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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)

2.
a.
b.
c.
d.

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)

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)

5.
a.
b.
c.

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)

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)

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.
d. Is required by generally accepted auditing standards.

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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)

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)

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)

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?

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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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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)

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.

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.

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.

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.

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.

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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.
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.

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Answer:
The acquisition of new insurance policies
The disbursement of cash for premiums
The recording of expense and premium disbursements
PROBLEMS
1. 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

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
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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