audit 2

During an audit of a client’s purchasing process, the auditor uncovers a concerning practice where purchase orders are not consistently generated for repeat, long-term vendors. Instead, these transactions are authorized based on informal verbal agreements. This raises potential risks related to the completeness and accuracy of accounts payable, as well as the potential for fraud or misstatements. In light of this observation, what approaches should the auditor consider to adequately assess the risks associated with the reliance on verbal agreements instead of formal purchase orders?

• Test all purchases to identify any missing purchase orders and increase sample size if necessary, thereby ensuring that all transactions are documented appropriately.

• Perform substantive testing on vendor invoices to validate the existence and accuracy of transactions, which would help in assessing whether the financial records reflect the actual transactions that occurred.

• Examine the impact of verbal agreements on the completeness assertion of accounts payable, to understand how these practices might affect the financial statements and risk exposure.

• Review control activities over the approved vendor list to ensure that only authorized vendors are used in the purchasing process, which is crucial for maintaining vendor integrity

• Recommend implementing a three-way match process for all purchases, regardless of vendor type, to enhance control over the procurement process and mitigate risks.

Which of the following is the primary objective of an audit of purchasing recognition?

• To verify the completeness and accuracy of inventory balances

• To ensure that all purchases are recorded in the proper period

• To confirm the validity of supplier payments

• To examine the effectiveness of marketing strategies

If an auditor observes a significant decline in accounts payable for a client operating in a seasonal industry, but the client’s sales and inventory levels remain stable, what approach should the auditor consider to ensure completeness of liabilities?

• Perform a search for unrecorded liabilities, focusing on vendor statements and subsequent cash disbursements

• Verify cash disbursement records to check if any payments have been misclassified as operating expenses

• Conduct analytical procedures on cash balances and compare against industry benchmarks

• Review control activities around accounts payable reconciliations at year-end

• Compare the accounts payable to current sales to identify discrepancies

An entity has implemented a two-way matching process for all purchases due to high transaction volume and reliance on standardized goods from known vendors. In this context, which factor should an auditor prioritize when assessing the purchasing process’s effectiveness?

• Completeness of purchase transactions by tracing receiving reports to purchase orders.This focuses on ensuring that all purchases are properly recorded, especially by verifying that every receiving report has a corresponding purchase order, helping detect any omissions

• Verification of goods received to confirm the quantity and price on vendor invoices match records.Here, the auditor would focus on accuracy by checking that the goods received align in quantity and price with the vendor invoices, helping to confirm that payments match what was ordered and received

• Assessing cutoff procedures for purchases near period-end.This factor examines whether purchases are recorded in the correct accounting period, crucial for accuracy in financial reporting, especially around the end of the period when timing is critical

• Evaluation of the system’s ability to prevent duplicate vendor payments.Preventing duplicate payments is essential in high-volume environments. An effective system should have controls to catch and prevent these errors, which is especially relevant given the potential risks associated with a large number of transactions

• Determining if key internal controls around vendor verification have been adequately tested.This option focuses on verifying that the organization has strong controls to confirm that vendors are legitimate and payments are made to the correct entities, which is vital for safeguarding against fraud

In an audit focused on purchasing recognition, an auditor aims to assess whether purchases are properly recorded to provide an accurate reflection of expenses and liabilities. Which of the following procedures would best support this goal?

• Reviewing receiving reports and matching them to purchase orders and invoices to verify completeness and accuracy of recorded purchases

• Performing cut-off testing around period-end to ensure that purchases are recorded in the correct accounting period, especially for year-end financials

• Examining supporting documentation for significant purchase transactions to confirm they are appropriately authorized and recorded

• Conducting analytical procedures by comparing current period purchasing patterns to prior periods to identify any unusual trends or variances.

An entity’s procurement system allows department managers to directly approve purchase requisitions up to a certain dollar amount, after which executive approval is required. An auditor is concerned this practice could increase risks related to procurement fraud. Which testing approach would most effectively address this risk?

• Review the vendor master file to detect any unauthorized or fictitious vendors.This approach would involve examining the vendor master file for any anomalies, such as vendors who have not been verified, duplicate entries, or those that may not have been properly vetted. By identifying potentially unauthorized or fictitious vendors, this test can help detect if fraudulent purchases are being routed to illegitimate vendors set up for the purpose of misappropriating funds.

• Test samples of purchase requisitions to ensure they are below the authorization limit. This approach would involve selecting a sample of purchase requisitions and verifying that the dollar amounts remain within the limits allowed for department managers’ approval. If any requisitions exceed this threshold without the required executive approval, it would indicate a possible circumvention of established controls and an increased risk of procurement fraud.

• Analyze high-volume transactions for instances where executive approval was bypassed. This approach focuses on identifying patterns in transactions, particularly high-volume or frequently occurring transactions, to see if executive approval was consistently bypassed for transactions that should have required it. Such an analysis could help in uncovering cases where department managers may have fragmented purchases or manipulated amounts to avoid triggering executive approval.

• Conduct a walkthrough of the procurement process with department managers. This approach entails directly engaging with department managers to walk through each step of the procurement process, observing how they approve requisitions and identifying any potential weaknesses in control or areas where fraud could occur. By understanding how the system is practically applied, an auditor could assess whether there are gaps in compliance or points at which fraud risk is heightened.

During an audit of a client’s purchasing process, an auditor observes that some invoices do not match receiving reports, resulting in discrepancies between inventory records and accounts payable. What is the most effective procedure to address this finding?

• Perform a detailed analysis of inventory valuation adjustments at period-end

• Test the reconciliation of unmatched invoices with subsequent cash disbursements

• Verify that all purchase orders have corresponding receiving reports and invoices

• Increase sample testing of accounts payable to validate completeness and accuracy

• Conduct an inventory count to match recorded quantities with physical inventory

During a purchasing process audit, an auditor identifies that a client consistently records all purchase transactions at the point when invoices are received, rather than when the goods are actually received. This practice deviates from the more standard approach of recognizing purchases upon goods receipt. The auditor is concerned that this timing difference could have implications on the accuracy of financial reporting and the completeness of expense recording. How does this practice impact the purchasing process audit, and what additional procedures should the auditor perform to address these concerns?

• It increases risk of cutoff misstatements; perform tests to verify purchases near period-end

• It risks overstating accounts payable; conduct analytical procedures on payable balances

• It increases risk of incomplete expense recording; match purchase orders to vendor invoices

• It reduces the need for testing cash disbursements; confirm payment terms on vendor statements

• It impacts classification accuracy; review purchase requisitions for correct coding

An auditor notices that a client’s purchasing process allows departments to initiate purchases up to a specific dollar limit without approval from the purchasing department. This has resulted in some irregular spending patterns. What audit approach should the auditor consider to assess potential risks?

• Test all departmental purchases to determine if spending limits were exceeded

• Conduct a walkthrough of the purchasing process with each department to evaluate control awareness

• Analyze departmental spending trends over time to identify unusual spending patterns

• Review vendor invoices to ensure that goods and services align with budgeted expenses

• Test access controls to determine if unauthorized users are initiating purchases

An entity’s accounts payable records show unexplained discrepancies when reconciled with vendor statements, specifically missing invoices. What should the auditor focus on to assess potential causes for these discrepancies?

• Test the recording of cash disbursements to confirm completeness of transactions

• Verify if the entity consistently applies a cutoff date for recording transactions

• Analyze the accounts payable subsidiary ledger to identify unrecorded liabilities

• Perform a fraud risk assessment to evaluate if discrepancies indicate potential misappropriatio

• Compare invoices from prior periods to identify recurring vendors with missing records