Ch 14 - A/P

Question 1

T/F: The misappropriation of AP is ______ (high/low).

Answer 1

High

Question 2

A fraudster disguises payments to themselves by making them look like payments to a legitimate vendor/supplier

Answer 2

Fraudulent Billing Scheme

Question 3

T/F: Financial Reporting Fraud related to AP is low.

Answer 3

FALSE; it’s medium/high

Question 4

A liability with associated expenses

Answer 4

Accounts payable (AP)

Question 5

What assertion are we most concerned with for AP?

Answer 5

Completeness (focus on finding understatements- leaving out expenses/liabilities)

Question 6

What 3 assertions do we look at for AP?

Answer 6

1) Completeness
2) Cut-off
3) Presentation/Classification

Question 7

AP Turnover Ratio:

Answer 7

AP Payments / Average AP
OR
Cash Payments / Average AP

Question 8

What does the AP Turnover Ratio answer tell auditors?

Answer 8

Tells them how many times the client “pays off their A/P” in a year

Question 9

A declining A/P Turnover could be a warning sign of… (2 things)

Answer 9

1) Liquidity issues (not paying vendors)
2) Out of control expenses

Question 10

An increasing A/P Turnover may be a warning of…

Answer 10

Fraudulent Billings Scheme

Question 11

The A/P Clerk pays off vendor bills/liabilities without ever recording the liability/payment (understatement) is an example of mixing which segregated duties?

Answer 11

Custody & Recording

Question 12

A fake vendor that is actually an employee is created/approved and payments are sent to the fake vendor (Fraudulent Billing Scheme) is an example of mixing which segregated duties?

Answer 12

Authorization & Custody

Question 13

How do we test internal controls to ensure that AP is accurate?

Answer 13

1) Inquiries
2) Inspections
3) Observations

Question 14

These come from the Purchasing Dept. when the client needs a good/service for business purposes.

Answer 14

Purchase Orders

Question 15

These show when a good was delivered.

Answer 15

Receiving Reports

Question 16

These come from the vendor and show the goods/services provided and how much was charged.

Answer 16

Vendor Invoices/Bills

Question 17

Voucher packet system (3 documents):

Answer 17

1) POs
2) Receiving Reports
3) Vendor Invoices/Bills
** all are forms of proof

Question 18

T/F: There should be a list of approved vendors, and no vendor gets paid unless they are on the list.

Answer 18

True

Question 19

What is the best way to search for unrecorded A/P liabilities?

Answer 19

TRACE cash payments happening just AFTER the fiscal year end

(think: TAU- trace, after, unrecorded)

Question 20

Cut-off testing for AP is primarily concerned with _______ (early/delayed) recognition.

Answer 20

Delayed (push off A/P transactions until next period to make the F/S look better with less liabilities)

Question 21

For delayed recognition, we vouch ________ (before/after) & trace ______ (before/after)

Answer 21

Vouch - after
(think: VAD)

Trace - before
(think: TBD)

Question 22

F/S items for vouching AP:

Answer 22

1) AP Subledger
2) Expense Subledger

Question 23

Source docs for tracing AP:

Answer 23

1) Vendor Invoices
2) Receiving Docs

Question 24

T/F: Confirmation Letters are good at testing Completeness and bad at testing Existence.

Answer 24

False; GOOD at testing Existence, BAD at testing Completeness

Question 25

T/F: AP Confirmation Letters are required.

Answer 25

False; AP Confirmation Letters are optional! (required for AR)

Question 26

Assertions tested for A/P Confirmation Letters:

Answer 26

1) Completeness 2) Valuation

Question 27

T/F: Auditors send A/P Confirmations to vendors with large amounts of activity/billings.

Answer 27

True; NOT large balances but lots of business with the vendor

Question 28

Assertion tested for Fraudulent Billing Schemes:

Answer 28

1) Classification/Presentation (classified as a legitimate looking expense i.e. COGS instead of the proper theft expense classification)

Question 29

How to test for Fraudulent Billing Schemes?

Answer 29

1) Identify a list of suspicious vendors based on warning signs 2) Investigate the legitimacy of the vendors

Question 30

Warning signs of a fraudulent billing scheme:

Answer 30

1) Invoices for vague consulting services. 2) Unfamiliar/new vendors. 3) Vendors with lots of initials in the name. 4) Vendors with rapidly increasing billings. 5) Vendors billing more than once per month. 6) Vendor billings just under approval/review thresholds. 7) Vendors with only P.O. Boxes. 8) Vendor addresses that match employee addresses.

Question 31

We audit AP because... (3 reasons)

Answer 31

1) it's often material to F/S 2) it's often used to steal cash 3) it factors into the liquidity of the client

Question 32

What are the 3 purposes of management approval for new vendors?

Answer 32

1) helps prevent the creation of fraudulent vendors 2) helps ensure competitive prices 3) helps prevent nepotism/favoritism with vendors