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Weekly Review Quiz #338 - AUD: Current Liabilities

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Question 1

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

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

The correct answer is: C.

A. Incorrect... Vouching a sample of accounts payable entries recorded just before year end to the unmatched receiving report file will not enable the auditor to detect an unrecorded liability. Working from the accounts payable records means that the auditor is verifying existing accounts payable, rather than searching for unrecorded payables.

B. Incorrect... Comparison of a sample of purchase orders issued just after year end to the year-end accounts payable trial balance is not an appropriate procedure to perform in the search for unrecorded liabilities. Purchase orders do not become liabilities until the goods are received.

C. Correct! Vouching a sample of cash disbursements recorded just after year end to receiving reports and vendor invoices would enable the auditor to determine if the goods were actually received or owned before year end. As a result, the amounts paid after year end would need to be accrued as year-end liabilities.

D. Incorrect... Scanning the cash disbursements entries recorded just before year end for indications of unusual transactions will not enable the auditor to detect unrecorded liabilities. Again, the auditor is looking at recorded items, so work performed would verify existence, rather than be a good test for completeness.

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Question 2

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

  1. Reconcile receiving reports with related cash payments made just prior to year end
  2. Contrast the ratio of accounts payable to purchases with the prior year's ratio
  3. Vouch a sample of creditor balances to supporting invoices, receiving reports, and purchase orders
  4. Compare cash payments occurring after the balance sheet date with the accounts payable trial balance

The correct answer is: D.

A. Incorrect... Reconciliation of receiving reports with cash payments made just prior to year end provides support for the existence of the purchases made. To provide evidence for unrecorded liabilities, receiving reports would be compared to cash payments made after year end.

B. Incorrect... Comparing the ratio of accounts payable to purchases for the current and prior years might indicate a problem in the recording of liabilities. Additional procedures would then need to be performed to try to detect specific unrecorded liabilities.

C. Incorrect... Vouching creditor balances to supporting invoices, receiving reports, and purchase orders provides evidence of the existence of recorded accounts payable. It would not identify unrecorded payables.

D. Correct! In searching for unrecorded payables, the auditor would look at disbursements made after year end to see if they should have been, and were, properly recorded as payables at year end.

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Question 3

An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to:

  1. Identify unusually large purchases that should be investigated further.
  2. Verify that cash disbursements were for goods actually received.
  3. Determine that purchases were properly recorded.
  4. Test whether payments were for goods actually ordered.

The correct answer is: C.

A. Incorrect... Tracing a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal will not enable the auditor to identify unusually large purchases. To identify such purchases, the auditor needs to scan the population of recorded purchases in the purchases journal.

B. Incorrect... Tracing a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal will not enable the auditor to verify that cash disbursements were for goods actually received. To verify cash disbursements, the auditor must start with the population of cash disbursements in the cash disbursements journal.

C. Correct! Tracing a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal will enable the auditor to determine that the purchases were properly recorded. Going from the detail into the records tests for the proper inclusion and recording of the items.

D. Incorrect... Tracing a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal will not enable the auditor to test whether payments were for goods actually ordered. To test payments, the auditor must start with the population of payments from the cash disbursements journal.

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Question 4

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?

  1. Investigating the open purchase order file to ascertain that prenumbered purchase orders are used and accounted for.
  2. Receiving the client's mail, unopened, for a reasonable period of time after the year end to search for unrecorded vendor's invoices.
  3. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.
  4. Confirming accounts payable balances with known suppliers who have zero balances.

The correct answer is: C.

A. Incorrect... Investigating the open purchase order file to ascertain that prenumbered purchase orders are used and accounted for aids in the verification of completeness. Completeness addresses whether or not all transactions have been properly included.

B. Incorrect... Receiving the client's mail, unopened, for a reasonable period of time after the year end to search for unrecorded vendor's invoices might aid the auditor in verifying completeness. Completeness addresses whether or not all transactions have been properly included. It is highly unlikely that this procedure would be performed.

C. Correct! Existence pertains to whether or not the liabilities are valid, while valuation addresses the accurate reporting of the amount. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports enables the auditor to verify both existence and valuation. By starting with recorded payables and then tracing to supporting documentation, the auditor verifies existence. The supporting documentation also provides proof of proper valuation.

D. Incorrect... Confirming accounts payable balances with known suppliers who have zero balances aids the auditor in verifying completeness. Completeness addresses whether all transactions have been properly included.

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Question 5

Which of the following audit procedures is best for identifying unrecorded trade accounts payable?

  1. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period
  2. Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports
  3. Examining unusual relationships between monthly accounts payable balances and recorded cash payments
  4. Reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date

The correct answer is: A.

A. Correct! The procedures used to identify unrecorded trade accounts payable are included in the basket of procedures performed as the search for unrecorded liabilities. Reviewing subsequent cash disbursements enables the auditor to detect items purchased before year end but not yet recorded, i.e., unrecorded accounts payable.

B. Incorrect... Investigating payables recorded before and after year end to see if they are supported by receiving reports verifies the existence and validity of recorded payables. It does not provide the best evidence for completeness, i.e., identifying unrecorded payables.

C. Incorrect... Analytical procedures such as the investigation of unusual relationships between recorded payables and recorded payments might provide some evidence for the completeness of payables. However, stronger evidence for completeness would be obtained from reviewing subsequent cash disbursements.

D. Incorrect... While it is appropriate to look at receiving reports to identify items received just prior to year end that may not have been recorded as payables, the reports need to be compared to recorded accounts payable, not the vendors' statements.

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End of Quiz

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