a. Capitalizing an expenditure that should be expensed.
b. Failing to record a liability for an expenditure.
c. Failing to record a check paying an item in Vouchers Payable.
d. All of the above would overstate net income.
7. A client's purchasing system ends with the recording of a liability and its eventual payment. Which of the following best describes the auditor's primary concern with respect to liabilities resulting from the purchasing system?
a. Accounts payable are not materially understated.
b. Authority to incur liabilities is restricted to one designated person.
c. Acquisition of materials is not made from one vendor or one group of vendors.
d. Commitments for all purchases are made only after established competitive bidding procedures are followed.
8. Which of the following is an internal control activity that could prevent a paid disbursement voucher from being presented for payment a second time?
a. Vouchers should be prepared by individuals who are responsible for signing disbursement checks.
b. Disbursement vouchers should be approved by at least two responsible management officials.
c. The date on a disbursement voucher should be within a few days of the date the voucher is presented for payment.
d. The official signing the check should compare the check with the voucher and should stamp "paid" on the voucher documents.
9. Budd, the purchasing agent of Lake Hardware Wholesalers, has a relative who owns a retail hardware store. Budd arranged for hardware to be delivered by manufacturers to the retail store on a COD basis, thereby enabling his relative to buy at Lake's wholesale prices. Budd was probably able to accomplish this because of Lake's poor internal control over
a. Purchase requisitions.
b. Cash receipts.
c. Perpetual inventory records.
d. Purchase orders.
10. Which of the following client internal control procedures most likely addresses the completeness assertion for inventory?
a. The work-in-process account is periodically reconciled with subsidiary inventory records.
b. Employees responsible for custody of finished goods do not perform the receiving function.
c. Receiving reports are prenumbered and the numbering sequence is checked periodically.
d. There is a separation of duties between the payroll department and inventory accounting personnel.