Auditing Aquisition And Payment Cycle

Front 1

Accounting purchasing system

Back 1

A networked software system that links a company's web site to other vendors whose offerings and prices have been preamp proved by appropriate management

Front 2

Cycle count

Back 2

Periodic testing of the accuracy of the perpetual inventory record by counting all inventories in a cycle basis

Front 3

Inventories

Back 3

Items of tangible personal property that are held for sale in the ordinary course of business, or that are in the process of production for such sale, or that are to be currently consumed in the production of goods or services to be available for sale

Front 4

Inventory shrinkage

Back 4

Reduction in inventory presumed to be due to physical loss or theft

Front 5

Periodic inventory system

Back 5

A system of inventory record keeping in which no continuous record of changes in inventory (receipts and issues of inventory items) is kept. At the end of an accounting period, the ending inventory is determined by an actual physical count of every item, and it's cost is computed using a suitable method

Front 6

Perpetual inventory system

Back 6

A system of inventory record keeping where book inventory is continuously in agreement with inventory on hand within specified time periods. In some cases, book inventory and stock on hand may be reconciled with each transaction; in other systems, these two numbers may be reconciled less often. This process is useful in keeping track of the actual availability of goods and determining what the correct time to reorder from suppliers might be.

Front 7

Requisition

Back 7

A request for the purchases of goods or services by an authorized department or function within the organization; may be documented on paper or in a computer system.

Front 8

Supply chain management

Back 8

The Management and control of materials in the logistics process from the acquisition of raw materials to the delivery of finished products to the end user.

Front 9

Three way match

Back 9

A control in which a purchase order, receiving orders, receiving information and a vendor invoice are matched to determine wether the vendors invoice is correct and should be paid. This process can be automated or can be performed manually.

Front 10

The existence and presentation/disclosure assertions are usually the most relevant for inventory

Back 10

False

Front 11

The most common concerns for inventory are that purchases are understated or ending inventory is overstated, both of which will result in lower cost of goods sold and higher net income

Back 11

True

Front 12

The audit inventory is complex bc inventory is easily transportable, exists at multiple locations, may become obsolete, and may be difficult to value.

Back 12

True

Front 13

The audit inventory is complex bc inventory is easily transportable, exists at multiple locations, may become obsolete, and may be difficult to value.

Back 13

True

Front 14

What are five management assertions?

Back 14

Existence and occurrence, completeness, rights and obligations, valuations or allocations, presentation and disclosure

Front 15

Two important complexities in auditing inventory arise bc inventory accounts experience a high volume of activity and are valued according to various inventory valuation methods.

Back 15

True

Front 16

One of the common ways that managers have committed fraud in the acquisition and payment cycle involves inappropriately classifying classifying assets as expenses.

Back 16

False the most common way of manipulating inventory is by overvaluation of inventory to reduce the COGS and increase the profit. It is also bc of the complexities to identify such overvaluation that given method is more common.

Front 17

The following are possible manipulations that may occur when fraud is perpetrated during purchase of inventory: under recording purchases, recording purchases in a later period, and not recording purchases.

Back 17

True

Front 18

A well conceived inventory control system should assure that all purchases are authorized and that inventory transactions are recorded accurately, completely and in a timely manner.

Back 18

True

Front 19

Common rationales for having a separate purchasing function in an organization include the ability of purchasing agents to exert favoritism to valuable suppliers, the reduction in the opportunity of fraud by combining the authorization to purchase with custody and recording, and the decentralization of control to enhance the application of knowledge of purchasing and inventory management.

Back 19

False. The common rationale of having a separate purchase department is as follows: Promote efficiency and effectiveness, Eliminate favoritism that could take place if individual departments are allowed to make purchases, Reducing fraud by segregating the authorization to purchase from custody and recording functions, Centralizes control in one function.

Front 20

In terms of preliminary analytical procedures, assume that the company has introduced a new product with a low price point and significant customer demand. The auditor would expect inventory turnover to increase, and days' sales in inventory to also increase.

Back 20

False. In preliminary analytical procedures for a low price and high demand product days sale i inventory is expected to decrease and inventory turnover is expected to increase.

Front 21

A preliminary analytical procedure in the acquisition and payment cycle that might indicate fraud is that inventory is growing at a rate greater than sales.

Back 21

True. Others are: Unexpected increase in gross margin. 2. Expected significantly above inventory norms. 3. Unexpected increase in the number of suppliers. 4. Inadequate follow up to the auditors recommendation

Front 22

The following mix of evidence would be appropriate for a high risk client when conducting the audit of the acquisition and payment cycle: significant test of internal controls, significant reliance on substantive analytical procedures, and limited test of details.

Back 22

False. In case of high risk clients significant tests on details are conducted to ensure that greater assurance can be obtained. By increasing the test of details the % of checking of transactions are high thereby reducing the risk.

Front 23

When considering the appropriate mix of evidence, the sufficiency and appropriateness of selected procedures vary to achieve the desired level of assurance for each relevant assertion.

Back 23

True. The appropriate mix for a low risk client would rely more on substantive testing and test of internal control and low tests of details. The reverse would be the case for high risk clients.

Front 24

When selecting controls to test and performing tests of controls in the acquisition cycle, the auditor might reasonably take a sample of receiving reports and trace them through the system to test controls related to the completeness assertion for inventory and accounts payable.

Back 24

True. Significant lags in recording the liabililty would indicate potential problems that would be required to be addressed.

Front 25

When conducting the audit of acquisition and payment cycle accounts, the auditor will likely conduct less substantive test for companies with effective internal control compared to companies with ineffective internal controls.

Back 25

True. The effectiveness of internal controls signifies the lower possibility of fraud and therefore also reducing the requirement of substantive testing.

Front 26

A substantive procedure appropriate for testing the existence of inventory would be to perform year-end cutoff tests by noting the last shipping and receiving document numbers used before the physical inventory count is taken.

Back 26

False.

Front 27

A substantive procedure appropriate for testing rights and obligations associated with inventory would be to review vendor invoices when testing disbursements to determine that proper title is conveyed.

Back 27

True. This helps the auditor identify that the invoices have been issued in the name of the company to ensure that rights and title of the goods have been transferred in favor of the company.

Front 28

Which of the following is not an activity associated with the acquisition and payment cycle?

A. Receive a customer purchase order.

B. Purchase of goods and services.

C. Receipt of, and accounting for, goods and services.

D. Approval of items for payment.

Back 28

A. Receive a customer purchase order.

Front 29

An automated purchasing system will perform which of the following tasks?

A. Apply preloaded specifications and materials lists to the system to start the process.

B. Automatically flag invoices that do not reconcile with purchase orders.

C. Create change orders and analyze variances from purchase orders.

D. All of the above

Back 29

D. All of the above

Front 30

Which of the following is an inherent risk relating to inventory?

A. Inventory is easily transportable.

B. Inventory may become obsolete bc of technological advances even though there and no visible signs of wear.

C. Inventory is often returned by customers, so care must be taken to separately identify returned merchandise, check if for quality, and record it at net realizable value.

D. All of the above

Back 30

D. All of the above

Front 31

Which of the following is not an inherent risk relating to inventory?

A. Sale contracts may contain unusual terms, and revenue recognition is often complex.

B. Inventory accounts typically experience a high volume of activity.

C.Inventory accounts may be valued according to various accounting valuation methods.

D. Identifying obsolete inventory and applying the lower of cost or market principle to determine valuation are difficult.

Back 31

A. Sales contracts may be contain unusual terms, and revenue recognition is often complex.

Front 32

Which of the following is an example of fraud in the acquisition and payment cycle?

A. Theft of inventory by an employee.

B. Employee schemes involving fictitious vendors as means to transfer payments to themselves.

C. Executives recording fictitous inventory or inappropriately recording higher values for existing inventory.

D. All of the above.

Back 32

D. All of the above

Front 33

Refer to Exhibit 11.2 and identify the possible inventory or COGS manipulation that might occur when inventory is sold.

A. Overstate returns.

B. Overcount inventory.

C. Not record COGS nor reduce inventory.

D. Under-record purchases.

Back 33

C. Not record COGS nor reduce inventory.

Front 34

Which of the following is a legitimate rationale for centralizing the purchasing function in a separate purchasing purchasing department?

A. It promotes efficiency and effectiveness.

B. It eliminates potential favoritism that could take place if individual department heads were allowed to place orders.

C. It decentralizes control across functions.

D. A & C

E A & B

Back 34

E. A & B

Front 35

Which of the following expected relationships is reasonable in terms of performing preliminary analytical procedures in the acquisition and payment cycle?

A. Assume that the company's production and pricing strategies have remained the same during the past year. Gross margin is expected to improve because of the stability.

B. Assume that the company has introduced a new product with a low price point and significant customer demand. Inventory is expected to decrease.

C. Assume that the company has invested in a new manufacturing process that results in significantly less waste and overall increases in efficiency during the production process. COGS is expected to increase, and gross margin is expected to decrease

Back 35

B. Assume that the company has introduced a new product with a low price point and significant customer demand. Inventory turnover is expected to increase, and days' sales in inventory is expected to decrease.

Front 36

Which of the following analytical relationships is most suggestive of a heightened risk of fraud in the acquisition and payment cycle?

A. Unexpected increases in gross margin.

B. Unexpected decreases in gross margin.

C. Inventory that is growing at a rate slower than sales.

D. Expense accounts that have significant debit entries.

Back 36

A Unexpected increases in gross margin.

Front 37

Which mix of evidence would be most appropriate for the following scenario? This is a client where the auditor has assessed the risk of material misstatement related to the existence of inventory at a maximum level. This client has incentives to overstate income to achieve profit targets that affect management bonuses. Oversight of the vice president of finance is relatively weak bc of a lack of supervision by top management. Other controls are designed effectively.

Back 37

B. 50 % test of details, 30% analytics, 20% test of controls

Front 38

Which mix of evidence would be most appropriate for the following scenario? This is a client where the auditor has assessed the risk of material mistatement related to the existence of inventory at a relatively low level. Top management appears to possess integrity. Managment has spent the resources necessary to ensure effective design, implementation, and operation of controls.

A. 100 % tests of details

B. 70 % test of details, 10% substantive analytics, 20 % tests of controls

C. 50% test of details, 10% substantive analytics, 40% test of controls

D. 20% test of details, 40% substantive analytics, 40% test of controls

Back 38

D. 20% test of details, 40% substantive analytics, 40% test of controls

Front 39

Which of the following statements is false regarding obtaining evidence about internal control operating effectiveness in the acquistion and payment cycle?

A. For integrated audits, the auditor will test the operating effectiveness of important controls as of the client's year end.

B. The auditor will select controls that are important to the auditor's conclusion about whether the orgainzation's controls adequately address the assessed risk of material misstatement in the acquisition and payment cycle.

C. Evidence of proper payment is not necessary for each purchase and payment, but is necessary for those that are material.

D. The auditor will take a sample of receiving reports and trace through the system to test controls related to the completeness assertion for accounts payable.

Back 39

C. Evidence of proper payment is not necessary for each purchase and payment, but is necessary for those that are material.

Front 40

Which of the following auditing procedures would be used to test the existence or occurrence assertion for inventory?

A. Perform year-end cutoff tests by noting the last shipping and receiving document numbers used before physical inventory is taken.

B. Make inquiries of the client regarding the segregation of duties between the purchasing department and the receiving department.

C. Review the client's proposed physical inventory procedures to determine whether they are likely to result in a complete and correct physical inventory.

D. Make inquiries of the client regarding allowances made for expected returns.

E. All of the above.

Back 40

C. Review the client's proposed physical inventory procedures to determine whether they are likely to result in a complete and correct physical inventory.

Front 41

Which of the following auditing procedure would be used to test the valuation or allocation assertion for inventory?

A, Inquired of production and warehouse personnel about the existence of obsolete inventory.

B. Test inventory cost by taking a sample of recorded inventory, and trace to source documents indicating cost of inventory.

C. Review trade journals for changes in product technology.

D. Inquire of the client about sales adjustments (markdowns) that have been offered to sell any products.

E. All of the Above

Back 41

E. All of the above

Front 42

What are the five primary activities involved in the acquisition and payment cycle.

Back 42

1. Requisition for the goods and services-Department requests the purchase department to procure the goods and service

2. Purchase of the goods and services-The purchse order is issued to the vendor after rate and other term finalization.

3. Receipt of, and accounting for, goods and services- Goods and services are received and necessary recording is done in the books.

4. Approval of items for payment-Item is approved by the department requiring the material as to correctness of the quality and specification.

5. Cash payment to the creditors-Payment is made to the vendor.