Auditing and Assurance Services, 15e, Global Edition (Arens)

Chapter 18 Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive
Tests of Transactions, and Accounts Payable

1) The overall objective in the audit of the acquisition and payment cycle is:
A) to ensure the reliability of the affected accounts.
B) to ensure the accuracy of the affected accounts.
C) to evaluate whether the affected accounts are fairly presented in accordance with accounting
standards.
D) to evaluate whether fraudulent payments were made.
Answer: C

2) Which of the following accounts is not part of the acquisition and payment cycle?
A) Prepaid expenses
B) Accounts payable
C) Sales returns and allowances
D) Property, plant, and equipment
Answer: C

3) What typically initiates the acquisitions and payment cycle?

A) Issuance of a purchase requisition or request for purchase of goods/services
B) Issuance of payment to vendor
C) Approval of a new vendor
D) Purchase requisition
Answer: A

4) What typically ends the acquisitions and payment cycle?

A) Issuance of a purchase requisition or request for purchase of goods/services
B) Issuance of a payment on accounts payable
C) Approval of a new vendor
D) Purchase requisition
Answer: B

5) Which of the following accounts is not included in the acquisitions class of transactions?
A) Inventory
B) Prepaid expenses
C) Purchase discounts
D) Accounts payable
Answer: C

6) A document indicating a reduction in the amount owed to a vendor because of returned goods
is:
A) a debit memo.
B) a credit memo.
C) a receiving report.
D) a contractual adjustment form.
Answer: A

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7) A document used by organizations to establish a formal means of recording and controlling
acquisitions which usually contains a package of documents about the acquisition is the:
A) voucher.
B) purchase order.
C) receiving report.
D) purchase requisition.
Answer: A

8) The computer-generated file which records acquisitions, disbursements and allowances for
each vendor is the:
A) Accounts payable master file.
B) Cash disbursements file.
C) Acquisitions transaction file.
D) Purchase approval file.
Answer: A

9) Which of the following business functions is not considered to be part of the acquisitions class
of transactions?
A) Processing purchase orders
B) Recognizing liabilities
C) Receiving goods and services
D) Processing cash disbursements
Answer: D

10) Smaller privately held companies may not maintain an accounts payable master file by
vendor. These companies pay on the basis of:
A) vendors' monthly statements.
B) individual vendors' invoices.
C) the accounts payable account in the general ledger.
D) dunning letters.
Answer: B

11) A document generally received from the vendor which indicates a reduction in the amount
owed due to the company granting an allowance is a:
A) vendor invoice.
B) debit memo.
C) credit adjustment form.
D) credit memo.
Answer: B

12) Absent disputed amounts and minor timing differences, the vendor's statements should
reconcile to the:
A) acquisition journal.
B) accounts payable master file.
C) cash disbursements amount for purchases.
D) vouchers payable amount for vendors.
Answer: B

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13) You have been assigned to the accounts payable transaction cycle as part of your auditing
responsibilities. You have decided to vouch a sample of entries in the accounts payable master
file to supporting documents. Which assertion is this test of controls most likely to support?
A) Accuracy
B) Classification
C) Completeness
D) Occurrence
Answer: D

14) An auditor is gathering evidence on the completeness assertion. To do so she performs a test
to verify that all goods received by the company have been recorded properly. The document
population for this test would consist of all:
A) vendor invoices.
B) purchase orders.
C) receiving reports.
D) cash disbursements for accounts payables.
Answer: C

15) Which of the following is not an accurate statement regarding the acquisition and payment
cycle?
A) The personnel in the receiving department should be independent of the storeroom personnel.
B) Goods received should be physically controlled from the time of their receipt until their use or
disposal.
C) Accounting records should transfer responsibility for the goods each time they are moved.
D) The accounting department should be responsible for receiving goods and preparing the
receiving report.
Answer: D

16) When reviewing the controls and procedures in the acquisition and payment cycle:
A) companies cannot record the liability for the acquisition until the invoice is received from the
vendor.
B) the purchasing department has the responsibility for verifying for appropriateness of the
acquisition.
C) personnel who record the acquisitions should not have access to cash or other assets.
D) the accounts payable department should account for all receiving reports to assure that the
occurrence objective is satisfied.
Answer: C

17) A written purchase order is a contractual document that is:

A) an offer to buy goods or services.
B) not enforceable if it is not in writing.
C) a binding agreement between purchaser and vendor.
D) an acceptance of a vendor's catalog offer to sell.
Answer: A

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18) Which one of the following duties should not be assigned the purchases department?
A) Finding the lowest cost vendor
B) Reviewing vendors' catalog descriptions and prices for standardized items
C) Designing the purchase order form
D) Authorizing the acquisition of goods
Answer: D

19) The accounts payable department usually has responsibility for approving acquisitions for
payment by comparing the details on the:
A) vendor's invoice and the receiving report.
B) vendor's invoice and the purchase requisition.
C) purchase order, receiving report, and vendor's invoice.
D) purchase requisition, purchase order, and receiving report.
Answer: C

20) A substantive tests of transactions for acquisitions that would be used to provide evidence
regarding the occurrence assertion would be to:
A) compare the classification with the chart of accounts by referring to vendors' invoices.
B) recompute the clerical accuracy on the vendors' invoice.
C) review the acquisitions journal for large or unusual amounts.
D) trace from a file of receiving reports to the acquisition journal.
Answer: C

21) When testing the controls for the completeness transaction-related audit objectives:
A) failure to record the acquisition of goods or services will generally understate net income.
B) failure to record the acquisition of goods or services has no impact on the balance sheet.
C) it is generally easy for the auditor to determine whether unrecorded transactions exist.
D) the audit time for accounts payable can be reduced if the client has effective internal controls
and the auditor properly tests those controls.
Answer: D

22) Which of the following is not a key control in the acquisition and payment cycle?
A) Authorization of purchases
B) Authorization of credit
C) Timely recording and independent review of transactions
D) Authorization of payments
Answer: B

23) A key internal control over the acquisition cycle is to ensure that the company requires
recording transactions as soon as possible after the goods and services have been received. This
satisfies the transaction-related audit objective of:
A) accuracy.
B) completeness.
C) timing.
D) occurrence.
Answer: C

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24) When a client uses perpetual inventory records, the tests of details of balances for inventory
can be significantly reduced if the auditor believes the records are accurate. The controls over the
acquisitions included in the records are normally tested as a part of the:
A) tests of controls for acquisitions.
B) tests of controls and substantive tests of transactions for acquisitions.
C) tests of details of balances for acquisitions.
D) analytical procedures and tests of controls for acquisitions.
Answer: B

25) The auditor's internal control objective to determine that "recorded acquisitions are for goods
and services received" satisfies the audit objective of:
A) accuracy.
B) occurrence.
C) authorization.
D) completeness.
Answer: B

26) Failure to record the acquisition of goods is a violation of which audit objective?
A) Accuracy
B) Occurrence
C) Authorization
D) Completeness
Answer: D

27) The internal control that requires that "checks are prenumbered and accounted for" satisfies
the objective of:
A) accuracy.
B) existence.
C) completeness.
D) posting and summarization.
Answer: C

28) Because of the importance of tests of controls and substantive tests of transactions for
acquisitions and cash disbursements, it is common in this audit area to use:
A) block sampling.
B) variables sampling.
C) attributes sampling.
D) probability proportional to size sampling.
Answer: C

29) Which of the following tests of controls is least useful in assessing the transaction-related
audit objective related to occurrence?
A) Examine documents in voucher package for occurrence.
B) Examine supporting documents for indication of approval.
C) Account for sequence of vouchers.
D) Attempt to input transactions with valid and invalid vendors.
Answer: C

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30) You are performing the audit of Jenkins and Company. Your tests of controls and tests of
transactions for accounts payable demonstrate that the controls are operating effectively. This
would normally allow you to:
A) eliminate the need for substantive testing of balances for accounts payable.
B) reduce the need for substantive testing of balances for accounts payable.
C) reduce control tests in other transactions cycles.
D) increase the need for substantive testing of balances for accounts payable.
Answer: B

31) An auditor is using audit sampling to test transactions in the acquisition and payment cycle.
She would normally set the tolerable exception rate at what level?
A) Low
B) Medium
C) High
D) Indeterminate
Answer: A

32) Which of the following is the most effective control procedure to detect vouchers that were
prepared for the payment of goods that were not received?
A) Count goods upon receipt in storeroom.
B) Match purchase order, receiving report, and vendor's invoice for each voucher in accounts
payable department.
C) Compare goods received with goods requisitioned in receiving department.
D) Verify vouchers for accuracy and approval in internal audit department.
Answer: B

33) Which of the following should sign checks under conditions of effective internal control?
A) Treasurer
B) Purchasing agent
C) Accounts payable clerk
D) Person preparing the checks
Answer: A

34) Internal controls that are likely to prevent the client from including as a business expense
those transactions that primarily benefit management or other employees rather than the entity
being audited satisfy the control objective that:
A) acquisitions are correctly valued.
B) existing acquisitions are recorded.
C) acquisitions are correctly classified.
D) recorded acquisitions are for goods and services received.
Answer: D

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35) The test of transactions which requires one to "reconcile recorded cash disbursements with
the cash disbursements on the bank statement" satisfies the objective of:
A) occurrence.
B) completeness.
C) accuracy.
D) posting and summarization.
Answer: B

36) For effective internal control purposes, the vouchers payable department generally should:
A) approve the purchase order.
B) have the authority to sign the checks.
C) establish the agreement of the vendor's invoice with the receiving report and purchase order.
D) supervise the preparation of the receiving report.
Answer: C

37) An auditor performs a test to determine whether all merchandise for which the client was
billed was received. The population for this test consists of all:
A) merchandise received.
B) vendors' invoices.
C) canceled checks.
D) receiving reports.
Answer: B

38) Matching the supplier's invoice, the purchase order, and the receiving report prior to
preparing the voucher would normally be the responsibility of the:
A) warehouse receiving function.
B) purchasing function.
C) general accounting function.
D) treasury function.
Answer: C

39) A CPA learns that his client has paid a vendor twice for the same shipment, once based upon
the original invoice and once based upon the monthly statement. A control procedure that should
have prevented this duplicate payment is:
A) attachment of the receiving report to the disbursement report.
B) prenumbering of disbursement vouchers.
C) use of a limit or reasonableness test.
D) prenumbering of receiving reports.
Answer: A

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40) With respect to a small company's system of purchasing supplies, an auditor's primary
concern should be to obtain satisfaction that supplies ordered and paid for have been:
A) requested by and approved by the same individual.
B) used in the course of business and solely for business purposes during the year under audit.
C) received, counted, and checked to quantities and amounts on purchase orders and invoices.
D) properly recorded as assets and systematically amortized over the estimated useful life of the
supplies.
Answer: C

41) Authorization for accepting goods in the receiving department should be based on the:
A) vendor invoice.
B) requisition request.
C) purchase order from the purchasing department.
D) vendor statement.
Answer: C

42) Auditors need to distinguish between accounts payable and accrued liabilities in designing
the appropriate control and substantive tests. A liability is properly accounted for as an account
payable if:
A) the amount is known and owed as of the balance sheet date.
B) the amount can be estimated and is owed at the balance sheet date.
C) the amount is known at the balance sheet date and owed by the end of the next fiscal year.
D) the amount is estimated and owed within 90 days of the balance sheet date.
Answer: A

43) When determining the methodology for designing tests of details of balances for accounts
payable:
A) supply-chain management activities has led to numerous changes in the design of systems
used to initiate and record acquisition and payment activities.
B) it is relatively inexpensive to audit accounts payable.
C) performance materiality for accounts payable is set relatively low.
D) inherent risk is often set at low.
Answer: A

44) The overall objective in the audit of accounts payable is to determine whether accounts
payable:
A) is fairly stated and properly disclosed.
B) is overstated.
C) is understated.
D) is accurately stated.
Answer: A

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45) At what point do most companies recognize liabilities in the acquisition and payment cycle
when the goods are shipped FOB destination?
A) When the purchase order is issued
B) When the vendor acknowledges receipt of the order
C) When the goods or services are received
D) When the vendor invoice is received
Answer: C

46) Cutoff procedures for inventory purchased should be designed by companies to assure the
company that:
A) inventory owned by the company has been received.
B) inventory included in the year end inventory count has been paid.
C) inventory received before year end was recorded before year end.
D) inventory was correctly valued at year end.
Answer: C

47) You are the in-charge auditor and are designing audit procedures for accounts payable.
Which of the following management assertions would you normally be most concerned about?
A) Occurrence
B) Accuracy
C) Completeness
D) Existence
Answer: C

48) The main focus taken by the auditor in verifying liability balances is on the discovery of:
I. understated liabilities.
II. omitted liabilities.
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C

49) By tracing receiving reports issued at and before year-end to vendors' invoices and making
sure they are included in accounts payable, the auditor is testing for:
A) theft of merchandise by employees.
B) unrecorded obligations.
C) lapping.
D) kiting.
Answer: B

50) The extent of a search for unrecorded liabilities largely depends on:
A) materiality and inherent risk.
B) materiality and control risk.
C) materiality only.
D) inherent risk only.
Answer: B

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51) A document review of which of the following is most likely to yield evidence of any
unrecorded liabilities?
A) Debit memos
B) Vendor memos
C) Unpaid accounts payable
D) Sales invoices out of sequence
Answer: C

52) When the client's physical inventory occurs before the last day of the year, it is still
necessary to perform an accounts payable cutoff at the time of the count. In addition, the auditor
must verify whether all acquisitions taking place between the count and the end of the year were
added to:
A) the physical inventory.
B) accounts payable.
C) accounts payable and cost of goods sold.
D) the physical inventory and accounts payable.
Answer: D

53) Peprah Company pays its accounts payable 45 days after receipt of the goods or services. In
this case which audit procedure should be used to detect any unrecorded liabilities?
A) Examine cash disbursements for several weeks after the balance sheet date.
B) Reconcile purchase orders to requisition orders.
C) Reconcile purchase orders to receiving reports.
D) Reconcile purchase orders to vendor invoices.
Answer: A

54) Cutoff information for inventory acquisitions should be obtained during:

A) the interim period prior to year-end.
B) the interim period immediately following year-end.
C) the physical observation of inventory.
D) either the interim period prior to or immediately following year-end.
Answer: C

55) The auditor has decided to use accounts payables confirmations when testing substantive
testing for balances. Which two management assertions is she testing?
A) Existence and completeness
B) Existence and occurrence
C) Existence only
D) Completeness only
Answer: A

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56) In searching for unrecorded liabilities the purpose of the audit procedure to "examine
underlying documentation for subsequent cash disbursements" is to:
A) uncover liabilities on the balance sheet which should not have been recorded until a
subsequent period.
B) find the documentation relating to a cash disbursement.
C) uncover payments made in a subsequent accounting period for liabilities that existed at the
balance sheet date.
D) uncover cash disbursements recorded in a subsequent accounting period which should be
recorded in this period.
Answer: C

57) To test for cutoff errors which overstate liabilities, the auditor should trace, to vendors'
invoices, the receiving reports issued:
A) after year-end.
B) before year-end.
C) the last day of the fiscal year.
D) both before and after year-end.
Answer: A

58) In determining that the accounts payable cutoff is correct, it is essential that the cutoff tests
be coordinated with the:
A) confirmation of payables.
B) tests of long-term liabilities.
C) observation of inventory.
D) cash count.
Answer: C

59) An inventory acquisition is received late in the afternoon of December 31 after the physical
inventory is completed. If the acquisition is included in accounts payable and purchases, but
excluded from inventory, the result:
A) is an understatement of net earnings.
B) is an overstatement of net earnings.
C) is an overstatement of working capital.
D) is an overstatement of owner's equity.
Answer: A

60) When an acquisition is on an FOB origin basis, the inventory and related accounts payable
must be recorded in the current period if the goods were:
A) received prior to the balance sheet date.
B) shipped on or before the balance sheet date.
C) both shipped and received prior to the balance sheet date.
D) paid for in advance.
Answer: B

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61) When assets are being verified, auditors focus much of their attention on making sure that
the accounts are not overstated. Alternatively, auditors focus their efforts on understatement
when auditing liabilities. What is the primary reason for this difference in focus?
A) Auditors' legal liability
B) GAAP
C) GAAS requirements
D) All of the above
Answer: A

62) A company recorded an acquisition of merchandise and its related liability, but failed to
include the merchandise in ending inventory. The effect on the financial statements was to:
A) understate liabilities.
B) understate net income.
C) overstate net income.
D) have no impact on the financial statements since the errors cancel each other out.
Answer: B

63) The documents typically used to reconcile the balance on the accounts payable list with the
confirmation or vendor's statements include all of the following except for:
A) receiving reports.
B) vendor's invoices.
C) sales invoices.
D) cancelled checks.
Answer: C

64) Which of the following is most reliable for verifying the correct balance of accounts
payable?
A) Vendors' invoices
B) Vendors' statements
C) Confirmations
D) Bills of lading
Answer: C

65) Vendors' statements and vendors' invoices are both relatively reliable evidence because they:
A) come directly to the auditor without being in client's possession.
B) originate from a third party.
C) validate the effectiveness of the control system.
D) are compared to and reconciled with sales invoices.
Answer: B

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66) The auditor is performing tests of transactions for individual accounts payable transactions
with vendors. Which document provides more reliable information about individual transactions
with vendors?
A) Receiving report
B) Vendors' invoices
C) Vendors' statements
D) Purchase orders
Answer: B

67) Auditor confirmation of accounts payable balances at the balance sheet date may not need to
be performed by the auditor because:
A) this is a duplication of cutoff tests.
B) there is likely to be other reliable external evidence available to support the balances.
C) accounts payable balances at the balance sheet date may not be paid before the audit is
completed.
D) correspondence with the audit client's attorney will reveal all legal action by vendors for
nonpayment.
Answer: B

68) Under which of the following circumstances would it be advisable for the auditor to confirm
accounts payable with creditors?
A) Internal accounting control over accounts payable is adequate, and there is sufficient evidence
on hand to minimize the risk of a material misstatement.
B) Confirmation response is expected to be favorable, and accounts payable balances are of
immaterial amounts.
C) Creditor statements are not available and internal control over payables is unsatisfactory.
D) The majority of accounts payable balances are with associated companies.
Answer: C

69) The auditor is performing substantive tests of balances for accounts payable. What
documentation would provide the best evidence for the ending balance?
A) Vendors' invoices
B) Vendors' statements
C) Receiving reports
D) Purchase orders
Answer: B

70) The auditor gets highly reliable evidence about individual transactions by examining:
A) vendors' invoices.
B) vendors' statements.
C) confirmations of accounts payable balances.
D) detailed inventory counting instructions.
Answer: A

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71) Which of the following documents is best for verifying the correct balance in accounts
payable?
A) Bills of lading
B) Confirmations
C) Vendors' invoices
D) Vendors' statements
Answer: D

72) When auditors examine vendors' statements or receive confirmations, there must be a
reconciliation of the statement or confirmation with the:
A) accounts payable list.
B) vendors' invoices.
C) purchase orders.
D) receiving reports.
Answer: A

73) You are performing an audit of Hawk Company. In evaluating the accounts payable balance
you are concerned with the completeness assertion. Which of the following audit procedures best
satisfy your concern?
A) Send confirmations to only vendors with large balances.
B) Send confirmations to vendors with large, active, zero balance accounts and a representative
sample of all others.
C) Send confirmations to vendors chosen from sample stratified by the dollar balance.
D) Send confirmations to all vendors.
Answer: B

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Short Answer Questions

1) List the four business functions in the acquisition and payment cycle.

Answer:
1. Processing purchase orders
2. Receiving goods and services
3. Recognizing the liability
4. Processing and recording cash disbursements

2) Discuss each of the four business functions that comprise the acquisition and payment cycle.

Answer:
The four business functions that comprise the acquisition and payment cycle are:
• Processing purchase orders. This function involves the preparation of a purchase requisition
and a purchase order to acquire goods and services.
• Receiving goods and services. When goods are received, a receiving report is prepared that
indicates the description of goods, the quantity received, the date received, and other relevant
data.
• Recognizing the liability. In most companies, the liability for acquisitions is recognized when
the goods and services are received.
• Processing and recording cash disbursements. This function involves the signing and
mailing of the check for payment of the acquisition and recording of the cash disbursement in the
cash disbursements journal.

3) Describe purchase requisitions and purchase orders. What is a key difference between the two
documents?

Answer:
Purchase requisitions represent requests for goods and services by an authorized employee.
Requisitions may originate from any authorized company employee such as a storeroom
supervisor or manufacturing manager. Purchase orders are documents that identify the
description, quantity, and other related information for goods or services that the company is
purchasing. Unlike requisitions, purchase orders are directed to specific vendors.

4) Discuss the circumstances in which it is desirable to send confirmation requests to the client's
vendors.

Answer:
It is desirable to send confirmation requests to the client's vendors when the client's internal
controls are weak, when vendors' statements are not available, or when the auditor questions the
client's integrity.
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5) What are the three most important controls over cash disbursements?

Answer:
• Signing of check by an individual with proper authority.
• Separation of responsibilities for signing checks and performing the accounts payable
function.
• Careful examination of supporting documents by the check signer at the time the check is
signed.

6) Discuss the key internal controls that should be present in the processing purchase orders
function in the acquisitions and payment cycle.

Answer:
Proper authorization for acquisitions ensures that the goods and services acquired are for
authorized company purposes, and it avoids the acquisition of excessive or unnecessary items.
Most companies require different levels of authorization for different types of acquisitions or
dollar amounts . A purchasing department that is independent of the authorization or receiving
functions is often established by companies to ensure an adequate quantity of goods and services
at a minimum price. Purchase orders should be prenumbered to permit easier accounting for all
outstanding purchase orders and should be designed to minimize the likelihood of unintentional
omissions on the form when goods are ordered.

7) Discuss the key internal controls that should be present in the receiving goods and services
function in the acquisitions and payment cycle.

Answer:
For good internal control over the receiving goods and services function, most companies require
that the receiving department initiate a receiving report as evidence of the receipt and
examination of the goods. One copy of the report is sent to the storeroom and another to the
accounts payable department for their information needs. To prevent theft, it is important that the
goods be physically controlled from the time of their receipt until their disposal. The personnel in
the receiving department should be independent of the storeroom personnel and the accounting
department. In addition, the accounting records should transfer responsibility for the goods as
they are transferred from receiving to storage and from storage to manufacturing.

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8) Listed below are some management assertions made for the acquisition and payment cycle.
For each one give an example of how the auditor by using the documents normally found in the
process can apply an auditing procedure to test the assertion. (Completeness, Timing, Accuracy)

Answer:
Completeness:
Trace from a file of receiving reports to the acquisitions journal or
Trace from a file of vendors' invoices to the acquisition journal

Timing:
Compare dates of receiving reports and vendors' invoices with dates in the acquisitions journal.

Accuracy:
Compare recorded transactions in the acquisitions journal with the vendors' invoice, receiving
report, and other supporting documentation or
Recompute the clerical accuracy on the vendor's invoice, including discounts and freight

9) Describe the methodology for designing tests of details of balances for accounts payable.

Answer:
The methodology for designing tests of accounts payable consists of:
1. Identify client and business risks affecting accounts payable.
2. Set performance materiality and assess inherent risk for accounts payable.
3. Assess control risk for the acquisition and payment cycle.
4. Design and perform tests of controls and substantive tests of transactions for the acquisition
and payment cycle.
5. Design and perform analytical procedures for accounts payable.
6. Design tests of details of accounts payable balance to satisfy balance-related audit objectives.
Decide audit procedures to perform, sample size, items to select, and timing of tests.

10) Explain why auditors should compare current year expense totals with prior year expense
totals as an analytical procedure for accounts payable.

Answer:
Auditors should compare current year expense totals with prior years to uncover misstatements
in accounts payable as well as in the expense accounts. Because of double-entry accounting, a
misstatement of an expense account usually also results in an equal misstatement of accounts
payable. Therefore, comparing current expenses such as rent, utilities, and other regularly
scheduled bills with prior years is an effective procedure for analyzing accounts payable when
expenses from year to year are expected to be relatively stable.

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11) Auditors examine supporting documentation for cash disbursements subsequent to the
balance sheet date in order to determine whether the cash disbursement was for a current period
liability.
Describe at least two audit procedures the auditor would perform to provide evidence that the
cash disbursement was made for a current period liability.

Answer:
1. Trace vendor invoice to accounts payable subsidiary ledger and to the trial balance
2. Trace receiving report to vendor invoice and to accounts payable subsidiary ledger
3. Examine vendor invoices for inclusion in the proper period
4. Examine cash disbursements for several weeks after the company's year end

12) Describe the audit procedures typically used to test for out-of-period liabilities (also referred
to as the search for unrecorded accounts payable).

Answer:
The audit procedures typically used to test for out-of-period liabilities are:
• Examine underlying documentation for subsequent cash disbursement.
• Examine underlying documentation for bills not paid several weeks after the year-end.
• Trace receiving reports issued before year-end to related vendors' invoices.
• Trace vendors' statements that show a balance due to the accounts payable trial balance.
• Send confirmations to vendors with which the client does business, including zero balance
confirmations.

13) How do auditors determine the extent of testing of internal controls in the acquisition and
payment cycle?

Answer:
When auditors intend to rely on controls to support a preliminary control risk below maximum,
the auditor performs tests of controls to obtain evidence that controls are operating effectively.
As the operating effectiveness of controls improves and is supported by additional tests of
controls, the auditor is able to reduce substantive tests. If the company is an accelerated filer
public company, then the auditor must document and test controls sufficiently to issue an opinion
on internal control over financial reporting.

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