CHAPTER 12 MULTIPLE CHOICE c When an auditor selects a sample of items from the vouchers payable register for the last month of the period audited and traces the items to underlying documents, the auditor is gathering evidence primarily in support of the assertion that a Recorded obligations were paid b Incurred obligations were recorded in the correct period c Recorded obligations were valid d Cash disbursements were recorded as incurred obligations (AICPA ADAPTED) a a b c d An auditor usually examines receiving reports to support entries in the Voucher register and sales returns journal Sales journal and sales returns journal Voucher register and sales journal Check register and sales journal (AICPA ADAPTED) a Unrecorded liabilities are most likely to be found during the review of which of the following documents? a Unpaid bills b Shipping records c Bills of lading d Unmatched sales invoices (AICPA ADAPTED) b a b c d An examination of the balance in the accounts payable account is ordinarily not designed to Detect accounts payable that are substantially past due Verify that accounts payable were properly authorized Ascertain the reasonableness of recorded liabilities Determine that all existing liabilities at the balance sheet date have been recorded (AICPA ADAPTED) c a b c d Confirmation of accounts payable balances Is usually performed at interim dates rather than at year-end Is not effective in testing for unrecorded liabilities Is particularly useful when the auditor suspects liabilities may be materially understated Is required by generally accepted auditing standards a In order to efficiently establish the correctness of the accounts payable cutoff, the auditor will be most likely to a Coordinate cutoff tests with physical inventory observation b Compare cutoff reports with purchase orders c Compare vendors' invoices with vendors' statements d Coordinate mailing of confirmations with cutoff tests (AICPA ADAPTED) 85 a A client's purchasing system ends with the assumption of a liability and the eventual payment of the liability Which of the following best describes the auditor's 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 (AICPA ADAPTED) d Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because a There is a duplication of cutoff tests b Accounts payable balances at the balance sheet date may not be paid before the audit is completed c Correspondence with the audit client's attorney will reveal all legal action by vendors for nonpayment d There is likely to be other reliable external evidence available to support the balances (AICPA ADAPTED) d Only one of the following four statements, which compare confirmation of accounts payable with suppliers and confirmation of accounts receivable with debtors, is true The true statement is that a Confirmation of accounts payable with suppliers is a more widely accepted auditing procedure than is confirmation of accounts receivable with debtors b As compared to the confirmation of accounts payable, the confirmation of accounts receivable will tend to emphasize accounts with zero balances at the balance sheet date c Statistical sampling techniques are more widely accepted in the confirmation accounts payable than in the confirmation of accounts receivable d It is less likely that the confirmation request sent to the supplier will show the amount owed than that the request sent to the debtor will show the amount due (AICPA ADAPTED) c 10 In connection with a review of the prepaid insurance account, which of the following procedures does the auditor generally not perform? a Recompute the portion of the premium that expired during the year b Prepare excerpts of insurance policies for audit working papers c Confirm premium rates with an independent insurance broker d Examine support for premium payments (AICPA ADAPTED) b 11 An auditor reviews the 2005 prepaid insurance ledger and balances the total to the general ledger account Which bad practice/error will most likely be detected by this procedure? a The client's excess liability coverage, which expired December 31, 2004, was not renewed in 2005 b A premium refund for a three-year policy expiring in 2003 was credited to the account and not amortized c The client has not recognized the probable loss associated with a damage suit that is only partially covered by insurance d An insurer improperly computed the amount of a premium paid by the client (AICPA ADAPTED) 86 a 12 The audit procedures used to verify accrued liabilities differ from those used to verify accounts payable because a Accrued liabilities usually pertain to services of a continuing nature, while accounts payable are the result of completed transactions b Accrued liability balances are less material than accounts payable balances c Evidence supporting accrued liabilities is nonexistent, while evidence supporting accounts payable is readily available d Accrued liabilities at year-end will become accounts payable during the following year (AICPA ADAPTED) a 13 In substantive tests of purchases and accounts payable, which of the following audit procedures is most appropriate for addressing the assertions of existence or occurrence? a Test cutoff b Verify accounts payable trial balance c Test for unrecorded liabilities d Perform analytical procedures d 14 Which of the following audit procedures is not appropriate for addressing the assertion of valuation? a Verify accounts payable trial balance b Confirm with creditors c Test for unrecorded liabilities d Perform analytical procedures c 15 a b c c 16 a b c d a 17 Which of the following is not used to test overstatements and understatements of accounts payable? a Cash receipts records b Cash disbursement records c Canceled voucher packages d Unmatched receiving reports c 18 In testing prepaid insurance, controls over which of the following are not of concern to the auditor? a The acquisition of new insurance policies b The disbursement of cash for premiums c The physical custody of the assets insured d The recording of expense and premium disbursements Which of the following is true about the audit procedure of confirming accounts payable? Payables confirmation are most appropriate when the auditor expects understatement errors It is not productive to mail second requests The auditor is not required by current professional pronouncements to justify his or her opinion on financial statements when payables are not confirmed d Payables are usually confirmed as of an interim date Which of the following would not likely be included in an accounts payable confirmation? An itemized statement of amounts owed An itemized statement of merchandise consigned An itemized statement of cash paid near the balance sheet date An itemized list of any notes or other obligations 87 c 19 a b c d Companies may be held liable for all of the following except: Noncompliance with environmental laws and regulations Remedial cleanup of hazardous waste sites Owners and operators before hazardous waste was disposed Personal injury or damage caused by hazardous waste SHORT ANSWER Name the four basic sources that are used to search for unrecorded payables Answer: a b c d A year-end accounts payable trial balance The cash disbursements journal Canceled (paid) voucher package The file of unmatched receiving reports (filed in an unpaid vouchers file) Name the three basic sources that are used to test for overstated payables Answer: a A year-end accounts payable trial balance b The cash disbursements journal c Canceled (paid) voucher packages What is the role of analytical procedures in testing of payables? Answer: Analytical procedures can be used to identify accounts that appear reasonable in relation to other accounts and therefore not require additional substantive testing, or accounts that appear unusual or unreasonable and therefore require additional substantive testing In the audit of property taxes, an auditor is concerned with an entity’s controls over what three activities? Answer:  Recognition of accrued taxes  Recording of expense for taxes owed  Disbursement of cash for taxes In the audit of prepaid insurance, an auditor is concerned with three predominant controls List these three controls Answer:  The acquisition of new insurance policies  The disbursement of cash for premiums  The recording of expense and premium disbursements 88 PROBLEMS List the related financial statement assertions with the audit procedure used to substantiate the Purchase or Accounts Payable account balance Answer: ASSERTION Existence or occurrence Existence or occurrence Completeness Completeness Completeness Rights and obligations Rights and obligations Valuation or allocation Valuation or allocation Valuation or allocation Presentation and disclosure AUDIT PROCEDURE Confirm balances with creditors Test cutoff Test for unrecorded liabilities Perform analytical procedures Test cutoff Confirm with creditors Test for unrecorded liabilities Verify accounts payable trial balance Confirm with creditors Test for unrecorded liabilities Compare statement presentation and disclosure with those required by GAAP You have been engaged by XYZ Company to audit the financial statements for year-ended 12/31/05 Confirmation letters are sent to each of the company’s A/P vendors to substantiate Accounts Payable balances Please issue a sample confirmation request to one of XYZ Company’s vendors based upon the following information The date of the confirmation will be 1/7/06 Vendor Information Joneses Supply Company 10 Lowend Street Anytown, TX 77666 Audit Client Information XYZ Company 99 High Street Anytown, TX 77666 Controller: Carol Harris 89 Audit Firm Information CPA Firm, LLP Answer: XYZ Company 99 High Street Anytown, TX 77666 January 7, 2006 Joneses Supply Company 10 Lowend Street Anytown, TX 77666 Our auditors, CPA Firm, LLP, are auditing our financial statements for 2005 Will you please furnish them with the following information as of December 31, 2005:    An itemized statement of amounts that we owe you An itemized statement of any merchandise that you have cosigned to us An itemized list of any notes, acceptances, or other obligations that we owe you Please reply directly to our auditors An envelope addressed to our auditors is enclosed Carol Harris Controller XYZ Company 90 ... Rights and obligations Rights and obligations Valuation or allocation Valuation or allocation Valuation or allocation Presentation and disclosure AUDIT PROCEDURE Confirm balances with creditors Test. .. Test for unrecorded liabilities Perform analytical procedures Test cutoff Confirm with creditors Test for unrecorded liabilities Verify accounts payable trial balance Confirm with creditors Test. .. with environmental laws and regulations Remedial cleanup of hazardous waste sites Owners and operators before hazardous waste was disposed Personal injury or damage caused by hazardous waste SHORT