Which of the following activities is not an activity associated with the acquisition and payment cycle?
a. Receive a customer purchase order.
b. Purchase of goods and services.
c. Receipt of goods and services.
d. Approval of items for payment.
Which of the following is not an inherent risk relating to inventory?
a. Inventory accounts typically experience a high volume of activity.
b. Identifying obsolete inventory and applying the lower of cost or market principle to determine valuation are difficult.
c. Inventory accounts may be valued according to various accounting valuation methods.
d. Sales contracts may contain unusual terms, and revenue recognition is often complex.
Which of the following is an example of fraud in the acquisition and payment cycle?
a. Theft of inventory by an employee.
b. Employee schemes involving fictitious vendors as means to transfer payments to themselves.
c. Executives recording fictitious inventory or inappropriately recording higher values for existing inventory.
d. All of these.
Which of the following audit procedures would an auditor use to test the existence assertion for inventory?
a. Make inquiries of the client regarding the segregation of duties between the purchasing department and the receiving department.
b. Make inquiries of the client regarding allowances made for expected returns.
c. Review the client's proposed physical inventory procedures to determine whether they are likely to result in a complete and correct physical inventory.
d. Perform year-end cutoff tests by noting the last shipping and receiving document numbers used before the client takes physical inventory.
Which of the following audit procedures would an auditor use to test the valuation or allocation assertion for inventory?
a. Inquire of production and warehouse personnel about the existence of obsolete inventory.
b. Test inventory cost by taking a sample of recorded inventory, and trace to source documents indicating cost of inventory.
c. Inquire of the client about sales adjustments (markdowns) that have been offered to sell any products.
The audit of inventory can be complex because inventory is easily transportable, exists at multiple locations, may become obsolete, and may be difficult to value.
Two important complexities in auditing inventory arise because inventory accounts experience a high volume of activity and are valued according to various inventory valuation methods.
A planning analytical procedure in the acquisition and payment cycle that might indicate fraud is that inventory is growing at a rate greater than sales.
When conducting the audit of acquisition and payment cycle accounts, the auditor will likely conduct less substantive tests for companies with effective internal controls than for companies with ineffective internal controls.
A substantive procedure appropriate for testing the existence of inventory would be to perform year-end cutoff tests by noting the last shipping and receiving document numbers used before the physical inventory count is taken.
