Name : Wida Widiawati

Class : 19AKJ

NPM : 194020034

Assignment II Chapter 18
18-1 (Objective 18-1) List five asset accounts, three liability accounts, and five expense accounts
included in the acquisition and payment cycle for a typical manufacturing company!
Answer:

 Asset Accounts: Cash in Bank, Inventory, Property Plant and Equipment, Prepaid
Expenses, Land
 Liability Accounts: Accounts Payable, Notes Payable, Accrued Liabilities
 Expense Accounts: Admin Expense, COGS, Rent Expense, Maintenance Expense, Legal
Fees

18-2 (Objective 18-3) List one possible internal control for each of the six transaction-related audit
objectives for cash disbursements. For each control, list a test of control to test its effectiveness.
Answer:

 (Occurrence) Recorded cash disbursements are for goods and services actually received:
examine indication of approval
 Completeness) Existing cash disbursement transactions are recorded: account for sequence
of checks
 (Accuracy) Recorded cash disbursement transactions are accurate: examine indication of
internal verification
 (Posting & Summarization) Cash disbursement transactions are correctly included in the
accounts payable master file and are correctly summarized: examine indication of internal
verification
 (Classification) Cash disbursement transactions are correctly classified: examine indication
of internal verification
 (Timing) Cash disbursement transactions are recorded on the correct dates: examine
indication of internal verification

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18-3 (Objective 18-3) List one possible control for each of the six transaction-related audit
objectives for acquisitions. For each control, list a test of control to test its effectiveness!
Answer:

 (Occurrence) Recorded acquisitions are for goods and services received, consistent with
the best interests in the client: examine indication of approval
 (Completeness) Existing acquisition transactions are recorded: account for a sequence of
purchase orders
 (Accuracy) Recorded acquisition transactions are accurate: examine indication of approval
 (Posting & Summarization) Acquisition transactions are correctly included in accounts
payable and inventory master files and are correctly summarized: examine indication of
internal verification
 (Classification) Acquisition transactions are correctly classified: examine indication of
internal verification
 (Timing) Acquisition transactions are recorded on the correct dates: examine indication of
internal verification

18-4 (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 randommonth and test every transaction for the period.
Using this approach enables me to thoroughly understandinternal control because I have examined
everything that happened during the period. As a part of the monthlytest, I also test the beginning
and ending bank reconciliations and prepare a proof of cash for the month. At thecompletion of
these tests I feel I can evaluate the effectiveness of internal control."
Answer:
Auditing standards require that the tests of controls and substantive tests of transactions cover the
entire accounting period in order to determine that the system was operating in a consistent manner
throughout the period. In selecting thenumber of items for testing, the auditor must determine the
samplesize, statistically or nonstatistically, such that it is likely to be representative of the actual
conditions of the population of all transactions during the entire period.In testing items that are
periodic procedures rather than individual transactions, the auditor must determine the appropriate
timing to determine that those procedures are operating properly.

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Testing every single transaction defeats the purpose of random testing. It is too time consuming
and unrealistic on the actual audit to test every transaction. The auditor will consider the accounts
being tested and then determine the population, which never includes every transaction in the test

18-5 (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?
Answer:
Cash discounts are important to the client because they produce a substantial savings to them.
Companies use this avenue to encourage customers to make earlier or timely payments so they can
reduce the amount of bad debt expenses. To verify whether the discounts are taken according to
company's policies and procedures, the auditor should examine voucher package (disbursement
vouchers, approved purchase orders, receiving reports, and vendor's invoices) to determine
whether discounts are being taken in accordance with the terms available (e.g., 1/10, n/30, or 1/15,
n/60).

18-6 (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.
Answer:

 Similarities
 Both procedures compare either the acquisition journal entries or receiving reports
to the vendor invoices.
 Both procedures look at the vendor's name, the type of material and quantity
acquired and the total amount of the acquisition.
 Differences
 The second procedure is selecting random samples from the acquisition journal
entries and comparing them to the vendor invoices while the first procedure is
selecting from a random sample of receiving reports.

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  The first procedure considers accuracy and completeness.
 The second procedure focuses more on occurrence and accuracy.

The difference in the purpose of the steps is that Procedure 1 ascertains whether all existing
acquisitions are recorded properly (completeness and accuracy), whereas Procedure 2 is designed
to determine whether recorded acquisitions are proper (occurrence and accuracy). Although the
two procedures test opposite objectives (completeness and occurrence), they are similar in that
each is designed to determine that the vendor's name, type of material and quantity purchased, and
total amount of the acquisition agree with the receiving report, vendor's invoice, and acquisitions
journal entries.

18-7 (Objective 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?
Answer:
If the client does not use prenumbered checks, the type of misstatement they are likely to create is
one related to the assertion of completeness. This is because prenumbered checks are a form of
internal control used to verify that each of the sequential checks are accounted for. To compensate
for the deficiency, the auditor can perform a bank reconciliation using the cutoff bank statement,
current bank statement and the cash disbursements journal.
It is difficult to control blank or voided checks (as well as checks issued before they are mailed)
without having a printed prenumbered system of blank checks. Without prenumbering,
unauthorized and unrecorded checks may be more easily issued without detection until after they
have cleared the bank. The auditor can compensate for poor control over checks by reconciling
recorded cash disbursements with cash disbursements on the bank statement for a test period.

18-8 (Objective 18-2) what is meant by a voucher? how can it improve organizational internal
controls?
Answer:
A voucher is a document used by an organization to establish a formal means of recording and
controlling acquisitions. A voucher register is a journal for recording the vouchers for the
acquisition of goods and services. By using a voucher system, it improves controls over the

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recording of purchases and facilitates the recording in numerical order at the earliest possible date,
which is the point at which the invoice is received. It also helps auditors to find out the whether
the audit client has recorded all purchases (liabilities) completely.

18-9 (Objective 18-2) Explain why most auditors consider the receipt of goods and services the
most important point in the acquisition and payment cycle.
Answer:
The receipt of goods and services is the most important point in the cycle because it is the point at
which the company can recognize the acquisition and if FOB destination, the related liability on
their records. Thus, it affects the accuracy objective as well as the completeness and classification
objective. In this point, a receiving report is created that should be carefully stored and later
compared to the purchase order and vendor's invoice.

18-10 (Objective 18-3, 18-4) Explain the relationship between acquisition and payment cycle tests
and inventory tests. Give specific examples of how the two types of tests affect each other.
Answer:
The acquisition and payment cycle is related to the inventory accounts in that normally all
purchases of raw materials in the case of a manufacturing operation or merchandise in the case of
a distribution company are recorded through this cycle. If the tests of internal controls of the
acquisition and payment cycle indicate that proper controls exist to ensure that the proper cost is
used in valuing the inventory and that new purchases of inventory are recorded at the proper time,
in the proper amount, and in the proper account, tests concerned with the accuracy and cutoff of
the inventory accounts may be reduced from that level required if the controls were not adequate.