18-18 (Objective 18-3)
The following questions concern internal controls in the acquisition and payment cycle. Choose
the best response.
a. A client erroneously recorded a large purchase twice. Which of the following
...
18-18 (Objective 18-3)
The following questions concern internal controls in the acquisition and payment cycle. Choose
the best response.
a. A client erroneously recorded a large purchase twice. Which of the following internal
controls would be most likely to detect this error in a timely and efficient manner?
(1) Footing the purchases journal.
(2) Reconciling vendors’ monthly statements with subsidiary payable ledger accounts.
(3) Tracing totals from the purchases journal to the ledger accounts.
(4) Sending written quarterly confirmations to all vendors.
b. Budd, the purchasing agent of Lake Hardware Wholesalers, has a relative who owns a
retail hardware store. Budd arranged for hardware to be delivered by manufacturers to the
relative’s retail store on a COD basis, thereby enabling his relative to buy at Lake’s
wholesale prices. Budd was probably able to accomplish this because of Lake’s poor
internal control over
(1) Purchase requisitions.
(2) purchase orders.
(3) Cash receipts.
(4) Perpetual inventory records.
c. Which of the following is an internal control that will prevent paid cash disbursement
documents from being presented for payment a second time?
(1) The date on cash disbursement documents must be within a few days of the date that the
document is presented for payment.
(2) The official signing the check compares the check with the documents and should deface the
documents.
(3) Unsigned checks are prepared by individuals who are responsible for signing checks.
(4) Cash disbursement documents are approved by at least two responsible management officials.
d. Which of the following questions would be best to include in an internal control
questionnaire concerning the completeness assertion for purchases?
(1) Is an authorized purchase order required before the receiving department can accept a
shipment or the vouchers payable department can record a voucher?
(2) Are purchase requisitions prenumbered and independently matched with vendor invoices?
(3) Is the unpaid voucher file periodically reconciled with inventory records by an employee who
does not have access to purchase requisitions?(4) Are purchase orders, receiving reports, and vouchers prenumbered and periodically
accounted for?
18-21 (Objective 18-3)
Questions 1 through 8 are typically found in questionnaires used by auditors to obtain an
understanding of internal control in the acquisition and payment cycle. In using the
questionnaire for a client, a “yes” response to a question indicates a possible internal
control, whereas a “no” indicates a potential deficiency.
1. Is the purchasing function performed by personnel who are independent of the receiving and
shipping functions and the payables and disbursing functions?
2. Are all vendors’ invoices routed directly to accounting from the mailroom?
3. Are all receiving reports prenumbered and the numerical sequence checked by a person
independent of check preparation?
4. Are all extensions, footings, discounts, and freight terms on vendors’ invoices checked for
accuracy?
5. Does a responsible employee review and approve the invoice account distribution before the
transaction is entered in the computer?
6. Are checks automatically posted in the cash disbursements journal as they are prepared?
7. Are all supporting documents properly cancelled at the time the checks are signed?
8. Is the custody of checks after signature and before mailing handled by an employee
independent of all payable, disbursing, cash, and general ledger functions? Required
a. For each of the preceding questions, state the transaction-related audit objective(s) being
fulfilled if the control is in effect.
b. For each internal control, list a test of control to test its effectiveness.
c. For each of the preceding questions, identify the nature of the potential financial
misstatement(s) if the control is not in effect.
d. For each of the potential misstatements in part c, list a substantive audit procedure that can be
used to determine whether a material misstatement exists.
QUESTION A.
TRANSACTIO
N RELATED
B. TEST OF
CONTROL
C. POTENTIAL
MISTATEMENTS
D.SUBSTANTIVE
PROCEDUREAUDIT
OBJECTIVES
1 Recorded
acquisitions and
payments are for
goods and
services
received,
consistent with
the best interest
of the client
(occurrence)
Observe
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