Chapter 7 Audit of the Purchases and Payment Cycle

(I) Multiple Choice Questions

1. To provide assurance that each voucher is submitted and paid only once, an
auditor most likely would examine a sample of paid vouchers and determine
whether each voucher is

A supported by a vendors invoice.

B stamped paid by the cheque signer.
C prenumbered and accounted for.
D approved for authorized purchases.

2. In assessing control risk for purchases, an auditor vouches a sample of entries in

the voucher register to the supporting documents. Which assertion would this
test of controls most likely support?

A Completeness
B Existence or occurrence
C Valuation or allocation
D Rights and obligations

3. Which of the following controls is NOT usually preformed in the vouchers

payable department?

A Matching the vendors invoice with the related receiving report.

B Approving vouchers for payment by having an authorized employee sign
the vouchers.
C Indicating the asset and expense accounts to be debited.
D Accounting for unused prenumbered purchase orders and receiving
reports.

4. With properly designed internal control, the same employee most likely would
match vendors invoices with receiving reports and also

A post the detailed accounts payable records.

B recompute the calculations on vendors invoices.
C reconcile the accounts payable ledger.

Q7-1
 D cancel vendors invoices after payment.

5. An entitys internal control requires for every cheque request that there be an
approved voucher, supported by a prenumbered purchase order and a
prenumbered receiving report. To determine whether cheques are being issued
for unauthorized expenditures, an auditor most likely would select items for
testing from the population of all

A purchase orders.
B canceled cheques.
C receiving reports.
D approved vouchers.

6. Which of the following questions would most likely be included in an internal

control questionnaire concerning the completeness assertion for purchases?

A Is an authorized purchase order required before the receiving department

can accept a shipment or the vouchers payable department can record a
voucher?
B Are purchase requisitions prenumbered and independently matched with
vendor invoices?
C Is the unpaid voucher file periodically reconciled with inventory records
by an employee who does not have access to purchase requisitions?
D Are purchase orders, receiving reports, and vouchers prenumbered and
periodically accounted for?

7. For effective internal control, the accounts payable department generally should

A stamp, perforate, or otherwise cancel supporting documentation after

payment is mailed.
B ascertain that each requisition is approved as to price, quantity, and quality
by an authorized employee.
C obliterate the quantity ordered on the receiving department copy of the
purchase order.
D establish the agreement of the vendors invoice with the receiving report
and purchase order.

8. A client erroneously recorded a large purchase twice. Which of the following

Q7-2
 internal control measures 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.

9. With well-designed internal control, employees in the same department most

likely would approve purchase orders, and also

A reconcile the open invoice file.

B inspect goods upon receipt.
C authorize requisitions of goods.
D negotiate terms with vendors.

10. Which of the following procedures would an auditor most likely perform in
searching for unrecorded liabilities?

A Trace a sample of accounts payable entries recorded just before year-end

to the unmatched receiving report file.
B Compare a sample of purchase orders issued just after year-end with the
year-end accounts payable trial balance.
C Vouch a sample of cash disbursements recorded just after year-end to
receiving reports and vendor invoices.
D Scan the cash disbursements entries recorded just before year-end for
indications of unusual transactions.

11. When using confirmations to provide evidence about the completeness assertion
for accounts payable, the appropriate population most likely would be

A Vendors with whom the entity has previously done business.

B Amounts recorded in the accounts payable subsidiary ledger.
C Payees of checks drawn in the month after the year-end.
D Invoices files in the entitys open invoice file.

Q7-3
12. Auditor confirmation of accounts payable balances at the balance sheet date may
be unnecessary because

A This 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 clients attorney will reveal all legal action
by vendors for non-payment.
D There is likely to be other reliable external evidence to support the
balances.

13. Which of the following is a substantive test that an auditor most likely would
perform to verify the existence and valuation of recorded accounts payable?

A Investigating the open purchase order file to ascertain that prenumbered

purchase orders are used and accounted for.
B Receiving the clients mail, unopened, for a reasonable period of time after
the year-end to search for unrecorded vendors invoices.
C Vouching selected entries in the accounts payable subsidiary ledger to
purchase orders and receiving reports.
D Confirming accounts payable balances with known suppliers who have
zero balances.

14. In auditing accounts payable, an auditors procedures most likely would focus
primarily on managements assertion of

A Existence or occurrence.
B Presentation and disclosure.
C Completeness.
D Valuation or allocation.

Q7-4
(II) Examination Style Questions

Question 1
Audit procedures Audit objectives
(a) Select a sample of trade creditor
balances and trace them to the
documentation supporting a
transaction or the transactions which
give rise to the balances.
(b) Review payments made subsequent
to the balance sheet date and unpaid
invoices.
(c) Send confirmations to all lenders
who have had dealings with the
client during the year.
(d) Select a sample of goods received
notes and trace them to entries in
purchase journal.
(e) Scrutinize the purchase journal for
large or unusual items.

Required:

Give the objectives or purposes of performing each of the above audit procedures.
(10 marks)
(HKAAT Paper 8 Auditing June 2004 Q.B4 (a)-(e))

Question 2
The following is an example of a substantive test designed to accomplish the given
audit objective:

Audit objective Substantive test

To ensure the completeness of all Prepare a reconciliation of the payroll
payroll cheques have been properly bank statement with payroll register
processed and recorded. payments. (Through the reconciliation
procedure, any pay cheques issued but
not recorded can be detected.

Q7-5
REQUIRED:

Design an efficient and effective substantive test to accomplish each of the following
audit objectives.

Audit objective Substantive test

(a) To ensure the completeness of
purchases.
(b) To ensure that there are no
unrecorded liabilities
(4 marks)
(HKIAAT Paper 8 Auditing June 2006 Q.B6 (d) and (i))

Question 3
The following is an example of a substantive test designed to accomplish the given
audit objective:

Audit objective Substantive test

To ensure the completeness of all Prepare a reconciliation of the payroll
payroll cheques have been properly bank statement with payroll register
processed and recorded. payments. (Through the reconciliation
procedure, any pay cheques issued but
not recorded can be detected.

REQUIRED:

Design an efficient and effective substantive test to accomplish each of the following
audit objectives.

Audit objective Substantive test

(a) To ensure that all purchases of
materials are properly recorded.
(b) To ensure that the creditors year
end balances are complete.
(c) Creditors shown in the creditors
listing exist.

Q7-6
 (6 marks)
(HKIAAT Paper 8 Auditing December 2006 Q.B6 (b) and (d))
(HKIAAT Paper 8 Auditing June 2007 Q.B6 (d))

Question 4

Q7-7
Required:

Identify TEN weaknesses of the materials requisition, purchases, goods received and
payment systems and make recommendations for improvement. There should be at
least one weakness and recommendation from each of the systems.
(20 marks)
(HKIAAT Paper 8 Auditing December 2007 Q.B5)

Question 5
The following audit procedures are commonly found in the audit of purchases and
payments cycle:
(a) Select a sample of transactions from the cash payments journal and vouch to
supporting documents.
(b) Perform year-end purchase cut-off test.
(c) Review payments made subsequent to balance sheet date and unpaid invoices.
(d) Select a sample of goods received note and trace to entries in cash payments
journal.
(e) Perform analytical procedures, such as review on the level of physical
production volume.
(f) Select a sample of trade creditors balances and trace to the documentation
supporting a transaction or the transactions which give rise to the balances.
(g) Scan the trial balance of creditors ledger for material debit balances.
(h) Scrutinise the purchase journal for large or unusual items.
(i) Sending confirmations to creditors.
(j) Select suppliers with zero balances for confirmation.

REQUIRED:

Give the objectives or purpose of performing each of the above audit procedures.
(20 marks)
(HKIAAT Paper 8 Auditing Pilot Paper 2001 Q.B4)

Q7-8