Chapter 8: Acquisition and Expenditure Cycle

Question 1

To reflect the consumption of economic benefits, GAAP prescribes that ____ be charged to income.

Answer 1

expenses

Question 2

The expenditure cycle begins when an individual or department that needs supplies, equipment or services sends a ____ to the purchasing department.
- purchase requisition
- bill of lading
- receiving report
- pruchase order

Answer 2

purchase requisition

Question 3

Once an appropriate vendor is selected for the goods or services, a(n) __ __ is sent to the selected vendor.

Answer 3

purchase order

Question 4

When goods are delivered the bill of lading must be matched to the ________ on file to ensure only the correct items are received.
- approved vendor list
- purchase requisition
- purchase order
- receiving report

Answer 4

purchase order

Question 5

According to the FASB Statement of Concepts, expenses may be recognized when they are ____. (Select all that apply)
- incurred
- allocated to future periods
- paid in cash
- matched to revenue

Answer 5

• incurred
• allocated to future periods
• matched to revenue

Question 6

Copies of the purchase order, vendor invoice and receiving report are contained in the ____ ____.

Answer 6

voucher package

Question 7

The most significant risks in the expenditure cycle generally relate to the ____ of expenditures and ____ of acquisitions.

Answer 7

completeness; valuation

Question 8

Because management may desire to improve the books by not recording an obligation in the correct period, _ and ____ are important assertions for accounts payable.

Answer 8

completeness; cutoff

Question 9

A “shell” company is used by an employee to ______.
- receive kickbacks on orders
- receive fictitious payments
- misdirect purchases for personal benefit

Answer 9

receive fictitious payments

Question 10

Expenses may be improperly classified to ______. (Select all that apply)
- lower total expenses
- decrease cost-plus contract expenses
- increase total assets

Answer 10

• lower total expenses
• increase total assets

These both occur when ordinary expenses are capitalized

Question 11

When goods arrive at a company, they are accompanied by a ______.
- bill of lading
- receving report
- purchase order
- purchase requisition

Answer 11

bill of lading

Question 12

Risks in the acquisition and expenditure cycle include ______. (Select all that apply)
- unrecorded assets
- noncancelable purchase agreements
- canceled purchase orders
- uncrecorded liabilities

Answer 12

• noncancelable purchase agreements
• uncrecorded liabilities

Question 13

A voucher package generally includes copies of the ___. (Select all that apply)
- purchase requisition
- receiving report
- purchase order
- vendor invoice
- billing of lading

Answer 13

• receiving report
• purchase order
• vendor invoice

Question 14

Because individuals may attempt to run personal expenses through accounts payable, the ____ of expenses is a significant risk in the expenditures cycle.
- completeness
- validity
- existence
- valuation

Answer 14

validity

Question 15

The primary relevant assertions for accounts payable are ______. (Select all that apply)
- cutoff
- classification
- completeness
- valuation

Answer 15

• cutoff
• completeness
• valuation

Question 16

True or false: Periodic comparison or reconciliation of existing assets to recorded amounts includes reviewing unmatched purchase orders, receiving reports and invoices.

Answer 16

True

Question 17

Selecting a sample of closed purchase orders and tracing them to the accounts payable journal provides evidence of ______.

Answer 17

completeness

Question 18

While the “three-way match” may be the most important control in the purchasing cycle, a problem in matching the documents can lead to ______. (Select all that apply)
- overstated costs
- unrecorded liabilities
- overstated profits

Answer 18

• unrecorded liabilities (AKA understating costs)
• overstated profits

Question 19

Entity-level controls over the expenditure process include ______. (Select all that apply)
- document security
- proper authorization
- limits on the number of approved vendors
- corporate values and ethics
- management review

Answer 19

• document security
• proper authorization
• corporate values and ethics
• management review

Question 20

When considering assertions and obtaining evidence about accounts payables and other liabilities, auditors must emphasize the ____ assertion.

Answer 20

completeness

Question 21

Selecting a sample of cash disbursements from the accounting period following the balance sheet date and vouching them to supporting documents is a procedure that is useful in the search for ____ ___.

Answer 21

unrecorded liabilities

Question 22

Periodic reconciliations of existing assets to recorded amounts include comparing ______. (Select all that apply)
- detailed fixed assets records to inspected fixed assets
- accounts payable records to purchase orders
- inventory records to a physical inventory account
- an accounts payable trial balance to the control account

Answer 22

• detailed fixed assets records to inspected fixed assets
• inventory records to a physical inventory account
• an accounts payable trial balance to the control account

For accounts payable records to purchase orders, the records should be compared to vendors’ monthly statements

Question 23

Tracing the date of receipt to the date in the voucher journal provides evidence of ____.

Answer 23

cutoff

Question 24

Auditors should examine the open purchase order file to find evidence of ______.
- understated expenses
- goods received but not recorded
- unrecorded liabilities
- losses on purchase commitments

Answer 24

losses on purchase commitments

Question 25

To find evidence of unrecorded liabilities, auditors should inspect the ______. - purchases journal - open purchase order file - unmatched receiving reports - accounts (vouchers) payable trial balance

Answer 25

- unmatched receiving reports

Question 26

T/F: Evidence is more difficult to obtain to support the completeness assertion than the existence assertion

Answer 26

True

Question 27

The search for unrecorded liabilities is normally performed from the audit client's ______. - beginning of the year to the date of the audit report - balance sheet date to the date of the audit report - beginning of the year to the balance sheet date

Answer 27

balance sheet date to the date of the audit report

Question 28

physical cut-off must be tested_____. - only at year-end - only in conjuction with the observation of the phsyical inventory count - both at year-end and in conjuction with the observation of the physical inventory count - either at year-end or in conjunction with the observation of the physical inventory count

Answer 28

both at year-end and in conjuction with the observation of the physical inventory count

Question 29

To search for unrecorded liabilities, auditors should inspect and compare the unmatched receiving report file with the ___ __ file.

Answer 29

unmatched invoice

Question 30

The accounts payable trial balance should agree with the accounts payable ___ __.

Answer 30

control account

Question 31

Specific assertions related to the valuation of PP&E include B______. (More than one answer may be correct.) - depreciation is properly allocated - asset cost includes freight-in - goodwill is not impaired - no repair & maintenance costs should be capitalized

Answer 31

- depreciation is properly allocated - asset cost includes freight-in - goodwill is not impaired ## Footnote no repair & maintenance costs should be capitalized (relates to completeness assertion)

Question 32

Selecting a sample of cash disbursements from the accounting period following the balance sheet date and vouching them to supporting documents is a procedure that is useful in the search for ___ ___.

Answer 32

unrecorded liabilities

Question 33

Which of the following statements are correct? (Select all that apply) - miscellaneous expenses do not need to be audited - if the risk material misstatement is high, expenses can be tested using tests of controls - maintenance and repair expenses should be examined for items requiring capitalization - most expenses can be tested along with related assets and liabilities

Answer 33

- maintenance and repair expenses should be examined for items requiring capitalization - most expenses can be tested along with related assets and liabilities ## Footnote For: if the risk material misstatement is high, expenses can be tested using tests of controls (tests of details)

Question 34

Which of the following statements are correct? (Select all that apply) - the accounts payable trial balance should agree with the accounts payable control account - vendor(s) with a zero balance should be excluded from the trial balance - the search for unrecorded liabilities should emphasize large accounts - records may be kept by individual voucher instead of by vendor name

Answer 34

- the accounts payable trial balance should agree with the accounts payable control account - records may be kept by individual voucher instead of by vendor name ## Footnote the search for unrecorded liabilities should emphasize large accounts (small and zero balance accounts should be emphasized)