Professional Documents
Culture Documents
4-1. Transactions in the expenditure cycle are recorded in the purchases and cash
payments journal or in the voucher register and the check register. Relevant
accounts are cash; vouchers payable; inventory, property, plant and equipment;
purchases; purchase returns and allowances; purchase discounts; prepaid rent and
other prepaid accounts; and expense accounts.
4-2. Errors that occur in the expenditure cycle include recording purchases in the
wrong period (cutoff errors), recording goods held on consignment as a purchase,
misclassifying purchases, failing to record payments, recording payments twice,
and failing to recognize prepaid expenses. Irregularities often relate to purchases
and include paying for fictitious purchases, purchasing goods for personal use,
and obtaining kickbacks.
4-3. Audit objectives for acquisitions transactions are to verify the following
assertions:
Existence or occurrence: Recorded acquisitions are for items that were
acquired.
Completeness: Acquisitions that occurred are recorded.
Rights and obligations: Recorded acquisitions are the entity’s purchases and
liabilities.
Valuation or allocation: Acquisitions are recorded for the proper amounts.
Presentation and disclosure: Acquisitions are recorded to result in
presentation and disclosure in accordance with GAAP.
4-4. The following misstatements could arise if controls for payments are ineffective:
Existence or occurrence
Unauthorized or inappropriate payments may be made.
Completeness
Checks may be issued and not recorded.
Rights and obligations
Unauthorized payments may be made.
4-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition
Valuation or allocation
Improper amounts may be paid because of math errors or incorrect discount.
Account may not reconcile or discrepancy may not be disclosed.
Presentation and disclosure
Payments may be credited to wrong accounts.
4-5. A vendor’s invoice is a bill for a single purchase, whereas the vendor’s monthly
statements report the beginning balance, additional sales, any payments, and the
ending balance. Auditors reconcile the monthly statements to the details included
in the vouchers payable listing to ascertain that all vouchers payable are recorded.
Vendors’ statements are generally considered to be a strong form of evidence
about amounts owed to particular vendors.
4-6. 1) a 2) b 3) c
4-7. 1) b 2) c 3) c
4-8. 1) d 3) a 5) b 7) c
2) a 4) d 6) a
4-9. 1) b 2) b 3) c
4-10. 1) d 2) a
4-12. 1) a 2) b
a. Those internal accounting control procedures that Long would expect to find if
Maybelle’s system of internal control over purchases is effective are as follows:
Purchase requisitions are prepared and/or approved only after there has been
a proper determination of the need for the goods requested.
One copy of the purchase requisition is maintained on file in the stores
department.
Purchase requisitions are approved by a responsible person in the stores
department. Approval is given only after that person is satisfied that a need
exists and that the requisition is properly prepared. Approval is clearly
indicated on requisitions.
Purchase orders are issued only after they are approved by persons given the
specific responsibility to make such approval.
Vendors are requested to confirm purchase orders. This indicates
acceptance and constitutes a contractual commitment.
Purchase requisitions are filed with purchase orders, and both are maintained
in an orderly file in the purchase office.
Copies of purchase orders sent to the receiving department do not include
the quantities of merchandise ordered.
All purchase orders are numbered, and all numbers are accounted for. This
allows control over purchase orders canceled or rejected by vendors.
Receiving department accepts only those goods for which a purchase order
is on hand.
4-6 Solutions Manual to Accompany Applied Auditing, 2006 Edition
2. a. Existence of liability
b. Documents may be reused and acquisitions may be recorded twice.
c. Examine cancellations on documents.
d. Scan voucher register for duplicate payments.
3. a. Existence or occurrence
b. Unauthorized payments may be made or checks may never be mailed.
c. Inquire and observe that authorized individual signs and promptly mails
checks.
d. Examine paid checks for appropriate signature.
4. a. Valuation
b. Improper amounts may be paid because of math errors or incorrect
discounts.
c. Examine signature on invoice indicating calculation has been verified.
d. Recalculate paid invoices.
5. a. Existence or occurrence
b. Acquisitions that did not occur may be recorded.
c. For a sample of cash payments, examine a purchase requisition, purchase
order, receiving report, and vendor’s invoice filed in support of each
acquisition.
d. Scan voucher register for large or unusual items.
6. a. Completeness
b. Acquisitions or payments may not be recorded.
c. Examine reconciliations.
d. Perform reconciliations.
Audit of the Expenditure Cycle: Tests of Controls and Substantive Tests of Transactions – I 4-7
4-17. a. For the four conditions, the following risks are incurred:
1. Buyers would not be officially notified of the strict code of conduct to
which management expects them to adhere. Buyers could deny that they
were expected to conform to a prescribed code of conduct.
2. Only favored suppliers may be asked to bid. Low-cost supplier may be
excluded.
3. Bids from favored suppliers could be retained. Bids from nonfavored
suppliers could be discarded.
4. The defect was caused by a minor human error. The procedure seems to
be adequate and requires no improvement.