List five asset accounts, three liability accounts, and five expense accounts included in the acquisition and payment cycle for a typical manufacturing company.
18-2 (OBJECTIVES 18-2, 18-7) Distinguish between a vendor’s invoice and a vendor’s state- ment. Which document should ideally be used as evidence in auditing acquisition transactions and which is best when verifying accounts payable balances? Why?
18-3 (OBJECTIVES 18-2, 18-3) If an audit client does not have prenumbered checks, what type of misstatement has a greater chance of occurring? Under the circumstances, what audit procedure can the auditor use to compensate for the deficiency?
18-4 (OBJECTIVE 18-3) List one possible internal control for each of the seven transactionrelated audit objectives for cash disbursements. For each control, list a test of control to test its effectiveness.
18-5 (OBJECTIVE 18-3) List one possible control for each of the seven transaction-related audit objectives for acquisitions. For each control, list a test of control to test its effectiveness.
18-6 (OBJECTIVE 18-3) Evaluate the following statement by an auditor concerning tests of acquisitions and cash disbursements: “In selecting the acquisitions and cash disbursements sample for testing, the best approach is to select a random month and test every transaction for the period. Using this approach enables me to thoroughly understand internal control because I have examined everything that happened during the period. As a part of the monthly test, I also test the beginning and ending bank reconciliations and prepare a proof of cash for the month. At the completion of these tests I feel I can evaluate the effectiveness of internal control.”
18-7 (OBJECTIVE 18-3) What is the importance of cash discounts to the client and how can the auditor verify whether they are being taken in accordance with company policy?
18-8 (OBJECTIVE 18-3) What are the similarities and differences in the objectives of the following two procedures? (1) Select a random sample of receiving reports and trace them to related vendors’ invoices and acquisitions journal entries, comparing the vendor’s name, type of material and quantity acquired, and total amount of the acquisition. (2) Select a random sample of acquisitions journal entries and trace them to related vendors’ invoices and receiving reports, comparing the vendor’s name, type of material and quantity acquired, and total amount of the acquisition.
18-9 (OBJECTIVES 18-3, 18-6) Explain the relationship between tests of the acquisition and payment cycle and tests of inventory. Give specific examples of how these two types of tests affect each other.
18-10 (OBJECTIVE 18-4) Describe two major changes a client may make to its supply-chain management system and discuss how those changes might increase or decrease the risk of material misstatement in specific accounts.
18-11 (OBJECTIVE 18-5) Identify two types of substantive analytical procedures an auditor may perform in testing purchases.
18-12 (OBJECTIVE 18-6) The CPA examines all unrecorded invoices on hand as of February 28, 2020, the last day of the audit. Which of the following misstatements is most likely to be uncovered by this procedure? Explain.
a. Accounts payable are overstated at December 31, 2019.
b. Accounts payable are understated at December 31, 2019.
c. Operating expenses are overstated for the 12 months ended December 31, 2019.
d. Operating expenses are overstated for the two months ended February 28, 2020.*
18-13 (OBJECTIVE 18-7) Explain why it is common for auditors to send confirmation requests to vendors with “zero balances” on the client’s accounts payable listing but uncommon to follow the same approach in verifying accounts receivable.