Here are 40 discussion, list, and explain questions and answers about the acquisition and payment cycle

and accounts payable, based on the provided source material, designed to help you prepare for your
exams:

1. **Q: Explain the primary objective in the audit of the acquisition and payment cycle.**

**A:** The primary objective in the audit of the acquisition and payment cycle is to **evaluate
whether the accounts affected by the acquisitions of goods and services and the cash disbursements for
those acquisitions are fairly presented in accordance with accounting standards**. This involves
assessing control risk and designing tests of controls and substantive tests of transactions for the
transaction classes, and performing tests of details of balances for accounts payable.

2. **Q: List the three classes of transactions included in the acquisition and payment cycle.**

**A:** The three classes of transactions included in the acquisition and payment cycle are:

* Acquisitions of goods and services.

* Cash disbursements.

* Purchase returns and allowances and purchase discounts.

3. **Q: Identify and explain the importance of the four main business functions that occur in recording
transactions in the acquisition and payment cycle.**

**A:** The source identifies four main business functions:

* **Processing purchase orders:** This function begins the cycle with a request for goods or services
by authorized personnel. It involves documents like **purchase requisitions** (request by an employee)
and **purchase orders** (document to order from vendors), which indicate authorization and
description of goods/services to be purchased. Proper authorization ensures acquisitions are for
company purposes and avoids unnecessary items.

* **Receiving goods and services:** This is a critical point as it's typically when the acquisition and
related liability are first recognised. It requires examining goods for description, quantity, timeliness, and
condition. A **receiving report** documents the receipt. Adequate control here includes **separation
of custody** from other functions and physical control of goods.

* **Recognising the liability:** This requires prompt and accurate recording to ensure all
acquisitions are included, only those that occurred are recorded, and at the correct amounts.
Documents include **vendor's invoices** (shows amount owed), **debit memos** (reduction in
amount owed), and **vouchers** (formal recording/control document). The accounts payable
department is often responsible for verifying the appropriateness of acquisitions by comparing
documents.

* **Processing and recording cash disbursements:** This involves paying for goods and services,
which reduces liability balances. Documents include **checks** or **electronic funds transfers (EFT)**.
**Strong controls over cash disbursements** are essential, including authorization of payments and
separation of duties.

4. **Q: Distinguish between a purchase requisition and a purchase order.**

**A:** A **purchase requisition** is a document used by an authorized employee *to request*

goods and services. A **purchase order** is a document used by the purchasing department *to order*
goods and services *from vendors*. It includes description, quantity, and pricing information, and
indicates authorization to acquire.

5. **Q: Explain what a voucher is and how its use can improve an organization's internal controls.**

**A:** A **voucher** is a document commonly used to **establish a formal means of recording and
controlling acquisitions**, primarily by enabling each acquisition transaction to be sequentially
numbered. Vouchers typically include a cover sheet or folder containing relevant documents like the
purchase order, receiving report, packing slip copy, and vendor's invoice. After payment, a copy of the
check or EFT is added. Using vouchers improves control by **gathering all relevant documentation for
an acquisition in one place**, facilitating review and approval before payment, and enabling sequential
numbering for completeness checks.

6. **Q: Why do auditors consider the receipt of goods and services a critical point in the acquisition and
payment cycle?**

**A:** The receipt of goods and services is considered a critical point because **it is when most
companies first recognise the acquisition and related liability on their records**. Proper recording at this
stage is crucial for accurate financial statements.

7. **Q: Describe the key documents and records used when a company recognises a liability in the
acquisition and payment cycle.**

**A:** Key documents and records for recognising liability include:

 * **Vendor's Invoice:** Received from the vendor, showing the amount owed, description, quantity,
price, terms, date, and total amount. It's important because it indicates the amount recorded.

* **Debit Memo:** Received from the vendor, indicates a reduction in the amount owed due to
returns or allowances.

* **Voucher:** A document or package used to formalise and control acquisitions, containing

related documents like the purchase order, receiving report, and vendor's invoice.

* **Acquisitions Transaction File:** A computer file of all acquisition transactions processed for a
period, including vendor name, date, amount, classification, etc..

* **Acquisitions Journal or Listing:** Generated from the transaction file, lists acquisitions with
details like vendor, date, amount, and account classification.

* **Accounts Payable Master File:** Records acquisitions, cash disbursements, returns, and
allowances for each vendor, updated from transaction files.

* **Accounts Payable Trial Balance:** A listing of the amount owed to each vendor or for each
invoice/voucher at a point in time, prepared from the master file.

* **Vendor's Statement:** Prepared by the vendor, showing beginning balance, acquisitions,

returns, payments, and ending balance. Represents the vendor's view of transactions.

8. **Q: Explain the key internal controls related to processing purchase orders.**

**A:** Key controls related to processing purchase orders include:

* **Proper authorization for acquisitions:** Ensures goods/services are for authorized purposes and
avoids excessive items. Authorization levels may vary by acquisition type or dollar amount.

* **Initiation of purchase order after requisition approval:** The purchase order follows an
approved request.

* **Establishment of purchasing departments:** To ensure quality goods/services at minimum price.

* **Separation of purchasing department:** Should be separate from those who authorize the
acquisition or receive the goods.

* **Prenumbered purchase orders:** To permit easier accounting for outstanding orders.

9. **Q: Describe the important internal controls concerning the separation of duties in the acquisition
and payment cycle.**
 **A:** Important separation of duties controls include:

* The **purchasing department should be separate from those who authorize the acquisition or
receive the goods**.

* Personnel in the **receiving department should be independent of the storeroom personnel and
the accounting department**.

* Personnel who **record acquisitions (accounts payable)** should **not have access to cash,
marketable securities, and other assets**.

* There should be **separation of responsibilities for signing checks/authorizing electronic transfers

and performing the accounts payable function**.

* An employee **independent of all payable, disbursing, cash, and general ledger functions** should
handle the custody of checks after signature and before mailing.

10. **Q: What are the most important controls over cash disbursements?**

**A:** The most important controls over cash disbursements are:

* **Signing of checks or approval of electronic funds transfers by an individual with proper

authority**.

* **Separation of responsibilities for signing checks/making transfers and performing the accounts
payable function**.

* **Careful examination of supporting documents by the person who signs checks or authorizes
electronic payments**.

* **Prenumbered checks** to facilitate accounting.

* **Physical control over blank, voided, and signed checks**.

* **Method of cancelling supporting documents** to prevent reuse (e.g., marking "paid", computer
verification).

* **Restrictions on electronic payment authorization** allowing only authorized, separated

individuals.

11. **Q: Explain the relationship between tests of controls, substantive tests of transactions, substantive
analytical procedures, and tests of details of balances in the acquisition and payment cycle audit.**

**A:** Auditors use all four types of tests to obtain audit assurance.
 * **Tests of controls (TOC)** and **substantive tests of transactions (STOT)** are performed to
**evaluate the effectiveness of internal controls** over acquisition and cash disbursement transactions.

* **Substantive analytical procedures (SAP)** are used to **identify potential misstatements** by

comparing balances and ratios, particularly for expenses and accounts payable.

* **Tests of details of balances (TDB)** are performed on ending account balances, like accounts
payable.

* If TOC and STOT show controls are effective (low control risk), and SAP results are satisfactory,
auditors can **reduce the extent of TDB** for accounts payable. Conversely, ineffective controls or
unsatisfactory SAP results necessitate **more extensive TDB**. Combining these tests allows the
auditor to obtain sufficient overall assurance.

12. **Q: How does assessing control risk in the acquisition and payment cycle influence the auditor's
work on accounts payable?**

**A:** After assessing control risk based on understanding internal controls, auditors design and
perform tests of controls and substantive tests of transactions. If controls are assessed as highly
effective and testing supports this, the auditor may **reduce the amount of substantive testing required
for accounts payable**. Conversely, if controls are deficient, the auditor will need to perform **more
extensive tests of details of accounts payable** to determine if the balance is correctly stated. The
auditor's substantive tests for accounts payable are directly affected by the relative effectiveness of
internal controls.

13. **Q: Why is the completeness objective particularly important when auditing accounts payable?**

**A:** The completeness objective for accounts payable is considered **essential** because a
**failure to record existing acquisitions understates accounts payable**. This understatement can also
**overstate net income and owners' equity**, which is a primary concern for auditors due to potential
legal liability. It can be difficult to detect unrecorded liabilities solely through tests of details of balances,
making reliance on controls and substantive tests of transactions for completeness crucial.

14. **Q: Explain the concept of a "search for unrecorded liabilities" and why it is important.**

**A:** A "search for unrecorded liabilities" involves **specific audit tests designed to uncover
liabilities that exist at the balance sheet date but have not been recorded**. It is important because
auditors place **emphasis on detecting understatements** of liability accounts like accounts payable,
as these can lead to material overstatements of net income and owners' equity. The extent of this
search depends heavily on assessed control risk and the materiality of potential unrecorded liabilities.
15. **Q: Describe three typical audit procedures performed as part of the search for unrecorded
liabilities.**

**A:** Three typical procedures for searching for unrecorded liabilities are:

* **Examine Underlying Documentation for Subsequent Cash Disbursements:** Auditors examine

supporting documents for cash payments made *after* the balance sheet date to see if they relate to
liabilities that existed *at* the balance sheet date. If so, they trace these to the accounts payable trial
balance to ensure they were included.

* **Examine Underlying Documentation for Invoices Not Paid Several Weeks After the Year End:**
Auditors examine supporting documents for obligations that remain unpaid several weeks after the year
end to determine if they represent liabilities at the balance sheet date.

* **Trace Receiving Reports Issued Before Year End to Related Vendors’ Invoices:** Auditors trace
receiving reports for goods received near or before the year end to vendors' invoices to ensure the
related acquisitions and accounts payable are recorded.

16. **Q: Explain why auditors typically set performance materiality for accounts payable relatively
high.**

**A:** Auditors typically set performance materiality for accounts payable relatively high for the
same reasons that result in a higher assessed inherent risk: **a large number of transactions can affect
accounts payable, its balance is often significant and composed of many vendor balances, and it is
relatively expensive to audit**.

17. **Q: Distinguish between a vendor's invoice and a vendor's statement regarding their reliability as
audit evidence for testing accounts payable balances.**

**A:**

* **Vendor's Invoice:** Provides **highly reliable evidence about individual transactions** because
auditors can examine the invoice and related supporting documents like receiving reports and purchase
orders. However, it shows details for a single transaction.

* **Vendor's Statement:** Prepared monthly by the vendor, shows the **ending balance**. It is
**superior to invoices for verifying the correct *balance* in accounts payable** because the auditor's
primary concern is completeness (uncovering missing liabilities), and comparing the vendor's statement
balance to the client's recorded balance helps identify potential unrecorded liabilities. While originating
from an independent third party, it is in the client's possession, allowing potential alteration or
withholding.

18. **Q: Distinguish between a vendor's statement and a confirmation of accounts payable regarding
their reliability as audit evidence.**

**A:**

* **Vendor's Statement:** Prepared by the vendor (independent third party), but it is **in the
client's possession**, which gives the client an opportunity to alter it or withhold it.

* **Confirmation of Accounts Payable:** A response sent **directly to the auditor's office by the
vendor**. It provides similar information to a vendor's statement but is **more reliable** because it
comes directly to the auditor, reducing the risk of client alteration or omission. Confirmations may also
request information about notes payable or consigned inventory.

19. **Q: Explain why confirming accounts payable is less common than confirming accounts
receivable.**

**A:** Confirmation of accounts payable is less common than for accounts receivable primarily
because **vendors' invoices and vendors' statements are readily available** and are considered
**relatively reliable evidence** as they originate from a third party. If the client has adequate internal
controls and vendor's statements are available and examined, confirmations are often not sent. For
accounts receivable, external confirmations are often necessary because internal documents (like sales
invoices) originate internally, and third-party evidence like customer statements are not always available
to the auditor directly from the third party.

20. **Q: When would an auditor choose to send confirmation requests to vendors for accounts
payable?**

**A:** An auditor might choose to send confirmation requests to vendors when:

* The **client's internal controls are deficient**.

* **Vendor's statements are not available**.

* The **auditor questions the client's integrity**.

* To test for **vendors omitted from the accounts payable list**, omitted transactions, or misstated
account balances.
21. **Q: Why do auditors sometimes send "zero balance confirmations" for accounts payable?**

**A:** Auditors send confirmations to active vendors for whom a balance has *not* been included in
the accounts payable list as a **useful means of searching for omitted amounts**. This type of
confirmation is commonly called a **zero balance confirmation**. This directly addresses the key audit
concern of understatement of accounts payable.

22. **Q: What are common reasons for differences found when reconciling vendor's statements or
confirmations with the accounts payable list?**

**A:** Differences are often caused by:

* **Inventory in transit:** Goods shipped by the vendor but not yet received by the client at the
statement date, especially for FOB origin shipments.

* **Checks mailed by the client but not received by the vendor** at the statement date.

* **Delays in processing accounting records** by either the client or the vendor.

* **Disputed amounts**.

23. **Q: Explain the relationship between accounts payable and expenses and how this relationship
influences analytical procedures.**

**A:** Because of double-entry accounting, a misstatement of an expense account usually results in

an **equal misstatement of accounts payable**. This relationship makes **comparing current-year
expense totals with prior years** an effective analytical procedure for analysing accounts payable. If
expenses like rent, utilities, or repairs and maintenance are expected to be stable but show significant
fluctuations, it could indicate misstatements in the corresponding accounts payable.

24. **Q: List three substantive analytical procedures useful for uncovering misstatements in accounts
payable.**

**A:** Three substantive analytical procedures useful for accounts payable are:

* **Compare acquisition-related expense account balances with prior years.** This can reveal
misstatements in both accounts payable and expenses.

* **Review list of accounts payable for unusual, nonvendor, and interest-bearing payables.** This
helps identify potential classification misstatements for nontrade liabilities.
 * **Compare individual accounts payable with previous years.** This can highlight unrecorded or
nonexistent accounts or other misstatements.

* **Calculate ratios, such as purchases divided by accounts payable, and accounts payable divided by
current liabilities.** These ratios can reveal unrecorded or nonexistent accounts or other
misstatements.

25. **Q: Why is it important for auditors to coordinate accounts payable cutoff tests with the physical
observation of inventory?**

**A:** It is essential to coordinate accounts payable cutoff tests with the physical observation of
inventory to **ensure that inventory received and included in the physical count is properly recorded as
a liability in accounts payable, and vice versa**. If inventory is counted but the related acquisition isn't
recorded as a payable, it can lead to an understatement of accounts payable and net income.
Coordinating procedures, such as recording the last receiving report number at the time of the physical
count and tracing it to accounts payable, helps ensure consistency.

26. **Q: Explain the concept of FOB destination and FOB origin and their relevance to accounts payable
cutoff tests.**

**A:**

* **FOB destination:** Title to the goods passes to the buyer when the goods are **received** at
the buyer's destination. For cutoff, **only inventory received on or before the balance sheet date**
should be included in inventory and accounts payable.

* **FOB origin (or FOB shipping point):** Title passes to the buyer when the goods are **shipped**
by the seller (vendor). For cutoff, if shipment occurred **on or before the balance sheet date**, the
company must record the inventory and related accounts payable in the current period, even if the
goods haven't been received yet.

Understanding these terms and examining vendor invoices helps auditors determine if inventory in
transit near year-end should be included in the accounts payable and inventory balances.

27. **Q: Describe the typical methodology for designing tests of details of balances for accounts
payable.**

**A:** The methodology involves several phases:

 * **Phase I:** Identify significant risks and assess the risk of material misstatement for accounts
payable. Set performance materiality for accounts payable. Assess control risk for the acquisition and
payment cycle.

* **Phase I and II:** Design and perform tests of controls and substantive tests of transactions for
the acquisition and payment cycle.

* **Phase III:** Design and perform substantive analytical procedures for accounts payable. Design
tests of details of accounts payable and related disclosures to satisfy balance-related audit objectives
(existence, completeness, accuracy, cutoff, detail tie-in, classification, obligations, presentation). The
extent of TDB is influenced by the results of TOC, STOT, and SAP.

28. **Q: What is the emphasis when designing tests of details of balances for accounts payable
compared to accounts receivable, and why?**

**A:** When verifying asset balances like accounts receivable, auditors emphasize testing for
**overstatements**. When verifying liability balances like accounts payable, the main focus is on
**understated or omitted liabilities**. This difference in emphasis stems directly from the **legal
liability of CPAs**; an overstatement of owners' equity (which can arise from understated liabilities) is
more likely to lead to lawsuits if discovered later.

29. **Q: List the eight balance-related audit objectives applicable to accounts payable.**

**A:** The eight applicable balance-related audit objectives are:

* Existence.

* Completeness.

* Accuracy.

* Cutoff.

* Detail tie-in.

* Classification.

* Rights and obligations (specifically the **obligations** aspect for liabilities).

* Presentation.

30. **Q: Explain the 'obligations' balance-related audit objective as it applies to accounts payable.**
 **A:** For liabilities, the auditor is concerned with whether the client has a **valid obligation to pay
the liability**. The 'obligations' objective ensures that accounts payable represent actual amounts owed
by the client. While normally not a major concern for typical accounts payable (as they are almost
always obligations), auditors still examine documents like vendors' statements and confirmations to
support this objective.

31. **Q: Describe the 'detail tie-in' balance-related audit objective for accounts payable and typical
audit procedures.**

**A:** The 'detail tie-in' objective ensures that **accounts payable in the accounts payable list agree
with the related master file, and the total is correctly added and agrees with the general ledger**.
Typical procedures include re-adding or using the computer to total the accounts payable list, tracing
the total to the general ledger balance, and tracing individual vendor's invoices to the master file for
names and amounts.

32. **Q: How does the client's focus on supply-chain management and use of technology potentially
impact audit risks in the acquisition and payment cycle?**

**A:** Recent changes in supply-chain management, including increased sharing of information and
technology use, can create significant client business risks. For example, **suppliers might have greater
access to accounts payable records**, which, if not properly controlled, threatens the likelihood of
misstatement. Increased focus on logistics might also **increase the difficulty of establishing effective
cutoff** of accounts payable balances at year end.

33. **Q: Explain how internal verification controls contribute to the accuracy objective for recorded
acquisition transactions.**

**A:** Internal verification involves checks performed by client personnel. When calculations and
amounts on vendors' invoices, receiving reports, purchase orders, and purchase requisitions are
**internally verified**, and there is an **indication of this verification** (like initials), it provides
evidence that the transactions have been checked for mathematical accuracy, pricing, and agreement
between documents. This control significantly reduces the risk of inaccurate acquisition transactions
being recorded. Auditors test this control by examining the indication of internal verification.

34. **Q: How can prenumbered documents like purchase orders and receiving reports help ensure the
completeness of recorded acquisitions?**
 **A:** Using prenumbered documents and accounting for the sequence of these documents helps
ensure that **all items are recorded and none are missing**. By accounting for a sequence of
prenumbered purchase orders or receiving reports, auditors can identify any missing documents, which
could indicate unrecorded acquisitions. Tracing from a file of receiving reports or vendors' invoices to
the acquisitions journal is a substantive test of transactions that directly tests the completeness
objective, assuming the initial document captures the transaction.

35. **Q: What is the role of the chart of accounts and internal verification of account classifications in
achieving the classification objective for acquisition transactions?**

**A:** An **adequate chart of accounts** provides a framework for correctly classifying

transactions. **Internal verification of account classifications** ensures that the codes assigned to
acquisitions are reviewed and checked for appropriateness based on the chart of accounts and the
nature of the expenditure (e.g., inventory, repair, utility). These controls help ensure that transactions
are recorded in the correct general ledger and subsidiary accounts, which is crucial for accurate financial
statements. Auditors test these controls by examining the procedures manual and chart of accounts and
examining indications of internal verification.

36. **Q: Describe how the auditor can use the cash disbursements journal and bank reconciliation to
test the completeness of recorded cash disbursements.**

**A:** **Prenumbered checks** are a key control; auditors can account for a sequence of checks to
see if any are missing, which might indicate unrecorded disbursements. Reconciling recorded cash
disbursements per the cash disbursements journal with the cash disbursements per the bank statement
(often through a **proof of cash disbursements**) helps ensure that all transactions clearing the bank
have been recorded in the books. An **independent bank reconciliation**, performed monthly, is a key
control supporting the accuracy and completeness of cash disbursements recording.

37. **Q: What makes the occurrence objective particularly important for cash disbursements, and what
control helps address this risk?**

**A:** The occurrence objective for cash disbursements is important to ensure that **recorded cash
disbursements are for goods and services actually received and are legitimate payments**. A significant
risk is that payments are made for fictitious acquisitions or to unauthorised parties, as illustrated in the
Hammes and Mueller cases. A key control is the **adequate segregation of duties between accounts
payable and custody of signed checks/authority to disburse funds electronically**. Another critical
control is the **careful examination of supporting documentation by the authorized person before
signing checks or authorizing electronic payments**.
38. **Q: Discuss the challenges related to sample size determination in auditing accounts payable
compared to accounts receivable.**

**A:** Statistical sampling is less common for accounts payable than accounts receivable. A key
challenge is **defining the population and determining the population size**. Since the emphasis is on
**omitted accounts payable**, auditors must try to ensure that the population tested **includes all
potential payables**, which can be difficult to define exhaustively before the audit is complete. For
accounts receivable, the population is generally well-defined by the customer subsidiary ledger.

39. **Q: Describe the purpose of cutoff tests for accounts payable and what types of misstatements
they are designed to detect.**

**A:** Accounts payable cutoff tests are performed to determine whether **transactions recorded a
few days before and after the balance sheet date are included in the correct period**. These tests are
primarily designed to detect **understatements of accounts payable** at year end by identifying
liabilities that existed but were recorded in the subsequent period. They also help detect
**overstatements** by ensuring subsequent period acquisitions are not incorrectly included in the
current period's accounts payable.

40. **Q: Based on the Cabela's case, describe an example of how manipulating vendor receivables
related to accounts payable overpayments led to a financial misstatement.**

**A:** In the Cabela's case, the company historically booked receivables for overpayments identified
by an examination company. In the third quarter of 2012, Cabela's changed its accounting policy for
"submitted" overpayment claims (those sent to vendors for potential objection). Instead of accruing
them at 0%, they accrued 73% based on the *number* of vendors from which they'd collected in the
prior year, with no regard to the *amounts* collected. This change increased the vendor receivable
amount, which in turn **decreased cost of goods sold** by $392,077 and **increased net income** by
$265,436, helping the company nearly meet its gross margin goal. This illustrates how misclassifying or
improperly accounting for items related to accounts payable can impact profitability.