CHAPTER 12

MULTIPLE CHOICE

c 1. 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 2. An auditor usually examines receiving reports to support entries in the

a. Voucher register and sales returns journal.
b. Sales journal and sales returns journal.
c. Voucher register and sales journal.
d. Check register and sales journal. (AICPA ADAPTED)

a 3. 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 4. An examination of the balance in the accounts payable account is ordinarily not designed to
a. Detect accounts payable that are substantially past due.
b. Verify that accounts payable were properly authorized.
c. Ascertain the reasonableness of recorded liabilities.
d. Determine that all existing liabilities at the balance sheet date have been recorded.
(AICPA ADAPTED)

c 5. Confirmation of accounts payable balances

a. Is usually performed at interim dates rather than at year-end.
b. Is not effective in testing for unrecorded liabilities.
c. Is particularly useful when the auditor suspects liabilities may be materially understated.
d. Is required by generally accepted auditing standards.

a 6. 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)

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a 7. 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 8. 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 9. 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)

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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.Which of the following is true about the audit procedure of confirming accounts payable?
a. Payables confirmation are most appropriate when the auditor expects understatement errors.
b. It is not productive to mail second requests.
c. 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.

c 16. Which of the following would not likely be included in an accounts payable confirmation?
a. An itemized statement of amounts owed.
b. An itemized statement of merchandise consigned.
c. An itemized statement of cash paid near the balance sheet date.
d. An itemized list of any notes or other obligations.

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.

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c 19. Companies may be held liable for all of the following except:
a. Noncompliance with environmental laws and regulations.
b. Remedial cleanup of hazardous waste sites.
c. Owners and operators before hazardous waste was disposed.
d. Personal injury or damage caused by hazardous waste.

SHORT ANSWER

1. Name the four basic sources that are used to search for unrecorded payables.

Answer:
a. A year-end accounts payable trial balance
b. The cash disbursements journal
c. Canceled (paid) voucher package
d. The file of unmatched receiving reports (filed in an unpaid vouchers file)

2. 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

3. 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 do not require additional substantive testing, or accounts that appear
unusual or unreasonable and therefore do require additional substantive testing.

4. In the audit of property taxes, an auditor is concerned with an entitys controls over what three
activities?

Answer:
Recognition of accrued taxes
Recording of expense for taxes owed
Disbursement of cash for taxes

5. 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

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 PROBLEMS

1. List the related financial statement assertions with the audit procedure used to substantiate the
Purchase or Accounts Payable account balance.

Answer:

ASSERTION AUDIT PROCEDURE

Existence or occurrence Confirm balances with creditors
Existence or occurrence Test cutoff
Completeness Test for unrecorded liabilities
Completeness Perform analytical procedures
Completeness Test cutoff
Rights and obligations Confirm with creditors
Rights and obligations Test for unrecorded liabilities
Valuation or allocation Verify accounts payable trial balance
Valuation or allocation Confirm with creditors
Valuation or allocation Test for unrecorded liabilities
Presentation and disclosure Compare statement presentation and disclosure
with those required by GAAP

2. 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 companys A/P vendors to substantiate
Accounts Payable balances. Please issue a sample confirmation request to one of XYZ
Companys vendors based upon the following information. The date of the confirmation will be
1/7/06.

Vendor Information Audit Client Information Audit Firm Information

Joneses Supply Company XYZ Company CPA Firm, LLP
10 Lowend Street 99 High Street
Anytown, TX 77666 Anytown, TX 77666
Controller: Carol Harris

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 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

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