditure cycle.
Source: Original
Topic: Expenditure fraud

55.

Which of the following would be an indicator of potential fraud?

A. Photocopies of invoices in the voucher file.


B.
Vendor invoices in numerical order.
C. Vendors with only post office box addresses.
D. All of the above indicate potential fraud.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-07 Describe some common errors and frauds in the acquisition and expenditure cycle
and design some audit and investigation procedures for detecting them.
Source: Original
Topic: Expenditure Error and Fraud Detection

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

56.

Which of the following fraud detection steps could not be performed


by CAATs?

A. Look for photocopies in invoice files.


B. Look for vendor invoices in numerical order.
C. Look for vendor invoices slightly below the approval threshold.
D.
Look for duplicate vendor numbers.
AACSB: Technology
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 08-06 Specify some ways fraud can be found in accounts payable and cash disbursements.
Source: Original
Topic: Expenditure fraud

57.

Tracing a sample of time clock cards to payroll registers (journals) is a


procedure designed to obtain evidence about the transaction
assertion(s) of

A.
B.
C.
D.

Occurrence only.
Occurrence and accuracy only.
Completeness only.
Accuracy only.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Source: Original
Topic: Payroll

58.

The permanent reference files (master files) in a personnel and


payroll database ordinarily do not include which of the following?

A.
B.
C.
D.

Deduction table.
Payroll master.
Compensation table.
Employee earning record.
AACSB: Technology
AICPA BB: Leveraging Technology

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

AICPA FN: Leveraging Technology


Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Source: Original
Topic: Payroll

59.

Which of the following situations represents an internal control


weakness in the payroll department?

A. Payroll department personnel are rotated in their duties.


B. Paychecks are distributed by the employees' immediate
supervisor.
C. Payroll records are reconciled with quarterly tax reports.
D. The timekeeping function is independent of the payroll
department.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Source: Original
Topic: Payroll

60.

Which of the following personnel department procedures reduces the


risk of payroll fraud and represents an appropriate responsibility for
the department?

A.
Distributing paychecks.
B.
Authorizing overtime hours.
C. Authorizing the addition or deletion of employees from the payroll.
D. Collecting and retaining unclaimed paychecks.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Source: Original
Topic: Payroll

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

61.

To test the transaction assertion of occurrence in the area of payroll,


the auditor most likely would

A. Select a sample of personnel files and trace the pay rate to union
contracts or other rate rights and obligations.
B. Select a sample of personnel files and trace the pay rate to payroll
department files used in payroll preparation.
C. Select a sample of payroll register entries and recalculate gross
pay, deductions, and net pay.
D. Select a sample of payroll register entries and vouch hours worked
to clock time cards.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Source: Original
Topic: Payroll

62.

Small Corporation uses a Wages Clearing Account for its payroll


disbursements. At the end of February, a reasonably large debit
balance remained in this account. The most likely reason for this is
that

A. More labor cost had been assigned to the expense accounts than
had been paid.
B. Some labor cost had not been properly classified in the expense
accounts.
C. Some employees had not yet cashed their checks.
D. Not enough cash had been transferred to the bank account.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Source: Original
Topic: Payroll

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

63.

Which of the following is not a major control risk in the payroll cycle?

A.
B.
C.
D.

Paying fictitious "employees."


Overpaying for time or production.
Losing employees to competitors.
Incorrect accounting for costs or expenses.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Source: Original
Topic: Payroll

64.

The sampling unit in a test of controls pertaining to the existence or


occurrence of payroll transactions ordinarily is a(an)

A.
B.
C.
D.

Clock card or time ticket.


Employee Form W-2.
Employee personnel record.
Payroll register (journal) entry.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Source: AICPA
Topic: Payroll

65.

The purpose of segregating the duties of hiring personnel and


distributing payroll checks is to separate the

A.
B.
C.
D.

Human resources function from the controllership function.


Administrative controls from the internal accounting controls.
Authorization of transactions from the custody of related assets.
Operational responsibility from the record keeping responsibility.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Difficulty: 2 Medium
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Source: AICPA
Topic: Payroll

66.

An auditor most likely would assess control risk at the maximum if


the payroll department supervisor is responsible for

A. Examining authorization forms for new employees.


B. Comparing payroll registers with original batch transmittal data.
C. Distribute payroll checks to all employees.
D. Hiring all subordinate payroll department employees.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Source: AICPA
Topic: Payroll

67.

An auditor most likely would extend substantive tests of payroll


when

A.
B.
C.
D.

Payroll is extensively audited by the state government.


Payroll expense is substantially higher than in the prior year.
Overpayments are discovered in performing tests of controls.
Employees complain to management about too much overtime.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Source: AICPA
Topic: Payroll

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

68.

An auditor most likely would perform substantive procedures on


payroll transactions and balances when

A. Cutoff tests indicate a substantial amount of accrued payroll


expense.
B. The assessed level of control risk relative to payroll transactions is
low.
C. Analytical procedures indicate unusual fluctuations in recurring
payroll entries.
D. Accrued payroll expense consists primarily of unpaid commissions.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Source: AICPA
Topic: Payroll

69.

An auditor vouched data for a sample of employees in a payroll


register to approved clock card data to provide assurance that

A. Payments to employees are computed at authorized rates.


B. Employees work the number of hours for which they are paid.
C. Separation of duties exists between the preparation and
distribution of the payroll.
D. Internal controls relating to unclaimed payroll checks are operating
effectively.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Source: AICPA
Topic: Payroll

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

70.

Substantive tests of account balances in the payroll cycle are likely to


include the following procedures except

A.
Analytical review procedures.
B.
Recalculation of accruals.
C. Comparison of accruals to subsequent payments.
D. Detail vouching of payroll expense entries.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Source: Original
Topic: Payroll

71.

Which of the following accounts does not appear in the acquisition


and expenditure cycle?

A.
B.
C.
D.

Cash.
Purchases Returns.
Sales Returns.
Prepaid Insurance.

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-02 Describe the acquisition and expenditure cycle; including typical source documents
and controls.
Source: Original
Topic: Expenditure Cycle

72.

For which of the following accounts would the matching concept be


the most appropriate?

A.
B.
C.
D.

Cost of Goods Sold.


Research and Development.
Depreciation Expense.
Sales.
AACSB: Analytic
AICPA BB: Legal

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

AICPA FN: Research


Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 08-03 Give examples of tests of controls over purchases of inventory and services.
Source: Original
Topic: Expenditure Controls

73.

Which of the following would not overstate current-period net


income?

A. Capitalizing an expenditure that should be expensed.


B. Failing to record a liability for an expenditure.
C. Failing to record a check paying an item in vouchers payable.
D. All of the above would overstate net income.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-01 Identify significant inherent risks in the acquisition and expenditure cycle.
Source: Original
Topic: Expenditure risks

74.

A client's purchasing system ends with the recording of a liability and


its eventual payment. Which of the following best describes auditors'
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. Acquisition 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.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-04 Explain the importance of the completeness assertion for the audit of accounts
payable and list some procedures for a search for unrecorded liabilities.
Source: Original
Topic: Expenditure Substantive Testing

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

75.

Which of the following is an internal control activity that could


prevent a paid disbursement voucher from being presented for
payment a second time?

A. Vouchers should be prepared by individuals who are responsible


for signing disbursement checks.
B. Disbursement vouchers should be approved by at least two
responsible management officials.
C. The date on a disbursement voucher should be within a few days
of the date the voucher is presented for payment.
D. The official who signs the check should compare the check with
the voucher and should stamp PAID on the voucher documents.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-03 Give examples of tests of controls over purchases of inventory and services.
Source: Original
Topic: Expenditure Controls

76.

R. Budd, the purchasing agent of Lake Hardware Wholesalers, has a


relative who owns a retail hardware store. Budd arranged for
hardware to be delivered by manufacturers to the retail store on a
cash-on-delivery (COD) basis, thereby enabling his relative to buy at
Lake's wholesale prices. Budd was probably able to accomplish this
because of Lake's poor internal control over

A.
B.
C.
D.

Purchase requisitions.
Cash receipts.
Perpetual inventory records.
Purchase orders.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-03 Give examples of tests of controls over purchases of inventory and services.
Source: Original
Topic: Expenditure Controls

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

77.

Which of the following is the best audit procedure for determining the
existence of unrecorded liabilities?

A. Examine confirmation requests returned by creditors whose


accounts are on a subsidiary trial balance of accounts payable.
B. Examine a sample of cash disbursements in the period subsequent
to year-end.
C. Examine a sample of invoices a few days prior to and subsequent
to year-end to ascertain whether they have been properly
recorded.
D. Examine unusual relationships between monthly accounts payable
and recorded purchases.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-04 Explain the importance of the completeness assertion for the audit of accounts
payable and list some procedures for a search for unrecorded liabilities.
Source: Original
Topic: Expenditure Substantive Testing

78.

Which of the following procedures is least likely to be performed


before the balance-sheet date?

A.
Observation of inventory.
B. Review of internal control over cash disbursements.
C.
Search for unrecorded liabilities.
D.
Confirmation of receivables.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-04 Explain the importance of the completeness assertion for the audit of accounts
payable and list some procedures for a search for unrecorded liabilities.
Source: Original
Topic: Expenditure Substantive Testing

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

79.

To determine whether accounts payable are complete, auditors


perform a test to verify that all merchandise received has been
recorded. The population for this test consists of all

A.
B.
C.
D.

Vendors' invoices.
Purchase orders.
Receiving reports.
Canceled checks.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-04 Explain the importance of the completeness assertion for the audit of accounts
payable and list some procedures for a search for unrecorded liabilities.
Source: AICPA
Topic: Expenditure Substantive Testing

80.

When verifying debits to the perpetual inventory records of a


nonmanufacturing company, auditors would be most interested in
examining a sample of purchase

A.
B.
C.
D.

Approvals.
Requisitions.
Invoices.
Orders.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-03 Give examples of tests of controls over purchases of inventory and services.
Source: Original
Topic: Expenditure Controls

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

81.

A furniture company ordered 84 tables from a supplier. The supplier


accidentally sent only 48 tables, but the receiving department at the
furniture company accepted the tables. The invoice was eventually
received but was for the 84 tables ordered. The furniture company
paid the entire amount. Which of the following controls would have
been least likely to have prevented this erroneous payment?

A. The copy of the purchase order sent to the furniture company's


receiving department should not have shown an expected
quantity.
B. Personnel in the furniture company's accounts payable department
should compare the receiving report to the purchase invoice before
creation of the voucher.
C. Personnel in the furniture company's cash disbursements
department should compare the check that is prepared to all of the
backup documentation.
D. Personnel in the furniture company's purchasing department
should compare the purchase requisition to the purchase order.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-03 Give examples of tests of controls over purchases of inventory and services.
Source: Original
Topic: Expenditure Controls

82.

L. Curtis, a maintenance supervisor, submitted maintenance invoices


from a phony repair company and received the checks at a post
office box. This should have been prevented by

A. Comparison of the company name to the approved vendor list by


the check signer.
B. Recognition of the excess maintenance costs by Curtis's
supervisor.
C. Refusal by the purchasing department to approve the vendor.
D.
All of the above.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Learning Objective: 08-02 Describe the acquisition and expenditure cycle; including typical source documents
and controls.
Source: Original
Topic: Expenditure Cycle

83.

An audit team would most likely examine the detail support for which
of the following charges?

A.
B.
C.
D.

Payroll expense.
Cost of goods sold.
Supplies expense.
Legal expense.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-05 Discuss audit procedures for other accounts affected by the acquisition and
expenditure cycle.
Source: Original
Topic: Expenditure Audit Procedures

84.

Which of the following accounts would most likely be audited in


connection with a related balance sheet account?

A.
B.
C.
D.

Property Tax Expense.


Payroll Expense.
Research and Development.
Legal Expense.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-05 Discuss audit procedures for other accounts affected by the acquisition and
expenditure cycle.
Source: Original
Topic: Expenditure Audit Procedures

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

85.

When auditing liabilities account balances, auditors are most


concerned with management' assertion about

A.
B.
C.
D.

Existence.
Rights and obligations.
Completeness.
Valuation and allocation.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 08-04 Explain the importance of the completeness assertion for the audit of accounts
payable and list some procedures for a search for unrecorded liabilities.
Source: Original
Topic: Expenditure Substantive Testing

86.

In a test of controls, auditors may trace receiving reports to vouchers


recorded in the voucher register. This is a test for

A.
B.
C.
D.

Occurrence.
Completeness.
Classification.
Cutoff.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-03 Give examples of tests of controls over purchases of inventory and services.
Source: Original
Topic: Expenditure Controls

87.

An audit team most likely would assess control risk at the maximum
if the payroll department supervisor is responsible for

A.
B.
C.
D.

Examining authorization forms for new employees.


Comparing payroll registers with original batch transmittal data.
Authorizing payroll rate changes for all employees.
Hiring all subordinate payroll department employees.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Source: AICPA
Topic: Payroll

88.

Which of the following departments most likely would approve


changes in pay rates and deductions from employee salaries?

A.
B.
C.
D.

Personnel.
Treasurer.
Controller.
Payroll.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Source: AICPA
Topic: Payroll

89.

Matthew Corp. has changed from a system of recording time worked


on clock cards to a computerized payroll system in which employees
record time in and out with magnetic cards. The computerized
system automatically updates all payroll records. Because of this
change,

A. A generalized computer audit plan must be used.


B.
Part of the audit trail is altered.
C. The potential for payroll-related fraud is diminished.
D. Transactions must be processed in batches.
AACSB: Technology
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Source: AICPA
Topic: Payroll

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

90.

Effective control over the cash payroll function would mandate which
of the following?

A. The payroll clerk should fill the envelopes with cash and include a
computation of the net wages.
B. The paymaster should be retain unclaimed payroll envelopes.
C. Each employee should be asked to sign a receipt for wages
received.
D. A separate checking account for payroll should be maintained.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Source: AICPA
Topic: Payroll

91.

A large retail enterprise has established a policy that requires the


paymaster to deliver all unclaimed payroll checks to the internal
audit department at the end of each payroll distribution day. This
policy was most likely adopted to

A. Ensure that employees who were absent on a payroll distribution


day are not paid for that day.
B. Prevent the paymaster from cashing checks that are unclaimed for
several weeks.
C. Prevent a bona fide employee's check from being claimed by
another employee.
D. Detect any fictitious employee who may have been placed on the
payroll.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Source: Original
Topic: Payroll

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

92.

Auditors ordinarily ascertain whether payroll checks are properly


endorsed during the audit of

A.
B.
C.
D.

Clock cards.
The voucher system.
Cash in bank.
Accrued payroll.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Source: AICPA
Topic: Payroll

93.

In determining the effectiveness of an entity's policies and


procedures relating to the occurrence assertion for payroll
transactions, auditors most likely would inquire about and

A. Observe the separation of duties concerning personnel


responsibilities and payroll disbursement.
B. Inspect evidence of accounting for prenumbered payroll checks.
C. Recompute the payroll deductions for employee fringe benefits.
D. Verify the preparation of the monthly payroll account bank
reconciliation.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Source: AICPA
Topic: Payroll

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

94.

Which of the following activities most likely would be considered a


weakness in an entity's internal control over payroll?

A. A voucher for the amount of the payroll is prepared in the general


accounting department based on the payroll department's payroll
summary.
B. Payroll checks are prepared by the accounts payable department
and signed by the treasurer.
C. The employee who distributes payroll checks returns unclaimed
payroll checks to the payroll department.
D. The personnel department sends employees' termination notices
to the payroll department.
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Source: AICPA
Topic: Payroll

95.

The transactions typically classified in the acquisition and


expenditure cycle flow do not include

A. Requesting goods, services, or assets.


B.
Placing the sales order.
C. Receiving, inspecting, and accepting the assets.
D.
Accounting for accounts payable.
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-02 Describe the acquisition and expenditure cycle; including typical source documents
and controls.
Source: Original
Topic: Expenditure Cycle

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

96.

The review phase of the transaction flow in the acquisition and


expenditure cycle does not include

A.
B.
C.
D.

Interviews.
Observations.
Collecting sample documents.
Substantive procedures.

Reference: Question also found in study guide


AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-07 Describe some common errors and frauds in the acquisition and expenditure cycle
and design some audit and investigation procedures for detecting them.
Source: Original
Topic: Expenditure Error and Fraud Detection

97.

The internal control questionnaire for receipt of purchases


completeness objective would not include which of the following
questions?

A. Are the purchase order forms prenumbered and the numerical


sequence checked for missing documents?
B. Are receiving report forms prenumbered and the numerical
sequence checked for missing documents?
C. Are competitive bids received and reviewed for certain items?
D. Is the accounts payable department notified of goods returned to
vendors?
Reference: Question also found in study guide
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-03 Give examples of tests of controls over purchases of inventory and services.
Source: Original
Topic: Expenditure Controls

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

98.

A voucher typically does not have attached to it a copy of which of


the following documents?

A.
B.
C.
D.

Requisition.
Purchase order.
Vendor's invoice.
Check register.

Reference: Question also found in study guide


AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-02 Describe the acquisition and expenditure cycle; including typical source documents
and controls.
Source: Original
Topic: Expenditure Cycle

99.

Computer controls that might be found in an advanced on-line


acquisition and expenditure system would not include

A. All vendor invoices are prenumbered and the numbers accounted


for.
B. Each terminal performs only designated functions.
C. An identification number and password are required to enter the
nonautomatic purchase orders.
D. The check signature is printed using a signature plate that is
installed on the computer printer only when checks are printed.
AACSB: Technology
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-03 Give examples of tests of controls over purchases of inventory and services.
Source: Original
Topic: Expenditure Controls

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

100. Specific balance assertions typical of accounts payable would not


include

A. Recorded liabilities are obligations of the entity.


B. Estimated liabilities are properly valued.
C. Accounts payable are not pledged as collateral.
D. Payables are recorded in the proper period.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-01 Identify significant inherent risks in the acquisition and expenditure cycle.
Source: Original
Topic: Expenditure risks

101. The inherent risk that accounts payable may be omitted or otherwise
understated typically is

A.
B.
C.
D.

Low.
High.
Moderate.
Indeterminate.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-01 Identify significant inherent risks in the acquisition and expenditure cycle.
Source: Original
Topic: Expenditure risks

102. An audit plan for accounts payable would not include which of the
following procedures?

A. Obtaining a trial balance of recorded accounts payable.


B. Sending confirmation to accounts with zero balances.
C. Reviewing cash receipts for the period after year-end.
D. Obtaining written client representations about related-party
payables and pledges of assets as collateral for liabilities.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-04 Explain the importance of the completeness assertion for the audit of accounts
payable and list some procedures for a search for unrecorded liabilities.
Source: Original
Topic: Expenditure Substantive Testing

103. Which of the following would not typically be a specific relevant


assertion about fixed asset accounts?

A. Fixed assets in the accounts exist and are in productive use.


B. Net carrying book values in the accounts are reflected at current
market values.
C. Depreciation has been calculated properly using accepted
methods and reasonable estimates of useful life and other factors.
D. Fixed assets are properly classified in the balance sheet under
appropriate descriptive captions.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-05 Discuss audit procedures for other accounts affected by the acquisition and
expenditure cycle.
Source: Original
Topic: Expenditure Audit Procedures

104. The typical functions of the personnel and payroll cycle would not
include

A.
B.
C.
D.

Labor relations.
Report of attendance and work performed.
Allocation to cost of goods sold.
Payroll accounting.

AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Source: Original
Topic: Payroll

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

105. An internal control questionnaire for payroll processing occurrence


assertion would not include which of the following questions?

A. Are names of terminated employees reported in writing to the


payroll department?
B. Is the payroll compared to personnel files periodically?
C. Are checks distributed by the employee's immediate supervisor?
D. Are all wage rates determined by contract or approved by a
personnel officer?
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Source: Original
Topic: Payroll

106. Which of the following functional responsibilities would not typically


relate to salaried employees?

A.
B.
C.
D.

Collecting timekeeping data.


Supervision.
Personnel or labor relations.
Payroll distribution.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Source: Original
Topic: Payroll

Fill in the Blank Questions

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

107. The _____________________________________ inspects the goods received


for _____________________________ and _____________________________
and then puts them in the hands of other responsible persons.
receiving department; quantity; quality
Reference: Question also found in study guide
108. When the _________________________________,
______________________________ and _________________________ are in
hand, the accountants can record the accounts payable.
purchase order; vendor's invoice; receiving report
Reference: Question also found in study guide
109. Auditors can compare the ________________________________ file to the
_________________________________ to determine whether the company
has material unrecorded liabilities on the financial statement date.
unmatched receiving reports; payables listing
Reference: Question also found in study guide
110. ___________________________________ and
___________________________________ can cause "unmatched" invoices
and related "unmatched" receiving reports to be unnoticed.
System failures; human coding errors
Reference: Question also found in study guide

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111. A _____________________________ is a cover sheet containing all


supporting documentation for an acquisition.
voucher
Reference: Question also found in study guide
112. A list of all purchases might exist only in a
____________________________________ file rather than a
_____________________________________.
computer transaction; purchase journal
Reference: Question also found in study guide
113. Assessment of _____________________________ of
__________________________________ is important because it governs the
nature, timing, and extent of substantive procedures that will be
applied in the audit of account balances in the acquisition cycle.
risk; material misstatement
Reference: Question also found in study guide
114. Vendor invoices should be compared to
_______________________________ and ________________________________
to determine that the vendor is charging the approved price and for
quantity received.
purchase orders; receiving reports
Reference: Question also found in study guide

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115. ____________________________________ consist of (1) identification of


data population for audit and (2) an expression of the action to be
taken to produce relevant audit evidence.
Tests of controls
Reference: Question also found in study guide
116. When considering assertions and obtaining evidence about accounts
payable, auditors must put emphasis on the
_____________________________ assertion.
completeness
Reference: Question also found in study guide
117. The ________________________________________ is a set of procedures
designed to yield audit evidence of liabilities that were not recorded
in the reporting period.
search for unrecorded liabilities
Reference: Question also found in study guide
118. The five functional responsibilities of a payroll cycle are
____________________________, ____________________________,
____________________________, and ________________________________.
personnel; supervision; timekeeping; record keeping; payroll
distribution
Reference: Question also found in study guide

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119. The __________________________________ has transaction initiation


authority to add new employees and delete terminated employees.
personnel department
Reference: Question also found in study guide
120. A personnel file should establish the reality of a person's
_______________________ and ____________________________.
existence; employment
Reference: Question also found in study guide
121. The ____________________________________ is the primary original record
for payroll accounting.
payroll register
Reference: Question also found in study guide

Short Answer Questions

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122. The internal control questionnaire for purchases and accounts


payable includes the following questions. Next to each of the
questions, indicate the letter of the related transaction assertion.
A. Occurrence
B. Completeness
C. Accuracy
D. Classification
E. Cutoff

1. C; 2. A; 3. B; 4. A; 5. C; 6. E; 7. A; 8. B
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis

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Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-01 Identify significant inherent risks in the acquisition and expenditure cycle.
Source: Original
Topic: Expenditure risks

Essay Questions
123. Explain why auditors must put more emphasis on the completeness
and obligation assertion when auditing payables and contrast this
with the audit of asset accounts.

The emphasis on completeness is rightly placed because companies


typically are less concerned about timely recording of expenses and
liabilities. Generally, they are more concerned with the timely
recording of revenues and assets. For asset accounts, the emphasis
therefore is on the existence and rights assertions. Ample evidence is
usually available to verify that an asset exists. However, less
evidence usually exists for unrecorded liabilities.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-01 Identify significant inherent risks in the acquisition and expenditure cycle.
Source: Original
Topic: Expenditure risks

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

124. F. Jack, CPA, is the auditor of Jill Corporation. Jack plans to follow last
year's work papers in selecting accounts payable to be confirmed.
Confirmations were mailed to 50 of Jill's 200 suppliers. The sample
was designed to select accounts with the largest balances. Jack and
Jill spent a lot of time reconciling minor differences between the
confirmation amounts and the accounts payable trial balance.
Required:
Do you believe Jack should use the same sample design for accounts
payable confirmations this year? If not, what suggestions can you
give to improve the design?

Because of the concern for understatement of liabilities, auditors are


more concerned with the completeness and valuation assertions for
accounts payable. Auditors emphasize accounts payable that are
more likely understated. Therefore, small and zero balances should
be included in the sample design. Also, vendors with high activity
during the year might be selected.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-04 Explain the importance of the completeness assertion for the audit of accounts
payable and list some procedures for a search for unrecorded liabilities.
Source: Original
Topic: Expenditure Substantive Testing

125. After checks are signed for vendor invoices, why should vouchers be
marked PAID or otherwise mutilated?

To show they have been processed so they cannot be paid again.


AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 1 Easy

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Learning Objective: 08-03 Give examples of tests of controls over purchases of inventory and services.
Source: Original
Topic: Expenditure Controls

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

126. This question requires knowledge of specific account balance


assertions, general audit procedures, and trade accounts payable.
You are assigned to audit the accounts payable of Green Corporation
whose business is wholesale and retail trade. The company
purchases products from 1,002,000 manufacturers ("vendors") and
sells the products to its retail and wholesale customers. The general
ledger shows the Accounts Payable control balance as of the balancesheet date in the amount of $42 million (which is 70 percent of
current liabilities, 50 percent of total liabilities, and 35 percent of
total liabilities and owners' equity). Green's management
accountants post the summary entries from the purchases journal
and from the cash disbursements journal each month to the Accounts
Payable control account. The accounts payable manager gave you a
detailed trial balance that lists all recorded unpaid invoices (recording
date, vendor name, vendor invoice number, invoice date, and
amount) subtotaled by vendor.
Other members of the audit team have already decided to assess
control risk at the maximum for the accounts payable work. The
engagement manager gave you last year's audit working papers but
said the audit plan was missing (!). Thus, the first part of your
assignment is to write the audit plan for audit of the Green
Corporation trade accounts payable.
Required:
For each of the balance assertions (existence, completeness, and
valuation or and allocation), write two or more specific audit
procedures designed to produce evidence related to the accounts
payable balance of $42 million.
(Hints: [1] For each of the three balance assertions, think about a
specific assertion before you write a procedure to gather evidence.
[2] Write specific procedures as adaptations of the general audit
procedures: recalculation, observation, confirmation, document
examination, inquiry, scanning, analytical procedures. [3] Most
procedures are two-part statements: "Select a sample of... [identify
the population]...and "do something"... [specify an action].)

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There may be other correct answers to this question


Existence
a. Select a sample of recorded accounts payable and send
confirmations to vendors.
b. Select a sample of recorded accounts payable and vouch them to
vendor statements received after the balance sheet date.
c. Other _______________________________________________
Completeness
a. Select a sample of small and zero account payable balances and
send confirmations to vendors.
b. Select a sample of (or scan) cash disbursements recorded after
year-end and determine whether they should have been recorded as
accounts payable at year-end.
c. List unmatched vendor invoices and determine when the good
were received. Review whether the invoices should have been
recorded at year-end.
d. Scan the open purchase order file for old orders that might have
been received. Trace to the purchases journal.
e. Study the accounts payable trial balance for indications of
untimely recording or omission of vendors' invoices.
f. Other _______________________________________________
Valuation or Allocation
a. Interview the accounts payable manager for information about
disputed accounts payable.
b. Audit the confirmations returned for evidence of disputed
balances.
c. Obtain written client representations on the payables total.
d. Study the attorney's response letter for indication of disputed
accounts payable.
e. Other _______________________________________________

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-04 Explain the importance of the completeness assertion for the audit of accounts
payable and list some procedures for a search for unrecorded liabilities.
Source: Original
Topic: Expenditure Substantive Testing

127. When performing procedures in a search of unrecorded liabilities,


auditors can utilize various sources of evidence/information (e.g.,
documents, files, management and clerical personnel).
Required:
List at least five, but not more than seven, sources of
evidence/information for the search for unrecorded liabilities.
(Do not write procedures. Do not take time to write about particular
evidence that can be obtained or reasons for using the sources.)

Inquiry of client personnel, open purchase order file, unmatched


vendor invoices listing, the unmatched receiving reports, and cash
disbursements from the accounting period following the balancesheet date. Other possible sources are vendor statements or
confirmations.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-05 Discuss audit procedures for other accounts affected by the acquisition and
expenditure cycle.
Source: Original
Topic: Expenditure Audit Procedures

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2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
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128. The test of controls for purchases, cash disbursements, and accounts
payable include the following audit procedures. Next to each of the
procedures, indicate the related transaction assertion.

1. completeness; 2. occurrence; 3. accuracy; 4. completeness; 5.


occurrence; 6. classification; 7. accuracy

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Feedback: Reference: Question also found in study guide


AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-03 Give examples of tests of controls over purchases of inventory and services.
Source: Original
Topic: Expenditure Controls

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

129. The test of controls for payroll includes the following audit
procedures. Next to each of the procedures, indicate the related
management assertion about transactions.

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1. classification; 2. occurrence; 3. accuracy; 4. classification; 5.


accuracy; 6. occurrence; 7. completeness; 8. accuracy

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Feedback: Reference: Question also found in study guide


AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-08 Describe the payroll cycle; including typical source documents and controls.
[Appendix 8C]
Source: Original
Topic: Payroll

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.