1. Describe the processing of transactions in the expenditure cycle.

Transactions in the expenditure cycle are recorded in the purchases and cash payments journal or in the
voucher register and the check register. Relevant accounts are cash; vouchers payable; inventory,
property, plant and equipment; purchases; purchase returns and allowances; purchase discounts;
prepaid rent and other prepaid accounts; and expense accounts.

2. Identify major risks of misstatements in the expenditure cycle.

Errors that occur in the expenditure cycle include recording purchases in the wrong period (cutoff
errors), recording goods held on consignment as a purchase, misclassifying purchases,
failing to record payments, recording payments twice, and failing to recognize prepaid expenses.
Irregularities often relate to purchases and include paying for fictitious purchases, purchasing
goods for personal use, and obtaining kickbacks.

3. Identify the financial statement assertions for acquisitions transactions.

Audit objectives for acquisitions transactions are to verify the following assertions:
 Existence or occurrence: Recorded acquisitions are for items that were acquired.
 Completeness: Acquisitions that occurred are recorded.
 Rights and obligations: Recorded acquisitions are the entity’s purchases and
liabilities.
 Valuation or allocation: Acquisitions are recorded for the proper amounts.
 Presentation and disclosure: Acquisitions are recorded to result in presentation and
disclosure in accordance with GAAP.

4. When an entity's controls are ineffective for payments, what potential misstatements could arise in
the financial statements?
The following misstatements could arise if controls for payments are ineffective:
Existence or occurrence
 Unauthorized or inappropriate payments may be made.
Completeness
 Checks may be issued and not recorded.
Rights and obligations
 Unauthorized payments may be made.
Valuation or allocation
 Improper amounts may be paid because of math errors or incorrect discount.
 Account may not reconcile or discrepancy may not be disclosed.
Presentation and disclosure
 Payments may be credited to wrong accounts.

5. Compare a vendor's statement to a vendor's invoice and describe how an auditor might use each.

A vendor’s invoice is a bill for a single purchase, whereas the vendor’s monthly statements
report the beginning balance, additional sales, any payments, and the ending balance. Auditors
reconcile the monthly statements to the details included in the vouchers payable listing to
ascertain that all vouchers payable are recorded. Vendors’ statements are generally considered
to be a strong form of evidence about amounts owed to particular vendors.
6. Give two reasons audit work on cash is likely to be more extensive than night appear to be justified by
the relative amount of the balance sheet figure for cash.

Liabilities, revenue, expenses and most other assets flow through the Cash account; thus the
examination of cash transactions assists the auditors in the substantiation of many other items in the
financial statements.
Cash is the most liquid of assets and offers the greatest temptation for theft, embezzlement, and
misappropriation.

7. Among the departments of J-R company are a purchasing department, receiving department,
accounting department, and finance department. If you were preparing a flowchart of a voucher system
to be installed by the company, in which department would you show:
a) The assembling of the purchase order, receiving report, and vendor's invoice to determine that these
documents are in agreement? Accounting Department
b) The preparation of a check? Accounting Department
c) The signing of a check? Finance Department
d) The mailing of a check to the payee? Finance Department
e) The cancellation of the voucher and supporting documents? Finance Department

8. During your audit of a small manufacturing firm, you find numerous checks for large amounts drawn
payable to the treasurer and charged to the Miscellaneous Expense account. Does this require any
action by the auditor?

There is a possibility that the funds went to the treasurer personally and were not expended for
business purposes. The auditors should investigate: Is there adequate documentary evidence
supporting the charge to Miscellaneous Expense, such as purchase orders, invoices, receipts Was the
disbursement specifically approved by the president or other officer besides the treasurer before
issuance of the checks. If fraud has been detected, the auditor should assure himself/herself that the
audit committee of the board of directors is adequately informed.

9. During your reconciliation of bank accounts in an audit, you find that a number of checks for small
amounts have been outstanding for more than a year. Does this situation call for any action by the
auditor? Explain.

The old outstanding checks should be eliminated as they cause unnecessary clerical work in each bank
reconciliation and also represent a threat to good internal control. A dishonest employee may conceal a
cash shortage merely by omitting old outstanding checks from the bank reconciliation. The auditor
should prepare a list of the old checks and ask the client to contact the payees and request them to
present the checks for payment. If this is not feasible, the checks should be eliminated by restoring the
appropriate amount to the cash balance and setting up a special liability account.

10. Explain the objectives of each of the following audit procedures for cash:
A. Obtain a cutoff bank statement subsequent to the balance sheet date.
B. Compare paid checks returned with the bank statement to the list of outstanding checks in the
previous reconciliation.

A. Obtaining a cutoff bank statement permits the examination of many checks listed as outstanding in
the bank reconciliation and establishes the collectability of customers' checks included in undeposited
receipts on the balance sheet date. Any unrecorded outstanding checks at year-end will also be
disclosed by the cutoff statement.
B. the auditors obtain assurance that the cash cutoff at the beginning of the bank reconciliation period is
accurate, and that cash shortages are not being obscured by manipulation of the outstanding checks list.