CHAPTER 11

MULTIPLE CHOICE
b

1. A client erroneously recorded a large purchase twice. Which of the following control procedures
would be most likely to detect this error in a timely and efficient manner?
a. Footing the purchases journal.
b. Reconciling vendors' monthly statements with subsidiary payable ledger accounts.
c. Tracing totals from the purchases journal to the ledger accounts.
d. Sending written quarterly confirmations to all vendors.
(AICPA ADAPTED)

2. An internal control questionnaire indicates that an approved receiving report must accompany
every check request for payment of merchandise. Which of the following procedures provides
the greatest assurance that this control is operating effectively?
a. Select and examine receiving reports and ascertain that the related canceled checks are dated no
earlier than the receiving reports.
b. Select and examine receiving reports and ascertain that the related canceled checks are dated no
later than the receiving reports.
c. Select and examine canceled checks and ascertain that the related receiving reports are dated no
earlier than the checks.
d. Select and examine canceled checks and ascertain that the related receiving reports are dated no
later than the checks.
(AICPA ADAPTED)

3. The accounts payable department receives the purchase order form to accomplish all of the
following except
a. Compare invoice price to purchase order price.
b. Ensure that the purchase had been properly authorized.
c. Ensure that the party requesting the goods had received the goods.
d. Compare quantity ordered to quantity purchased.
(AICPA ADAPTED)

4. For effective internal control purposes, which of the following individuals should be responsible
for mailing signed checks?
a. Receptionist.
b. Treasurer.
c. Accounts payable clerk.
d. Payroll clerk.
(AICPA ADAPTED)

5. A client's expenditure/disbursement cycle begins with requisitions from user departments and
ends with the receipt of materials and the recognition of a liability. An auditor's primary objective
in reviewing this cycle is to
a. Evaluate the reliability of information generated by the cycle.
b. Investigate the physical handling and recording of unusual acquisitions of materials.
c. Consider the need to be on hand for the annual physical inventory count if this system is not
functioning properly.
d. Ascertain that materials said to be ordered, received, and paid for are on hand.
(AICPA ADAPTED)

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6.
a.
b.
c.
d.

Which of the following is a primary function of the purchasing department?

Authorizing the acquisition of goods.
Ensuring the acquisition of goods of a specified quality.
Verifying the propriety of goods of a specified quality.
Reducing expenditures for goods acquired.
(AICPA ADAPTED)

7. An auditor is planning the consideration of internal control over the expenditure/disbursement

cycle. The auditor will be least influenced by
a. The availability of a company procedures manual describing purchasing and cash disbursement
procedures.
b. The scope and results of work performed by the company's internal auditors.
c. The existence within the purchasing department of control procedures that offset deficiencies.
d. The strength or deficiency of control procedures in other areas, e.g., sales and accounts
receivable.
(AICPA ADAPTED)

8. Omitting quantities from copies of purchase orders sent to the receiving department is a control
procedure intended mainly to
a. Ensure that goods received are physically counted by receiving department personnel.
b. Identify and return damaged goods as soon as they are received.
c. Provide a crosscheck for verifying the accuracy of perpetual inventory records.
d. Prevent theft of goods by receiving department personnel.

9.
a.
b.
c.
d.

10. An effective internal control procedure that protects against the preparation of improper or
inaccurate disbursements is to require that all checks be
a. Signed by an official after necessary supporting evidence has been examined.
b. Reviewed by the treasurer before mailing.
c. Sequentially numbered and accounted for by internal auditors.
d. Perforated or otherwise effectively canceled when they are returned with the bank statement.
(AICPA ADAPTED)

11. As an in-charge auditor, you are reviewing a write-up of internal control in cash receipt and
disbursement procedures. Which of the following deficiencies alone should cause you the least
concern?
a. Checks are signed by only one person.
b. Signed checks are distributed by the controller to approved payees.
c. The treasurer fails to establish bona fide names and addresses of check payees.
d. Cash disbursements are made directly out of cash receipts.
(AICPA ADAPTED)

12. Matching the supplier's invoice, the purchase, and the receiving report normally should be the
responsibility of the
a. Receiving department.
b. Purchasing department.
c. Accounting function.
d. Treasury function.
(AICPA ADAPTED)

Which of the following is not an appropriate activity for the treasurer's department?
Prepare checks.
Forward checks to vendors.
Cancel vouchers.
Prepare vouchers.

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13. To avoid potential errors and irregularities, well-designed controls in the accounts payable area
should include a separation of which of the following functions?
a. Cash disbursements and vendor invoice verification.
b. Vendor invoice verification and merchandise ordering.
c. Physical handling of merchandise received and preparation of receiving reports.
d. Check signing and cancellation of payment documentation.
(AICPA ADAPTED)

14. Which of the following is a necessary control procedure for cash disbursements?
a. Checks should be signed by the controller and at least one other employee of the company.
b. Checks should be sequentially numbered, and the numerical sequence should be accounted for by
the person preparing the bank reconciliation.
c. Checks and supporting documents should be marked "Paid" immediately after the check is
returned with the bank statement.
d. Checks should be sent directly to the payee by the employee who prepares documents that
authorize check preparation.
(AICPA ADAPTED)

15.
a.
b.
c.
d.

Which of the following is not a common activity of the expenditure/disbursement cycle?

Purchasing.
Fixed asset additions.
Receiving.
Recording.

16.
a.
b.
c.
d.

Which of the following functions is not appropriate for the accounts payable department?
Compare purchase requisitions, purchase orders, receiving reports, and vendors' invoices.
Prepare purchase orders.
Prepare voucher and daily summary.
File voucher package by due date.

17.
a.
b.
c.

18. Based on observations made during an audit, an independent auditor should discuss with
management the effectiveness of procedures that control against the purchase of
a. Supplies purchased from a vendor who offers no trade or cash discounts.
b. Inventory acquired just-in-time.
c. Equipment that is needed but does not qualify for investment tax credit.
d. Supplies ordered without considering potential volume discounts.
(AICPA ADAPTED)

19. Internal control is improved when the quantity of merchandise ordered is omitted from the copy
of the purchase order sent to the
a. Department that initiated the requisition.
b. Receiving department.
c. Purchasing agent.
d. Accounts payable department.
(AICPA ADAPTED)

The accounts payable department generally should

Cancel supporting documentation after a cash payment is mailed.
Approve the price and quantity of each purchase requisition.
Assure that the quantity ordered is omitted from the receiving department's copy of the purchase
order.
d. Agree the vendor's invoice with the receiving report and purchase order. (AICPA ADAPTED)

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20.
a.
b.
c.
d.

When goods are received, the receiving clerk should match the goods with the
Purchase order and requisition.
Vendor's invoice and the receiving report.
Vendor's shipping document and the purchase order.
Receiving report and the vendor's shipping document.
(AICPA ADAPTED)

21. The accounts payable department should compare the information on each vendor's invoice with
the
a. Receiving report and the purchase order.
b. Receiving report and the voucher.
c. Vendor's packing slip and the purchase order.
d. Vendor's packing slip and the voucher.
(AICPA ADAPTED)

22. Effective internal control over the purchase of raw materials should usually include all of the
following procedures except
a. Reporting product changes that will affect raw materials needs.
b. Determining the need for raw materials prior to preparing a purchase order.
c. Obtaining third-party written quality and quantity reports prior to paying for the raw materials.
d. Obtaining approval prior to making a purchase commitment.
(AICPA ADAPTED)

23.
a.
b.
c.
d.

24. To assure that disbursements are neither improper nor inaccurate, an entity could require that all
checks be
a. Signed by an officer after supporting documentation has been examined.
b. Reviewed by the treasurer before mailing.
c. Numbered sequentially and accounted for by internal auditors.
d. Canceled when they are returned with the bank statement.
(AICPA ADAPTED)

25. The mailing of disbursement checks and remittance advices should be controlled by the employee
who
a. Signed the checks last.
b. Approved the vouchers for payment.
c. Matched the receiving reports, purchase orders, and vendor invoices.
d. Verified the mathematical accuracy of the vouchers and remittance advices.
(AICPA ADAPTED)

26. An auditor plans to examine a sample of 20 checks for countersignatures as prescribed by the
client's internal control procedures. One of the checks in the sample cannot be found. The auditor
should
a. Evaluate the results as if sample size had been 19.
b. Treat the missing check as a deviation.
c. Treat the missing check in the same manner as the majority of the other 19 checks, i.e.,
countersigned or not.
d. Choose another check to replace the missing check in the sample.
(AICPA ADAPTED)

To improve control over merchandise purchases, a company's receiving department should

Accept merchandise only if an approved purchase order is on hand.
Accept and count all merchandise received from known vendors.
Rely on shipping documents to prepare receiving reports.
Be responsible for handling merchandise but not for preparing receiving reports.
(AICPA ADAPTED)

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27. Which of the following procedures relating to the audit of accounts payable could the auditor
delegate entirely to the client's employees?
a. Test footings in the accounts payable ledger.
b. Reconcile unpaid invoices to vendors' statements.
c. Prepare a schedule of accounts payable.
d. Mail confirmations for selected account balances.
(AICPA ADAPTED)

28.
a.
b.
c.
d.

29.
a.
b.
c.
d.

30. When an auditor selects a sample of items from the vouchers payable register for the last month
of the period under audit and traces them to underlying documents, the auditor is gathering
evidence primarily to support 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)

31. Which of the following audit procedures is the most efficient at detecting unrecorded liabilities at
the balance sheet date?
a. Confirm large accounts payable balances at the balance sheet date.
b.Compare cash disbursements in the subsequent period with the accounts payable trial
balance at year-end.
c. Examine purchase orders issued for several days prior to the close of the year.
d.Obtain a letter from the client's attorney.
(AICPA ADAPTED)

32.
a.
b.
c.
d.

33. A company sells a product only in the last month of its fiscal year. The company uses commission
agents and pays them 6 percent of their net sales 30 days after the sales are made. The agents'
sales were $10,000,000. Experience indicates that 10 percent of the sales are usually not collected
and 2 percent are returned in the first month of the new year. The auditor would expect the
year-end balance in the accrued commissions account to be
a. $528,000.
b. $540,000.
c. $588,000.

In order to establish accounts payable cutoff, an auditor will most likely

Coordinate cutoff tests with the physical inventory observation.
Compare cutoff reports with purchase orders.
Compare vendors' invoices with vendors' statements.
Coordinate the mailing of confirmations with cutoff tests.
(AICPA ADAPTED)

An audit of accounts payable is ordinarily not designed to

Detect substantially past due accounts.
Verify that accounts payable were properly authorized.
Determine the reasonableness of recorded liabilities.
Determine that all existing liabilities at the balance sheet date have been recorded.
(AICPA
ADAPTED)

Which of the following audit procedures is least likely to detect an unrecorded liability?
Analysis and recomputation of interest expense.
Analysis and recomputation of depreciation expense.
Mailing a standard bank confirmation form.
Reading the minutes of board of directors' meetings.
(AICPA ADAPTED)

81

d. $600,000.

(AICPA ADAPTED)
SHORT ANSWER

1. Outline how an auditor obtains an understanding of internal control.

Answer:
i.
ii.
iii.
iv.

Performing a preliminary review

By documenting the system
By performing a transaction walk-through
Determining whether existing control procedures are potentially reliable in assessing
control risk below the maximum.

2. Name the two major business functions associated with the expenditure/disbursement cycle.
Answer:
Resources (goods and services) are acquired from vendors and employees in
exchange for obligations to pay.
Obligations to vendors and employees are paid.
3. In the recording process of the expenditure/disbursement cycle, how can management protect
against inaccurate account balances and misstated financial statements?
Answer:
To protect against inaccurate account balances and therefore against misstated financial
statements, management should institute policies to assure that all purchases and cash
disbursements are recorded properly and in the proper period. Management could control the
recording function by preparing input totals, by reconciling journals and subsidiary ledgers, and
by establishing procedures for processing and recording.
4. Following system documentation and assuming that controls are potentially reliable in assessing
control risk below that maximum, what are the next steps the auditor would take in the
identification of control procedures?
Answer:
The auditor would:
Identify the systems control objectives.
Consider the potential errors or frauds that might result if specific control objectives
are not met.
Determine what control procedures management uses to prevent or detect potentially
material errors or frauds.
Design tests of controls.
5. In what ways can management safeguard cash or other company assets?
Answer:
Management could safeguard cash and other company assets by:
Restrict access to purchasing and cash disbursement records and forms.
Prenumber and control forms and documents; maintaining lists and samples of
authorized signatures.
Segregating responsibility for authorizing, executing, and recording.

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PROBLEMS
1. There are several forms of documentation affecting the expenditure/disbursement cycle and are
also used as audit evidence. Name and describe five forms of documentation.
Answer:
FORM
Voucher Package
Vendors Invoice
Receiving Report
Purchase Order
Purchase Requisition

PURPOSE
The purchase requisition, purchase order,
receiving report, and invoice. Often includes
a summarizing document, the voucher.
Identifies goods purchased and represents
formal notice about the amount and terms of
payment often called the bill.
Identifies information about goods received
from a vendor.
A request issued by the purchasing
department to a vendor to purchase goods
A request from an employee or department
supervisor that goods be purchased.

2. Summarize the purchasing and cash disbursements activities, narrating the flow through the
Purchasing, Receiving, Accounts Payable, and Cash Disbursements process.
Answer:
Purchasing Department
Purchase requisitions are accepted and approved.
Prepares purchase orders, distributes copies, and retains the file copy.
Receiving Department
Files purchase orders until goods are received.
When goods are received, counts quantities and compares the results with the
purchase orders.
Prepares a receiving report.
Forwards goods to Inventory Control.
Forwards copies of receiving report to Accounts Payable and to Purchasing;
Receiving also retains a file copy of receiving report, purchase order, and
updated receiving log.
Accounts Payable Department
Compares purchase requisition, purchase order, receiving report, and
vendors invoice.
Prepares voucher and daily summary and then assembles voucher package.
Files voucher package by due date; forwards to cash disbursements on date
due.
Forwards daily summary to General Accounting for recording; Accounts
Payable retains the file copy.
Cash Disbursements
Reviews voucher packages received from Accounts Payable on due date.

83

 Prepares checks and daily summary.

Has checks signed by authorized signatories.
Forwards checks to vendors.

84

 Forwards summary to General Accounting and Accounts Payable for

recording; Cash Disbursements retains a file copy of summary.
Cancels and files voucher packages.

85