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ACC 4010 - Auditing > Chapter 11 > Flashcards

Chapter 11 Flashcards

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1
Q

What assertions are most relevant for purchases and payables?

A

Completeness, accuracy, and cut-off

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2
Q

Which assertions are most relevant when auditing purchases and payables?

A

Completeness, accuracy, and cut-off.

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3
Q

Which assertions are most relevant when auditing payroll?

A

Occurrence, completeness, accuracy, and cut-off.

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4
Q

What transactions are included in payroll?

A

Salaries, wages, commissions, bonuses, and employee benefits.

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5
Q

What is the audit objective for the occurrence assertion in:

Purchases
Payroll expense

A

Purchases: Purchases recorded represent goods and services actually received during the period; payments reflect payments made to suppliers.

Payroll: Payroll expenses relate to services actually performed; payroll payments were made to employees during the period.

(Note: Payables and accrued payroll liabilities don’t test occurrence — they test existence.)

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6
Q

What is the audit objective for the completeness assertion in:

Purchases
Payables
Payroll expense
Accrued payroll liabilities

A

Purchases: All purchase transactions and payments that occurred during the period have been recorded.

Payables: All amounts owing to suppliers and creditors are recorded.

Payroll expense: All payroll expenses incurred during the period are recorded.

Accrued payroll liabilities: All amounts owing for payroll and deductions are recorded in accrued liabilities.

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7
Q

What is the audit objective for the accuracy assertion in:

Purchases
Payroll expense

A

Purchases: All purchases and payments are accurately recorded.

Payroll: All payroll expenses are accurately recorded.

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8
Q

What is the audit objective for the cut-off assertion in:

Purchases
Payroll expense

A

Purchases: All purchases and payments are recorded in the correct period.

Payroll: All payroll expenses are recorded in the correct period.

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9
Q

What is the audit objective for the existence assertion in:

Payables
Accrued payroll liabilities

A

Payables: Recorded payables and accrued liabilities represent amounts actually owed by the entity.

Accrued payroll liabilities: Accrued payroll liabilities recorded represent amounts owed by the entity.

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10
Q

What is the audit objective for the rights and obligations assertion in:

Payables
Accrued payroll liabilities

A

Payables: The liabilities are the entity’s obligations.

Accrued payroll liabilities: The accrued payroll liabilities are the obligations of the entity.

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11
Q

What is the audit objective for the valuation assertion in:

Payables
Accrued payroll liabilities

A

Payables: Recorded balances represent gross amounts owed and agree with the A/P sub-ledger.

Accrued payroll liabilities: Balances represent gross amounts owed and agree with the payroll register.

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12
Q

What is the audit objective for the classification, presentation, and disclosure assertion in:

Purchases
Payables
Payroll expense
Accrued payroll liabilities

A

All purchases, payables, payroll expenses, and accrued payroll liabilities are:

Recorded in the correct accounts

Appropriately presented

Properly disclosed in the financial statements

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13
Q

Why is segregation of duties important in the purchases and payments cycle?

A

To reduce the risk of fraudulent purchases or misappropriation of assets, such as personal orders or unauthorized payments.

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14
Q

What risk is reduced by separating requisitioning from ordering?

A

Reduces the risk of ordering goods for personal use or bypassing approval processes.

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15
Q

Why should ordering be separated from receiving?

A

To prevent ordering and accepting goods for personal benefit without detection.

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16
Q

What fraud risk is addressed by separating ordering from payment approval?

A

Prevents employees from both ordering and approving payment for unauthorized or fictitious purchases.

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17
Q

Who is typically authorized to requisition goods or services?

A

Individuals with specific authority based on their role and responsibility within the entity.

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18
Q

What types of purchases usually require special requisition procedures?

A

Capital asset purchases

Complex agreements requiring technical expertise

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19
Q

What control is needed when inventory systems automatically reorder stock?

A

Access to the system must be restricted to prevent unauthorized transactions.

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20
Q

Why are purchase requisitions often pre-numbered and multi-copy?

A

To ensure authorization, budgetary accountability, and support the occurrence assertion.

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21
Q

Who is responsible for placing orders for goods and services?

A

The purchasing department, after receiving an approved requisition.

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22
Q

What are the responsibilities of the purchasing department?

A

Selecting suppliers

Obtaining best price and quality

Obtaining and evaluating competitive bids for major purchases

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23
Q

Why are purchase orders pre-numbered and approved?

A

To ensure purchases are authorized and valid, supporting the occurrence assertion.

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24
Q

What key information must be included on a purchase order?

A

Description of goods/services

Quantity

Price

Delivery instructions

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25
What must the receiving department verify before accepting a delivery?
That the delivery is supported by an approved purchase order.
26
What should the receiving department do upon receiving goods?
Inspect the goods and compare them to the purchase order; note any discrepancies or damage, or refuse the goods.
27
What is the purpose of a pre-numbered receiving report?
To document the quantity and quality of goods received and support the occurrence assertion.
28
What documentation provides audit evidence that goods were received?
The receiving report and packing slip.
29
Which department is responsible for checking and approving supplier invoices?
The accounting department.
30
What documents are matched to verify the validity of a supplier invoice?
Purchase requisition Purchase order Receiving report
31
Which assertions are supported by matching supplier invoices to other documents?
Occurrence and accuracy.
32
How is the accuracy of a supplier invoice verified?
By recalculating invoice totals to ensure mathematical correctness.
33
How is a supplier invoice formally approved for payment?
By having an authorized person sign the invoice after all checks are completed.
34
What is the purpose of the approval grid on a supplier invoice?
To record key verification steps and initials of those who performed them — ensuring accountability and audit evidence.
35
Where are approved supplier invoices recorded?
In the accounts payable sub-ledger, with totals posted to inventory and the general ledger.
36
What regular reconciliation should be performed involving the accounts payable sub-ledger?
It should be reconciled to the general ledger, and any discrepancies must be investigated promptly.
37
What external document should be reconciled with the accounts payable sub-ledger?
Monthly supplier statements, to confirm recorded supplier balances.
38
In online systems, what happens when a supplier invoice is entered?
It is immediately processed, and the system automatically performs verification, approval, and real-time updates to A/P, inventory, and GL.
39
When is manual follow-up required in online A/P systems?
Only when programmed application controls reject an invoice.
40
Which assertions are supported by regular A/P reconciliation and automated controls?
Completeness, accuracy, and valuation.
41
What key segregation of duties should exist in the payment process?
The person recording liabilities should not be the person executing payments.
42
What are the two common methods of making payments to suppliers?
Cheques (less common now) Electronic funds transfers (EFTs)
43
Who should authorize cheques or EFTs?
Someone not involved in initiating or processing purchases — typically a Controller or CFO.
44
What must support each cheque or EFT before payment is approved?
An approved supplier invoice that matches the payee and amount.
45
What control helps prevent duplicate payments?
Cancelling supplier invoices after payment or using system controls to prevent reuse.
46
How is access to cheques and electronic signatures controlled?
Use of pre-numbered cheques and restricted access to blank cheques and digital approvals.
47
What should each cheque or EFT include to clarify what’s being paid?
A remittance advice or reference to the supplier invoices being paid.
48
What is the primary fraud risk in payroll?
Overstatement of payroll (not understatement), such as payments to fictitious or overpaid employees.
49
What is the term for payroll fraud involving non-existent employees?
“Horses on the payroll” — payments made to fictitious employees.
50
What are three common forms of payroll fraud?
Payments to fictitious employees Payments for unearned hours/services Payments at unauthorized rates
51
Which assertion is most critical for auditing payroll?
Occurrence — ensuring payroll relates to real, authorized work performed by real employees.
52
Why is understatement of payroll generally not a significant audit concern?
Because employees would complain if they were underpaid.
53
What types of executive-level payroll or benefit abuses should auditors monitor?
Abuse of compensation, travel, and hospitality spending privileges.
54
What should auditors look for in payroll records to detect fraud?
Unusual adjustments or suspicious/abnormal activity in payroll transactions.
55
Why can the auditor often assess control risk for payroll as low?
Because most entities have strong payroll controls, allowing a combined audit strategy.
56
Why is segregation of duties important in the payroll cycle?
To minimize the risk of payroll fraud, such as fictitious employees or unauthorized pay increases.
57
How does separating personnel (HR) and payroll processing reduce fraud risk?
Only HR can hire and authorize pay changes, and only payroll can process payments — this prevents one person from creating and paying fictitious employees.
58
What is a common type of fraud that segregation in payroll helps prevent?
Payments to fictitious employees or unauthorized salary changes.
59
Who is typically responsible for hiring and terminating employees?
The human resources (HR) department, with input from relevant departments.
60
Who typically sets executive salaries and benefits?
The Board of Directors.
61
What form documents the hiring of an employee?
A personnel authorization form.
62
What happens after the personnel authorization form is completed?
Info is entered into the employee master file One copy is kept in the employee file Another copy is sent to the payroll department
63
Who usually initiates a change in an employee’s job classification or wage rate?
The employee’s supervisor.
64
Who must review and approve payroll changes before they're entered into the employee master file?
The personnel (HR) department, in writing.
65
What should the HR department issue when an employee leaves, and why?
A termination notice to payroll, to prevent continued payment to former employees.
66
Which audit assertion is most supported by controls over timekeeping and payroll changes?
Occurrence – ensuring employees are paid only for authorized hours and wage rates.
67
What data is used to calculate payroll?
Employee master file Attendance/timekeeping data
68
What is an example of a reasonableness test during payroll calculation?
Checking for unusually high hours worked.
69
Where are payroll calculation details recorded?
In a payroll transaction file, which is used to prepare the payroll register and update the general ledger.
70
What does a payroll service provider do?
Calculates payroll based on input from the entity and provides detailed payroll reports used for paying employees and recording payroll in the GL.
71
Which assertions are most supported by edit checks and payroll recording procedures?
Accuracy and completeness.
72
What must happen before payroll is paid?
The detailed payroll register must be reviewed and approved by a supervisor.
73
Why is direct deposit preferred over paper cheques?
It reduces the risk of cheque misuse, such as theft or forgery.
74
Why do entities use a payroll imprest account?
To improve control and traceability over payroll payments.
75
What is a payroll imprest bank account?
A dedicated bank account used only for payroll, where all payroll payments are drawn.
76
Why must auditors assess RMM for purchases and payroll?
Because they are typically material transaction areas in most entities.
77
What is the first step in developing the audit strategy for purchases and payroll?
Understanding the entity to develop expectations for cost of sales, gross margins, expenses, and payables.
78
What should an auditor do if actual financial amounts differ from expectations?
Treat it as a potential risk and perform additional audit procedures to address the discrepancy.
79
Which audit assertions are typically targeted through analytical procedures in purchases and payroll?
Primarily accuracy, completeness, and valuation.
80
Why might management understate expenses in the purchases cycle?
To meet sales or profitability targets, often by not recording expenses or using cut-off errors.
81
Why might payables be understated in financial statements?
To improve working capital or avoid going-concern concerns, often through unrecorded liabilities.
82
What are two examples of complex accounting judgments that pose inherent risk?
Estimating warranty provisions Deciding whether to expense or capitalize repairs
83
What are three common types of fraud risk in the purchases cycle?
Unauthorized purchases (abuse of authority) Misappropriation of assets (employee theft) Kickbacks from suppliers
84
What is the major inherent risk in the payroll cycle?
Overstatement of payroll, including fictitious employees or inflated hours/rates.
85
Which audit assertion is most at risk from unrecorded expenses or payables?
Completeness
86
How does the control environment affect the auditor’s testing approach?
It can enhance or negate control effectiveness, influencing whether the auditor can rely on controls.
87
When controls are assessed as effective, what audit strategy can the auditor adopt?
A combined audit strategy, using both tests of controls and substantive procedures.
88
Is the decision to test controls made for the entire process or each assertion?
Separately for each assertion.
89
What direction is used to test the occurrence assertion?
Vouching (backward: from records to source documents).
90
What direction is used to test the completeness assertion?
Tracing (forward: from source documents to accounting records).
91
What are dual-purpose tests?
Tests that provide both control testing and substantive evidence, such as checking supplier invoice approval and liability recording.
92
When using dual-purpose tests, how is control effectiveness assessed?
By evaluating the number of control deviations, not the size of monetary errors.
93
How does detection risk affect the auditor’s approach?
It determines the nature, timing, and extent of substantive procedures.
94
How is the acceptable level of detection risk determined?
By considering the combined assessment of inherent risk and control risk for each assertion.
95
What role does professional judgment play in planning substantive procedures?
Auditors must use judgment to evaluate risks and design appropriate procedures for each assertion.
96
How does the auditor verify the opening balances for payables?
By tracing them to the prior year’s working papers and checking the accuracy of the payables listing.
97
What is the purpose of performing analytical procedures on purchases and payables?
To identify unexpected fluctuations and obtain corroborating explanations.
98
What is tested by vouching a sample of purchases and payables to supporting documentation?
The occurrence assertion — ensuring recorded transactions are valid.
99
Why are cut-off tests performed on purchases and payments?
To ensure transactions are recorded in the correct period.
100
What is the purpose of reconciling payables with supplier statements?
To confirm the completeness and accuracy of recorded payables.
101
What audit assertion is addressed by searching for unrecorded liabilities?
Completeness — ensuring all payables that exist at year-end are recorded.
102
What is the primary audit procedure used to identify unrecorded liabilities?
Testing subsequent payments made after year-end.
103
How can analytical procedures help identify unrecorded liabilities?
By identifying unexpected differences in year-end payable balances (e.g., lower than expected).
104
How is the opening balance for accrued payroll liabilities verified?
By tracing it to the prior year’s working papers.
105
What is the purpose of analytical procedures in the payroll audit?
To identify unexpected differences and obtain corroborating explanations.
106
What is tested by recalculating a sample of payroll transactions?
The accuracy of payroll amounts (can also be part of a dual-purpose test).
107
How does the auditor test accrued payroll liabilities?
By recalculating the year-end accrual using payroll records and timesheets.
108
What additional procedure is performed for governance-level payroll review?
Verifying director and executive officer remuneration, and testing travel/hospitality expenses for validity.
109
Why does the auditor review payroll-related financial statement disclosures?
To ensure proper classification, presentation, and disclosure, especially for key management compensation.

ACC 4010 - Auditing (14 decks)

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