Chapter 18 Audit of the Acquisition and Payment Cycle: Tests of Controls,

Substantive Tests of Transactions, and Accounts Payable

18.1 Learning Objective 18-1

1) The overall objective in the audit of the acquisition and payment cycle is
) to ensure the reliability of the affected accounts.
!) to ensure the accuracy of the affected accounts.
") to evaluate #hether the affected accounts are fairly presented in accordance #ith accoun
accounting
ting
standards.
$) to evaluate #hether fraudulent payments #ere made.

%) &hich of the follo#ing accounts is not part of the acquisition and payment cycle'
) prepaid e(penses
!) accounts payable
") sales returns and allo#ances
$) property plant and equipment

*) &hich of the follo#ing is not one of the classes of transactions in the acquisition and payment
cycle'
) acquisition of common stoc+ 
!) acquisition of goods and services
") cash disbursements
$) purchase returns and allo#ances and purchase discounts

,) &hich of the follo#ing accounts is not included in the acquisitions class of transactions'

) inventory
!) prepaid e(penses
") sales discounts
$) accounts payable

True false questions

) The acquisition and payment cycle consists of one class of transactions. F

) The cash account is not part of the acquisitions and payment cycle. T

/) uditing the acquisition and payment cycle often ta+es more time than any other cycle. T

18.% Learning Objective 18-%

1) &hat typically initiates the acquisitions and payment cycle'

) issuance of a purchase requisition or request for purchase of goods or services
!) issuance of payment to vendor 
") approval of a ne# vendor 
$) purchase requisition

%) &hat typically ends the acquisitions and payment cycle'

cy cle'
) issuance of a purchase requisition or request for purchase of goods0services

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!) issuance of a payment on accounts payable

") approval of a ne# vendor 
$) purchase requisition

*)  document indicating a reduction in the amount o#ed to a vendor because of returned goods
is
) a debit memo.
!) a credit memo.
") a receiving report.
$) a contractual adjustment form.

,)  document used by organiations to establish a formal means of recording and controlling

acquisitions #hich usually contains a pac+age of
o f documents about the acquisition is the
) voucher.
!) purchase order.
order.
") receiving report.
$) purchase requisition.

) The computer-generated file #hich records acquisitions disbursements and allo#ances for
each vendor is the
) accounts payable master file.
!) cash disbursements file.
") acquisitions transaction file.
$) purchase approval file.

) &hich of the follo#ing business functions is not considered to be part of the acquisitions class
of transactions'
) processing purchase orders
!) recogniing liabilities
") receiving goods and services
$) processing cash disbursements

/) 2maller
vendor. privately
These held companies
companies pay on the may of  maintain an accounts payable master file by
basisnot
) vendors3 monthly statements.
!) individual vendors3 invoices.
") the accounts payable account in the general ledger.
$) dunning letters.

8) fter
fter a purchase requisition is approved a 44444444 must be initiated to purchase the goods
or services.
) purchase order 
!) vendor order 
") call order 
$) vendor invoice

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5)  document generally received from the vendor

ven dor #hich indicates a reduction in the amount
o#ed due to the company granting an allo#ance is a
) vendor invoice.
!) debit memo.
") credit adjustment form.
$) credit memo.

16) bsent disputed amounts and minor timing differences the vendor3s statements should
reconcile to the
) acquisition journal.
!) accounts payable master file.
") cash disbursements amount for purchases.
$) vouchers payable amount for vendors.

11) t #hat point in the acquisition and payment cycle do most companies first recognie the
acquisition and related liability on their records'
) #hen the purchase requisition is received by the accounting department
!) #hen the purchase order is prepared
") #hen the company receives the invoice from the vendor 
$) #hen the company receives the goods or services from the vendor 

1%) 7n the processing and recording of cash disbursements

) after a chec+ includes the signature of an authoried person it is a liability.
liability.
!) #hen a chec+ cashed by the vendor has cleared the ban+ it is called an outstanding chec+.
") in many cases the company submits payment to the vendor electronically through an
electronic funds transfer 9:T) bet#een the company3s ban+ and the vendor3s ban+.
$) the accounts payable master file is a computer-generated file that includes all cash
disbursement transaction processed by the accounting system for a period.

1*) List the four business functions in the acquisition and payment
pay ment cycle.
1) ;rocessing ;urchase Orders
-purchase requisition purchase order 

%) <eceiving =oods > 2ervices

-receiving report

*) <ecogniing Liability
-vendor3s invoice debit memo voucher acq. trans. file acq. journal 0; master file 0;
0; T!
?endor3s statement

,) ;rocessing > <ecording "ash $isbursements

-chec+ cash disbursements Trans. :ile
-"ash $isbursements journal

1,) $iscuss each of the four business functions that comprise the acquisition and payment cycle.

1) $escribe purchase requisitions and purchase orders. &hat is a +ey difference bet#een the
t#o documents'
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;urchase requisition #hich is used to request authoriation for goods or services and a
 purchase order #hich is used for the order after it has been authoried.

1) @atch seven of the terms for documents and records a-m) used in the acquisitions and cash
disbursement cycle #ith the descriptions provided belo# 1-/)A

a. purcha
purchasese requ
requis
isit
itio
ionn
 b. purchase order 
c. rece
receiv
ivin
ingg repo
reportrt
d. acqui
acquisi
siti
tion
onss jour
journanall
e. su
summ
mmar aryy acqui
acquisisiti
tions
ons rep
repor ortt
f. vend
vendor
or3s
3s invoi
nvoice
ce
g. debit me
memo
h. voucher  
i. acc
accou
ount
ntss paya
payabl
blee mas
maste terr ffil
ilee
 j. accounts payable trial balance
+. vend
vendor
or3s
3s sta
state
teme
ment nt
l. chec+  
m. cash
cash disburse
disbursemenments ts journal
journal

 44444444 1. a document indicating a reduction in the amount o#ed to a vendor because

b ecause of
returned goods or an allo#ance granted

 44444444 %. a document received from the vendor #hich sho#s the amount o#ed for an
acquisition

 44444444 *. a document prepared by the purchasing department indicating the description

quantity and related information for goods and services that the company intends to purchase
quantity

 44444444 ,. a listing of the amount o#ed to each vendor at a point in time

 44444444 . ait document

acquisitionsB includes aused
covertosheet
establish
and aa pac+age
formal means of recording
of relevant and controlling
documents

 44444444 . a document used to request goods and services by an authoried employee

 44444444 /. the listing or report that includes all cash payments for a given period
 1. g %. f *. b ,. j . h . a /. m

True false questions

1/) The acquisition and payment cycle typically begins #ith the initiation of a purchase
requisition for goods and services from an authoried individual.

18)  vendor invoice is normally prepared at the time tangible goods are received and indicates
the description of goods the quantity received the date received and other relevant data.

15)  document received from the vendor indicating such things as the description and q
quantity
uantity

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of goods and services received price

p rice including freight cash discount terms and date of billing is
called the voucher.

%6) n acquisitions transaction file is a computer generated file that includes all information
entered into the system regarding acquisition transactions.

%1) The acquisition and payment cycle ends #ith the receiving of the goo
goods
ds or services.

18.* Learning Objective 18-*

1) Cou have been assigned to the accounts payable transaction cycle as part of your auditing
responsibilities. Cou have decided to vouch a sample of entries in the accounts payable master
file to supporting documents. &hich assertion is this test of controls most li+ely to support'
) accuracy
!) classification
") completeness
$) occurrence
%) n auditor is gathering evidence on the completeness assertion. ToTo do so she performs a test
to verify that all goods received by the company have been recorded properly. The document
 population for this test #ould consist of all
) vendor invoices.
!) purchase orders.
") receiving reports.
$) cash disbursements for accounts payable.

*) &hich of the follo#ing is not an accurate statement regarding the acquisition and payment
cycle'
) The personnel in the receiving department should be independent of the storeroom personnel.
!) =oods received should be physically
ph ysically controlled from the time of their receipt until their use or 
disposal.
") ccounting records should transfer responsibility
responsibility for the goods each time they are moved.
$) The accounting department should be responsible for receiving goods and preparing the

receiving report.
,) &hen revie#ing the controls and procedures in the acquisition and payment cycle
) companies cannot record the liability for the acquisition until the invoice is received from the
vendor.
!) the purchasing department has the responsibility for verifying for appropriateness of the
acquisition.
") personnel #ho record the acquisitions
acqu isitions should not have access to cash or other assets.
$) the accounts payable department should
shou ld account for all receiving reports to assure that the
occurrence objective is satisfied.

)  #ritten purchase order is a contractual document that is

) an offer to buy goods or services.
!) not enforceable if it is not in #riting.
") prepared by the receiving department.
$) an acceptance of a vendor3s catalog offer to sell.


 

) &hich one of the follo#ing duties should not be assigned the purchases department'
depa rtment'
) finding the lo#est cost vendor 
!) revie#ing vendors3 catalog descriptions and prices for standardied items
") designing the purchase order form
$) authoriing the acquisition of goods

/) The accounts payable department usually has

h as responsibility for approving acquisitions for
 payment by comparing the details on the
) vendor3s invoice and the receiving report.
!) vendor3s invoice and the purchase requisition.
") purchase order receiving report and vendor3s invoice.
$) purchase requisition purchase order and receiving report.

8)  substantive tests of transactions for acquisitions that #ould be used to provide evidence
regarding the occurrence assertion #ould be to
) compare the classification #ith the chart of accounts by referring to vendors3 invoices.
!) recompute the clerical accuracy on the vendors3 invoice.
") revie# the acquisitions journal for large or unusual amounts.
$) trace from a file of receiving reports to the acquisition journal.

5) &hen testing the controls for the completeness transaction-related audit objectives
) failure to record the acquisition of goods or services #ill generally understate net income.
!) failure to record the acquisition of goods or services has no impact on the ba
balance
lance sheet.
") it is generally easy for the auditor to determine #hether unrecorded transactions e(ist.
$) the audit time for accounts payable can be reduced if the client has effective internal controls
and the auditor properly tests those controls.

16) &hich of the follo#ing is not a +ey control in the acquisition and payment cycle'
) authoriation of purchases
!) authoriation of credit
") timely recording and independent revie# of transactions

$) authoriation of payments
11)  +ey internal control over the acquisition cycle is to ensure that the co
company
mpany requires
recording transactions as soon as possible after the goods and services have been received. This
satisfies the transaction-related audit objective of 
) accuracy.
!) completeness.
") timing.
$) occurrence.

1%) &hen a client uses perpetual inventory records the tests of details of balances for inventory
can be significantly reduced if the auditor believes the records are accurate. The con
controls
trols over the
acquisitions included in the records are normally tested as a part of the
) tests of controls for acquisitions.
!) tests of controls and substantive tests of transactions for acquisitions.
") tests of details of balances for acquisitions.


 

$) analytical procedures and tests of controls for acquisitions.

1*) The auditor3s internal control objective to determine that Drecorded acquisitions are for goods
and services receivedD satisfies the audit objective of 
) accuracy.
!) occurrence.
") authoriation.
$) completeness.

1,) :ailure to record the acquisition of goods

goo ds is a violation of #hich audit objective'
) accuracy
!) occurrence
") authoriation
$) completeness

1) The internal control that requires that Dchec+s are prenumbered and accounted forD satisfies
the objective of 
) accuracy.
!) e(istence.
") completeness.
$) posting and summariation.

1) !ecause of the importance of tests of controls and substantive tests of transactions for
acquisitions and cash disbursements it is common in this audit area to use
) bloc+ sampling.
!) variables sampling.
") attributes sampling.
$) probability proportional to sie sampling.

1/) &hich of the follo#ing tests of controls is least useful in assessing the transaction-related
audit objective related to occurrence'
) 9(amine documents in voucher pac+age for occurrence.

!)
") 9(amine supporting
ccount for sequencedocuments for indication of approval.
of vouchers.
$) ttempt to input transactions #ith valid and invalid vendors.

18) Cou
Cou are performing the audit of Een+ins and "ompany.
"ompany. Cour
Cour tests of controls and tests of
transactions for accounts payable demonstrate that the controls are operating effectively.
effectively. This
#ould normally allo# you to
) eliminate the need for substantive testing of balances for accounts payable.
!) reduce the need for substantive testing of balances for accounts payable.
") reduce control tests in other transactions cycles.
$) increase the need for substantive testing of balances for accounts payable.

15) n auditor is using audit sampling to test transactions in the acquisition and payment cycle.
2he #ould normally set the tolerable e(ception rate at #hat level'
) Lo#

/
 

!) @edium
") Figh
$) 7ndeterminate

%6) &hich of the follo#ing is the most effective control procedure to detect vouchers that #ere
 prepared for the payment of goods that #ere not received'
) "ount goods upon receipt in storeroom.
!) @atch purchase order receiving report and vendor3s invoice for each voucher in accounts
 payable department.
") "ompare goods received #ith goods requisitioned in receiving department.
$) ?erify
?erify vouchers for accuracy and approval in internal audit department.

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%1) &hich of the follo#ing should sign chec+s under

un der conditions of effective internal control'
) treasurer 
!) purchasing agent
") accounts payable cler+ 
$) person preparing the chec+s

%%) &hich of the follo#ing is a +ey internal control for the posting and summariation
transaction-related audit objective'
) !atch totals are compared #ith computer summary reports.
!) $ocuments are canceled.
") $ates are internally verified.
$) The accounts payable master file contents are internally verified.

%*) The test of transactions #hich requires one to Dreconcile recorded cash disbursements #ith
the cash disbursements on the ban+ statementD satisfies the objective of 
) occurrence.
!) completeness.
") accuracy.
$) posting and summariation.

%,) :or effective internal control purposes the accounts payable department generally should
) approve the purchase order.
!) have the authority to sign the chec+s.
") establish the agreement of the vendor3s invoice #ith the receiving report and purchase order.
order.
$) supervise the preparation of the receiving report.

%) n auditor performs a test to determine #hether all merchandise for #hich the client #as
 billed #as received. The population for this test consists
consists of all
) merchandise received.
!) vendors3 invoices.
") canceled chec+s.
$) receiving reports.

%) @atching the supplier3s invoice the purchase order and the receiving report prior to
 preparing the voucher #ould normally be the responsibility of the
) #arehouse receiving function.
!) purchasing function.
") general accounting function.
$) treasury function.

%/)  ";
"; learns that his client has paid a vendor t#ice for the same shipment once based upon
upo n
the original invoice and once based upon the monthly statement.  control procedure that should
have prevented this duplicate payment is
) attachment of the receiving report to the disbursement report.
!) prenumbering of disbursement vouchers.
") use of a limit or reasonableness test.
$) prenumbering of receiving reports.

5
 

%8) &ith
&ith respect to a small company3s system of purchasing supplies an auditor3s primary
concern should be to obtain
o btain satisfaction that supplies ordered and paid for have been
) requested by and approved by the same individual.
!) used in the course of business and solely for business purposes during the year under audit.
") received counted and chec+ed to quantities and amounts on purchase orders and invoices.
$) properly recorded as assets and systematically amortied over the estimated useful life of the
supplies.

%5) 7nternal controls that are li+ely to prevent the client from including as a business e(pense
those transactions that primarily benefit management or other employees rather that the entity
 being audited satisfy the control objective that
) acquisitions are correctly valued.
!) e(isting acquisitions are recorded.
") acquisitions are correctly classified.
$) recorded acquisitions are for goods and services received.

*6) &hat are the three most important controls over cash disbursements'

*1) $iscuss the +ey internal controls that should be present in the processing purchase orders  
function in the acquisitions and payment cycle.

*%) $iscuss the +ey internal controls that should be present in the receiving goods and services 
function in the acquisitions and payment cycle.

**) Fo# do auditors determine the e(tent

e( tent of testing of internal controls in the acquisition and
 payment cycle'

*,) Listed belo# are some management assertions made for the acquisition and payment cycle.
:or each one give an e(ample of ho# the auditor by using the documents normally found in the
 process can apply an auditing procedure to test the assertion.
completeness
timing

accuracy
True false questions
*) 2ignificant audit efficiencies can be achieved on many audits #hen controls are operating
o perating
effectively.

*) :ailure to record the acquisition of goods

goo ds and services received overstates both accounts
 payable and net income.

*/) The controls over acquisitions included in the perpetual inventory records are normally tested
as a part of the test of controls and substantive tests of transactions for the sales and collection
cycle.

*8) !ecause of the importance of tests of controls and substantive tests of transactions for
acquisitions and cash disbursements attributes sampling is commonly used #hen testing the

16
 

acquisitions and cash disbursements cycle.

*5)  substantive test of transactions commonly used to test the completeness objective for
acquisitions is DTrace from a file of receiving reports to the acquisitions journal.D

,6) The audit procedure DTest clerical accuracy by footing the journals and tracing postings
po stings to
general ledger and to accounts payable and inventory master filesD is used to test the posting and
summariation objective for acquisitions.

,1) uditors are normally more concerned about violations of the completeness objective for
acquisitions than about violations of the occurrence objective for acquisitions.

,%) "hec+s should be prenumbered to ma+e it easier to account for all chec+s.

,*) 2ince there are a large number of accounts involved in the acquisition and payment cycle
there is the potential for classification misstatements some of #hich are li+ely to affect income.

,,) The audit procedure D9(amine canceled chec+ for authoried signature proper endorsement
and cancellation by the ban+D is used to test the occurrence objective for cash disbursements.

,) uditors typically perform the acquisitions and cash disbursements tests at different times.

18., Learning Objective 18-,

1)  liability is properly accounted for as an account

accou nt payable if 
) the amount is +no#n and o#ed as of the balance sheet date.
!) the amount can be estimated and is o#ed at the balance sheet date.
") the amount is +no#n at the balance sheet date and o#ed by the end of the ne(t fiscal year.
$) the amount is estimated and o#ed #ithin 56 days of the balance sheet date.

%) &hen determining the methodology for designing tests of details of balances for accounts

 payable
) the focus by many companies on improving their supply-chain management activities has led
to numerous changes in the design
de sign of systems used to initiate and record acquisition and payment
activities.
!) it is relatively ine(pensive to audit accounts payable.
") performance materiality for accounts payable is set relatively lo#.
lo#.
$) inherent ris+ is often set at lo#.

*) uditors are especially concerned about the 44444444 and 44444444 balance-related audit
objectives because of the potential for understatements in the account balance.
) completenessB cutoff 
!) completenessB accuracy
") classificationB realiable value
$) classificationB cutoff 

,) $escribe the methodology for designing tests of details of balances for accounts payable.

11
 

• 7dentify 2ignificant <is+s and ssess the <is+ of @aterial @isstatement for ccounts
;ayable ;hase 7).
• 2et ;erformance @ateriality ;hase 7).
• ssess "ontrol <is+ and $esign and ;erform Tests
Tests of "ontrols and 2ubstantive Tests
Tests of
Transactions ;hases 7 and 77).

True false questions

) The auditors ultimate substantive tests depend on the relative effectiveness of internal controls
related to accounts payable. T

) uditors typically set performance materiality for accounts payable relatively lo#. T

/) @ost accrued liabilities can be identified by the e(istence of vendors3 invoices for the
obligation. F
 

1%