AUDITING THEORY - 073: Processes CMP Revenue Receipt Cycle Sales - Test of controls 1. After the auditor has prepared prepared a flowchart of internal internal control for sales and cash receipts receipts transactions and evaluated the design of the system, the auditor would perform tests of controls on all control procedures a. Documented in the flowchart. b. Considered to be deficiencies that might allow errors to enter the accounting system. c. Considered to be strengths that the auditor plans to rely on in assessing control risk. d. That would aid in preventing irregularities.
2.
To determine whether internal control effectively minimized errors of failure to bill a customer for a shipment, the auditor would select a sample of transactions from the population represented by the a. Customer order file. b. Shipping records file. c. Subsidiary customer accounts ledger. d. Sales invoice.
3.
Which of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom? a. The cashier posts the receipts to the accounts receivable subsidiary ledger. b. The cashier makes the daily deposit at a local bank. c. The cashier prepares the daily deposit. d. The cashier endorses the checks.
4.
The a. b. c. d.
5.
Which of the following is not a universal rule for achieving control over cash? a. Separate the cash-handling and record-keeping functions. b. Decentralize the receiving of cash as much as possible. c. Deposit each day's cash receipts by the end of the day. d. Have bank reconciliations performed by employees who do not handle cash.
6.
least crucial element of control over cash is Separation of cash record keeping from custody of cash. Preparation of the monthly bank reconciliation. Batch processing of checks. Separation of cash receipts from cash disbursements.
At which point in an ordinary sales sales transaction of a wholesaling business business is a lack of specific authorization of least concern to the auditor in the conduct of an audit? a. Granting of credit. b. Shipment of goods. c. Determination of discounts. d. Selling of goods for cash.
7.
To verify that all sales transactions have been recorded, a test of transactions should be completed on a representative sample drawn from a. Entries in the sales journal. b. The billing clerk's file of sales orders. c. A file of duplicate copies of sales invoices invoices for which all prenumbered forms forms in the series have been accounted. d. The shipping clerk's file of duplicate copies of shipping documents.
8.
The negative form of accounts receivable confirmation request is particularly useful except when a. Control procedures surrounding accounts receivable are considered to be effective. b. A large number of small balances are are involved. c. The auditor has reason to believe the persons receiving the requests are likely to give them consideration. d. Individual account balances are relatively large.
9.
Which of the following is not a primary objective of the auditor in tests of accounts receivable? a. Determine the approximate realizable value. b. Determine the adequacy of internal controls. c. Establish the validity of the receivables. d. Determine the approximate time of collectibility of the receivables.
10.
Tracing copies of sales invoices to shipping documents will provide evidence that all a. Shipments to customers were recorded as receivables. b. Billed sales were shipped. c. Debits to the subsidiary accounts receivable ledger are for sales shipped. d. Shipments to customers were billed.
AUDITING THEORY - 073: PROCESSES
CMP
11.
To gather audit evidence about the proper credit approval of sales, the auditor would select a sample of documents from the population represented by the a. Customer order file. b. Bill of lading file. c. Subsidiary customers' accounts ledger. d. Sales invoice file.
12.
Which of the following functions is common to the revenue/receipt cycle? a. Resources are acquired from vendors and employees in exchange for obligations to pay. b. Resources are sold to customers in exchange for promises for future payments. c. Resources are acquired from employees in exchange for obligations to pay. d. Capital funds are received from investors and creditors.
13.
Which of the following is not a common activity of the revenue/receipt cycle? a. Order entry. b. Inventory control. c. Receiving. d. Cash collection.
14.
To achieve control when there is no Billing Department, the billing function should be performed by the a. Accounting Department. b. Sales Department. c. Shipping Department. d. Credit and Collection Department.
15.
The person who opens the mail commonly prepares a remittance advice when a customer fails to return one with a payment. Consequently, mail should be opened by the: a. Credit manager. b. Receptionist. c. Sales manager. d. Accounts receivable clerk.
16.
Which of the following control procedures will likely prevent the concealment of a cash shortage that was perpetrated by improperly writing off a trade account receivable? a. Write-offs must be approved by a responsible officer a fter reviewing Credit Department recommendations and supporting evidence. b. Write-offs must be supported by an aging schedule showing that only receivables months overdue have been written off. c. Write-offs must be approved by the cashier. d. Write-offs must be authorized by field sales representatives.
17.
Which of the following would best protect a company that wishes to prevent lapping? a. Segregate duties so that accounting has no access to incoming mail. b. Segregate duties so that no employee has access both to checks from customers and to currency from daily cash receipts. c. Have customers send payments directly to the company's bank. d. Request that customers checks be made payable to the company and be addressed to the treasurer.
18.
During the review of a small owner managed company's internal controls, the auditor discovers that the accounts receivable clerk approves credit memos and has access to cash. Which of the following controls would offset this deficiency? a. The owner reviews errors in billings to customers and postings to subsidiary records. b. The controller receives the monthly bank statement directly and reconciles the checking accounts. c. The owner reviews credit memos after they are recorded. d. The controller reconciles the detailed receivables records to th e general ledger.
19.
Defective merchandise returned by customers should be presented to a. Inventory control personnel. b. Sales personnel. c. Purchasing personnel. d. Receiving personnel. 20. A sales cutoff test complements tests of a. Sales returns. b. Cash. c. Accounts receivable.
AUDITING THEORY - 073: PROCESSES
d. 21.
22.
CMP
Sales allowances.
In considering internal control within the revenue/receipt cycle, what is the purpose of a transaction walkthrough? a. To assure that employees are performing assigned functions accurately. b. To confirm the auditor's understanding of the internal control structure. c. To select documents for detailed tests of controls. d. To verify the results of the auditor's sampling plan. Following are four steps an auditor undertakes in assessing control risk: A Determine what control procedures are used by the entity. B Identify the system's control objectives. C Design tests of controls. D Consider the potential errors or irregularities that could result. In what order would an auditor perform these steps? a. DBAC. b. BCDA. c. BDAC. d. DCAB.
23.
The a. b. c. d.
purpose of tests of controls over shipping is to Determine whether billed goods have been shipped. Determine whether shipments are billed. Determine whether shipping department personnel are competent. Determine whether credit is approved before goods are shipped.
24.
The a. b. c. d.
purpose of tests of controls over billing is to Determine whether billed goods have been shipped. Determine whether shipments are billed. Determine whether billing department personnel are competent. Determine whether credit is approved before goods are billed.
Revenue Receipt Cycle Sales - Substantive Test 25. A sales cutoff test of billings complements tests of a. Sales returns. b. Cash. c. Accounts receivable. d. Sales allowances.
26. An auditor should perform alternative procedures to substantiate the existence of accounts receivable when a. No reply to a positive confirmation request is received. b. No reply to a negative confirmation request is received. c. Collectibility of the receivables is in doubt. d. Pledging of the receivables is probable. 27.
In the confirmation of accounts receivable, the auditor would most likely a. Confirm a sample of the inactive accounts. b. Seek to obtain positive confirmations for at least 50 percent of the total peso amount of the receivables. c. Confirm all receivables from agencies of the national government. d. Send confirmation requests within one month of the fiscal year-end.
28. Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. An auditor most likely will use a. The positive form to confirm all balances, regardless of size. b. A combination of the two forms, with the positive form used for large balances and the negative form for small balances. c. A combination of the two forms, with the positive form used for trade receivables and the negative form for other receivables. d. The positive form when the control structure related to receivables are satisfactory, and the negative form when controls are unsatisfactory. 29. An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account, as of October 31, 2015. By this procedure, the auditor would be most likely to learn which of the following?
AUDITING THEORY - 073: PROCESSES
a. b. c. d.
CMP
An October invoice was improperly computed. An October check from a customer was posted in error to the account of another customer with a similar name. An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period. An account balance is past due and should be written off.
30.
If accounts receivable turned over 7.1 times in 2015, as compared to only 5.6 times in 2014, it is possible that there were a. Unrecorded credit sales in 2015. b. Unrecorded cash receipts in 2015. c. More thorough credit investigations made by the company in late 2015. d. Fictitious sales in 2015.
31.
Which of the following would most likely be detected by an auditor's review of a client's sales cutoff? a. Unrecorded sales for the year. b. Lapping of year end accounts receivable. c. Excessive sales discounts. d. Unauthorized goods returned for credit.
32.
The auditor should ordinarily mail confirmation requests to all banks with which the client has conducted any business during the year, regardless of the year-end balance, since a. The confirmation form also seeks information about indebtedness to the bank. b. This procedure will detect kiting activities, which would otherwise not be detected. c. The mailing of confirmation forms to all such banks is required by PSAs. d. This procedure relieves the auditor of any responsibility with respect to non-detection of forged checks.
33.
To gather evidence about the balance per bank in a bank reconciliation, an auditor would examine all of the following except the a. Cutoff bank statement. b. Year-end bank statement. c. Bank confirmation. d. General ledger.
34.
Two months before year-end, the bookkeeper erroneously recorded the receipt of a long-term bank loan by a debit to cash and a credit to sales. Which of the following is the most effective procedure for detecting this type of error? a. Analyze the notes payable journal. b. Analyze bank confirmation information. c. Prepare year-end bank reconciliation. d. Prepare a year-end bank transfer schedule.
35. An auditor would be least likely to use confirmations in connection with the examination of a. Inventories. b. Refundable income taxes. c. Long-term debt. d. Stockholders' equity. 36. An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when the a. Check register for the last month is reviewed. b. Cutoff bank statement is reconciled. c. Bank confirmation is reviewed. d. Search for unrecorded liabilities is performed. 37. An auditor compares information on canceled checks with information contained in the cash disbursement journal. The objective of this test is to determine that a. Recorded cash disbursement transactions are properly authorized. b. Proper cash purchase discounts have been recorded. c. Cash disbursements are for goods and services actually received. d. No discrepancies exist between the data on the checks and the data in the journal. 38.
Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting? a. Review composition of authenticated deposit slips.
AUDITING THEORY - 073: PROCESSES
b. c. d.
CMP
Review subsequent bank statements and canceled checks received directly from t he banks. Prepare a schedule of bank transfers from the client's books. Prepare year-end bank reconciliations.
39.
Which of the following audit procedures would be most appropriate to address the existence assertion for sales? a. Confirm receivables balances. b. Perform analytical procedures. c. Review collectibility. d. Confirm cash deposits in banks.
40.
Which of the following financial statement assertions is not addressed by the confirmation of accounts receivable? a. Existence. b. Presentation and disclosure. c. Rights. d. Valuation.
41. Audit working papers often include a client prepared, aged trial balance of accounts receivable as of the balance sheet date. An aging is best used by the auditor to a. Evaluate controls over credit sales. b. Test the accuracy of recorded charge sales. c. Estimate credit losses. d. Verify the validity of the recorded receivables. 42. An entity's financial statements were misstated over a period of years due to large amounts of revenue having been recorded in journal entries that involved debits and credits to an illogical combination of accounts. The auditor could most likely have been alerted to this irregularity by a. Scanning the general journal for unusual entries. b. Performing cutoff tests at year-end. c. Tracing a sample of journal entries to the general ledger. d. Examining documents supporting sales returns and allowances recorded after year -end. 43.
When auditing the allowance for uncollectible accounts, the least reliance should be placed on which of the following? a. The credit manager's opinion. b. An aging of past due accounts. c. Collection experience of the client's collection agency. d. Ratios that show the past relationship of the allowance to net credit sales.
44.
In determining the existence of accounts receivable, which of the following would the auditor consider most reliable? a. Documents that supports the accounts receivable balance. b. Credits to accounts receivable from the cash receipts book after the close of business at year-end. c. Direct telephone communication between auditor and debtor. d. Confirmation replies received directly from customers.
45. An auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents' exceptions and comments. By this procedure, the auditor would most likely to learn of which of the following? a. One of the cashiers has been covering embezzlement by lapping. b. One of the sales clerks has not been preparing charge slips for credit sales to family and friends. c. One of the computer control clerks has been removing from the data file all sales invoices applicable to his own account. d. The credit manager has misappropriated remittances from customers whose a ccounts have been written off. 46.
47.
Customers with substantial due balances have failed to reply after second requests had been mailed to them directly. Which of the following audit procedures is most appropriate? a. Examine shipping documents. b. Review cash collections during the year being audited. c. Intensify the study of internal controls for receivables. d. Increase the balance in the accounts receivable allowance account. (AICPA ADAPTED) The negative form of accounts receivable confirmation is not useful when a. Internal control is considered to be effective.
AUDITING THEORY - 073: PROCESSES
b. c. d. 48.
CMP
A large number of small balances are involved. The auditor has reason to believe that persons receiving the requests are likely to consider them. Individual account balances are relatively large.
Negative confirmation of accounts receivable is less effe ctive than positive confirmation of accounts receivable because a. A majority of recipients are usually unwilling to respond objectively. b. Some recipients may report incorrect balances that require extensive follow up. c. The auditor cannot infer that all nonrespondents have verified the account information. d. Negative confirmations do not produce evidence that is statistically quantifiable.
49. You are auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. Control risk is at the maximum. To determine the existence of the accounts receivable balances at the balance sheet date, you would most likely a. Send positive confirmation requests. b. Send negative confirmation requests. c. Examine evidence of subsequent cash receipts. d. Inspect internal records such as copies of tax invoices that had been mailed to the residents. Expenditure/Disbursement Cycle Control Test 50. A client erroneously recorded a large purchase twice. Which of the following control procedures would be most likely to detect this error in a timely and efficient manner? a. Footing the purchases journal. b. Reconciling vendors' monthly statements with subsidiary payable ledger accounts. c. Tracing totals from the purchases journal to the ledger accounts. d. Sending written quarterly confirmations to all vendors. –
51. An internal control questionnaire indicates that an approved receiving report must accompany every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively? a. Select and examine receiving reports and ascertain that the related canceled checks are dated no earlier than the receiving reports. b. Select and examine receiving reports and ascertain th at the related canceled checks are dated no later than the receiving reports. c. Select and examine canceled checks and ascertain that the related receiving reports are dated no earlier than the checks. d. Select and examine canceled checks and ascertain that the related receiving reports are dated no later than the checks. 52.
The a. b. c. d.
accounts payable department receives the purchase order form to accomplish all of the following except Compare invoice price to purchase order price. Ensure that the purchase had been properly authorized. Ensure that the party requesting the goods had received the goods. Compare quantity ordered to quantity purchased.
53.
For effective internal control purposes, which of the following individuals should be responsible f or mailing signed checks? a. Receptionist. b. Treasurer. c. Accounts payable clerk. d. Payroll clerk.
54. A client's expenditure/disbursement cycle begins with requisitions from user departments and ends with the receipt of materials and the recognition of a liability. An auditor's primary objective in reviewing this cycle is to a. Evaluate the reliability of information generated by the cycle. b. Investigate the physical handling and recording of unusual acquisitions of materials. c. Consider the need to be on hand for the annual physical inventory count if this system is not functioning properly. d. Ascertain that materials said to be ordered, received, and paid for are on hand. 55.
Which of the following is a primary function of the purchasing department? a. Authorizing the acquisition of goods. b. Ensuring the acquisition of goods of a specified quality.
AUDITING THEORY - 073: PROCESSES
c. d.
CMP
Verifying the propriety of goods of a specified quality. Reducing expenditures for goods acquired. (AICPA ADAPTED)
56. An auditor is planning the consideration of internal control over the expenditure/disbursement cycle. The auditor will be least influenced by a. The availability of a company procedures manual describing purchasing and cash disbursement procedures. b. The scope and results of work performed by the company's internal auditors. c. The existence within the purchasing department of control procedures that offset deficiencies. d. The strength or deficiency of control procedures in other areas, e.g., sales and accounts receivable. 57.
Omitting quantities from copies of purchase orders sent to the receiving department is a control procedure intended mainly to a. Ensure that goods received are physically counted by receiving department personnel. b. Identify and return damaged goods as soon as they are received. c. Provide a crosscheck for verifying the accuracy of perpetual inventory records. d. Prevent theft of goods by receiving department personnel.
58.
Which of the following is not an appropriate activity for the treasurer's department? a. Prepare checks. b. Forward checks to vendors. c. Cancel vouchers. d. Prepare vouchers.
59. An effective internal control procedure that protects against the preparation of improper or inaccurate disbursements is to require that all checks be a. Signed by an official after necessary supporting evidence has been examined. b. Reviewed by the treasurer before mailing. c. Sequentially numbered and accounted for by internal auditors. d. Perforated or otherwise effectively canceled when they are returned with the bank statement. 60. As an in-charge auditor, you are reviewing a write-up of internal control in cash receipt and disbursement procedures. Which of the following deficiencies alone should cause you the least concern? a. Checks are signed by only one person. b. Signed checks are distributed by the c ontroller to approved payees. c. The treasurer fails to establish bona fide names and addresses of check payees. d. Cash disbursements are made directly out of cash receipts. 61.
Matching the supplier's invoice, the purchase, and the receiving report normally should be the responsibility of the a. Receiving department. b. Purchasing department. c. Accounting function. d. Treasury function.
62.
To avoid potential errors and irregularities, well-designed controls in the accounts payable area should include a separation of which of the following functions? a. Cash disbursements and vendor invoice verification. b. Vendor invoice verification and merchandise ordering. c. Physical handling of merchandise received and preparation of receiving reports. d. Check signing and cancellation of payment documentation.
63.
Which of the following is a necessary control procedure for cash disbursements? a. Checks should be signed by the controller and at least one other employee of the company. b. Checks should be sequentially numbered, and the numerical sequence should be accounted for by the person preparing the bank reconciliation. c. Checks and supporting documents should be marked "Paid" immediately after the check is returned with the bank statement. d. Checks should be sent directly to the payee by the employee who prepares documents that authorize check preparation.
64.
Which of the following is not a common activity of the expenditure/disbursement cycle? a. Purchasing. b. Fixed asset additions. c. Receiving.
AUDITING THEORY - 073: PROCESSES
65.
CMP
d. Recording. Which of the following functions is not appropriate for the accounts payable department? a. Compare purchase requisitions, purchase orders, receiving reports, and vendors' invoices. b. Prepare purchase orders. c. Prepare voucher and daily summary. d. File voucher package by due date.
66.
The accounts payable department generally should a. Cancel supporting documentation after a cash payment is mailed. b. Approve the price and quantity of each purchase requisition. c. Assure that the quantity ordered is omitted from the receiving department's copy of the purchase order. d. Agree the vendor's invoice with the receiving report and purchase order.
67.
Based on observations made during an audit, an independent auditor should discuss with management the effectiveness of procedures that control against the purchase of a. Supplies purchased from a vendor who offers no trade or cash discounts. b. Inventory acquired just-in-time. c. Equipment that is needed but does not qualify for investment tax credit. d. Supplies ordered without considering potential volume discounts.
68.
Internal control is improved when the quantity of merchandise ordered is omitted from the copy of the purchase order sent to the a. Department that initiated the requisition. b. Receiving department. c. Purchasing agent. d. Accounts payable department.
69.
When goods are received, the receiving clerk should match the goods with the a. Purchase order and requisition. b. Vendor's invoice and the receiving report. c. Vendor's shipping document and the purchase order. d. Receiving report and the vendor's shipping document.
70.
The a. b. c. d.
71.
Effective internal control over the purchase of raw materials should usually include all of the following procedures except a. Reporting product changes that will affect raw materials needs. b. Determining the need for raw materials prior to preparing a purchase order. c. Obtaining third party written quality and quantity reports prior to paying for the raw materials. d. Obtaining approval prior to making a purchase commitment.
72.
To improve control over merchandise purchases, a company's receiving department should a. Accept merchandise only if an approved purchase order is on hand. b. Accept and count all merchandise received from known vendors. c. Rely on shipping documents to prepare receiving reports. d. Be responsible for handling merchandise but not for preparing receiving reports.
73.
To assure that disbursements are neither improper nor inaccurate, an entity could require that all checks be a. Signed by an officer after supporting documentation has been examined. b. Reviewed by the treasurer before mailing. c. Numbered sequentially and accounted for by internal auditors. d. Canceled when they are returned with the bank statement.
74.
The a. b. c. d.
accounts payable department should compare the information on each vendor's invoice with the Receiving report and the purchase order. Receiving report and the voucher. Vendor's packing slip and the purchase order. Vendor's packing slip and the voucher.
mailing of disbursement checks and remittance advices should be controlled by the employee who Signed the checks last. Approved the vouchers for payment. Matched the receiving reports, purchase orders, and vendor invoices. Verified the mathematical accuracy of the vouchers and remittance advices.
75. An auditor plans to examine a sample of 20 checks for countersignatures as prescribed by the client's internal
AUDITING THEORY - 073: PROCESSES
CMP
control procedures. One of the checks in the sample cannot be found. The auditor should a. Evaluate the results as if sample size had been 19. b. Treat the missing check as a deviation. c. Treat the missing check in the same manner as the majority of the other 19 checks, i.e., countersigned or not. d. Choose another check to replace the missing check in the sample. 76.
Which of the following procedures relating to the audit of accounts payable could the auditor delegate entirely to the client's employees? a. Test footings in the accounts payable ledger. b. Reconcile unpaid invoices to vendors' statements. c. Prepare a schedule of accounts payable. d. Mail confirmations for selected account balances.
77.
In order to establish accounts payable cutoff, an auditor will most likely a. Coordinate cutoff tests with the physical inventory observation. b. Compare cutoff reports with purchase orders. c. Compare vendors' invoices with vendors' statements. d. Coordinate the mailing of confirmations with cuto ff tests.
78. An audit of accounts payable is ordinarily not designed to a. Detect substantially past due accounts. b. Verify that accounts payable were properly authorized. c. Determine the reasonableness of recorded liabilities. d. Determine that all existing liabilities at the balance sheet date have been recorded. 79.
When an auditor selects a sample of items from the vouchers payable register for the last month of the period under audit and traces them to underlying documents, the auditor is gathering evidence primarily to support the assertion that a. Recorded obligations were paid. b. Incurred obligations were recorded in the correct perio d. c. Recorded obligations were valid. d. Cash disbursements were recorded as incurred obligations.
80.
Which of the following audit procedures is the most efficient at detecting unrecorded liabilities at the balance sheet date? a. Confirm large accounts payable balances at the balance sheet date. b. Compare cash disbursements in the subsequent period with the accounts payable trial balance at year-end. c. Examine purchase orders issued for several days prior to the close of the year. d. Obtain a letter from the client's attorney.
81.
Which of the following audit procedures is least likely to detect an unrecorded liability? a. Analysis and recomputation of interest expense. b. Analysis and recomputation of depreciation expense. c. Mailing a standard bank confirmation form. d. Reading the minutes of board of directors' meetings.
82. A company sells a product only in the last month of its fiscal year. The c ompany uses commission agents and pays them 6 percent of their net sales 30 days after the sales are made. The agents' sales were P10,000,000. Experience indicates that 10 percent of the sales are usually not collected and 2 percent are returned in the first month of the new year. The auditor would expect the year end balance in the accrued commissions account to be a. P528,000. b. P540,000. c. P588,000. d. P600,000. Expenditure Disbursement Cycle : Substantive Test 83. When an auditor selects a sample of items from the vouchers payable register for the last month of the period audited and traces the items to underlying documents, the auditor is gathering evidence primarily in support of the assertion that a. Recorded obligations were paid. b. Incurred obligations were recorded in the correct period. c. Recorded obligations were valid. –
AUDITING THEORY - 073: PROCESSES
d.
CMP
Cash disbursements were recorded as incurred obligations.
84. An auditor usually examines receiving reports to support entries in the a. Voucher register and sales returns journal. b. Sales journal and sales returns journal. c. Voucher register and sales journal. d. Check register and sales journal. 85.
Unrecorded liabilities are most likely to be found during the review of which of the following documents? a. Unpaid bills. b. Shipping records. c. Bills of lading. d. Unmatched sales invoices.
86. An examination of the balance in the accounts payable account is ordinarily not designed to a. Detect accounts payable that are substantially past due. b. Verify that accounts payable were properly authorized. c. Ascertain the reasonableness of recorded liabilities. d. Determine that all existing liabilities at the balance sheet date have been recorded. 87.
Confirmation of accounts payable balances a. Is usually performed at interim dates rather than at year-end. b. Is not effective in testing for unrecorded liabilities. c. Is particularly useful when the auditor suspects liabilities may be materially understated. d. Is required by generally accepted auditing standards.
88.
In order to efficiently establish the correctness of the accounts payable cutoff, the auditor will be most likely to a. Coordinate cutoff tests with physical inventory observation. b. Compare cutoff reports with purchase orders. c. Compare vendors' invoices with vendors' statements. d. Coordinate mailing of confirmations with cutoff tests.
89. A client's purchasing system ends with the assumption of a liability and the eventual payment of the liability. 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. 90. Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because a. There is a duplication of cutoff tests. b. Accounts payable balances at the balance sheet date may not be paid before the audit is completed. c. Correspondence with the audit client's attorney will reveal all legal action by vendors for nonpayment. d. There is likely to be other reliable external evidence available to support the balances. 91.
Only one of the following four statements, which compare confirmation of accounts payable with suppliers and confirmation of accounts receivable with debtors, is true. The true statement is that a. Confirmation of accounts payable with suppliers is a more widely accepted auditing procedure than is confirmation of accounts receivable with debtors. b. As compared to the confirmation of accounts payable, the confirmation of accounts receivable will tend to emphasize accounts with zero balances at the balance sheet date. c. Statistical sampling techniques are more widely accepted in the confirmation accounts payable than in the confirmation of accounts receivable. d. It is less likely that the confirmation request sent to the supplier will show the amount owed than that the request sent to the debtor will show the amount due.
92.
In connection with a review of the prepaid insurance account, which of the following procedures does the auditor generally not perform? a. Recompute the portion of the premium that expired during the year. b. Prepare excerpts of insurance policies for audit working papers. c. Confirm premium rates with an independent insurance broker. d. Examine support for premium payments.
AUDITING THEORY - 073: PROCESSES
CMP
93. An auditor reviews the 2015 prepaid insurance ledger and balances the total to the general ledger account. Which bad practice/error will most likely be detected by this procedure? a. The client's excess liability coverage, which expired December 31, 2014, was not renewed in 201 5. b. A premium refund for a three-year policy expiring in 2013 was credited to the account and not amortized. c. The client has not recognized the probable loss associated with a damage suit that is only partially covered by insurance. d. An insurer improperly computed the amount of a premium paid by the client. Test of Personnel Controls and Substantive 94. An auditor will ordinarily determine whether payroll checks are properly endorsed during the testing of a. Time cards. b. The voucher system. c. Cash in bank. d. Accrued payroll. –
95.
Which of the following control procedures could best prevent direct labor from being charged to manufacturing overhead? a. Comparison of daily journal entries with factory labor s ummary. b. Examination of routing tickets from finished goods on delivery. c. Reconciliation of work-in-process inventory with cost records. d. Recomputation of direct labor based on inspection of time cards.
96.
For appropriate segregation of duties, journalizing and posting summary payroll transactions should be assigned to a. The treasurer's department. b. General accounting. c. Payroll accounting. d. The timekeeping department.
97.
The proper use of prenumbered termination notice forms by the payroll department should provide assurance that all a. Uncashed payroll checks were issued to employees who have not been terminated. b. Personnel files are kept up to date. c. Employees who have not been terminated receive their payroll checks. d. Terminated employees are removed from the payroll.
98.
Hitech, Inc., has changed from a conventional to a computerized payroll clock card system. Factory employees now record time in and out with magnetic cards, and the computer system automatically updates all payroll records. Because of this change, a. The auditor must audit through the computer. b. Internal control has improved. c. Part of the audit trail has been lost. d. The potential for payroll-related fraud has been diminished.
99.
In the weekly computer run to prepare payroll checks, a check was printed for an employee who had been terminated the previous week. Which of the following control procedures, if properly utilized, would have been most effective in preventing the error or assuring prompt detection? a. A control total for hours worked, prepared from time cards collected by the timekeeping department. b. Requiring the treasurer's office to account for the numbers of the prenumbered checks issued to the computer department for the processing of the payroll. c. Use of a check digit for employee numbers. d. Use of a header label for the payroll input sheet.
100. To minimize the opportunities for fraud, unclaimed cash payroll should be a. Deposited in a safe deposit box. b. Held by the payroll custodian. c. Deposited in a special bank account. d. Held by the controller. 101. A large retail enterprise has established a policy that requires that the paymaster deliver all unclaimed payroll checks to the internal auditing department at the end of each payroll distribution day. This policy was most likely adopted in order to a. Assure that employees who were absent on a payroll distribution day are not paid for that day.
AUDITING THEORY - 073: PROCESSES
b. c. d.
CMP
Prevent the paymaster from cashing checks that are unclaimed for several weeks. Prevent a bona fide employee's check from being claimed by another employee. Detect any fictitious employee who may have been placed on the payroll.
102. In the audit of the following types of profit-oriented enterprises, which one woul d the auditor be most likely to place special emphasis on testing the internal controls over proper classification of payroll transactions? a. A manufacturing organization. b. A retailing organization. c. A wholesaling organization. d. A service organization. 103. A common audit procedure in the audit of payroll transactions involves tracing selected items from the payroll journal to employee time cards that have been approved by supervisory personnel. This procedure is designed to provide evidence in support of the audit proposition that a. Only bona fide employees worked, and their pay was properly computed. b. Jobs on which employees worked were charged with the appropriate labor cost. c. Internal controls relating to payroll disbursements are operating effectively. d. All employees worked the number of hours for which their pay was computed. 104. Which of the following procedures is most effective in providing reasonable assurance that payroll checks are distributed only to bona fide employees? a. An employee independent of payroll preparation compares endorsements on canceled payroll checks with employee signatures in personnel records. b. All changes in pay rates and deductions are reviewed and approved by a responsible official independent of payroll preparation and distribution. c. All unclaimed paychecks are returned to an employee independent of payroll preparation and distribution. d. All personnel and payroll records and documents are prenumbered and physically protected from unauthorized access. 105. Personnel department responsibilities should be separated from payroll preparation to a. Separate the custody of assets from the recording function. b. Establish clear lines of authority and accountability. c. Separate the authorization of transactions from the recording function. d. Separate the authorization of transactions from the execution of transactions. 106. For internal control purposes, which of the following individuals should preferably be responsible for the distribution of payroll checks? a. Bookkeeper. b. Payroll clerk. c. Cashier. d. Receptionist. 107. A factory foreman discharged an hourly worker but did not notify the payroll department. The foreman then forged the worker's signature on time cards, and, when giving out the checks, diverted the payroll checks drawn for the discharged worker to his own use. The most effective procedure for preventing this activity is to a. Require written authorization for all employees added to or removed from the payroll. b. Have a "paymaster" who has no other payroll responsibility distribute the payroll checks. c. Have someone other than persons who prepare or distribute payroll obtain custody of unclaimed checks. d. From time to time, rotate persons distributing the payroll. 108. Which of the following is not a common activity within personnel and payroll? a. Initiate terminations. b. Prepare and update personnel records. c. Prepare and record payroll. d. Distribute paychecks to employees. 109. Which of the following control procedures is inappropriate to prevent errors or irregularities resulting form hiring unqualified employees? a. Establish clear statements of hiring policies and procedures. b. Maintain updated listings of authorized pay rates and deductions. c. Maintain updated personnel records for all employees. d. Verify employment applications.
AUDITING THEORY - 073: PROCESSES
CMP
110. What control objective is served by management's establishing and documenting account distribution procedures? a. Amounts due to employees should be recorded at the proper amounts, be recorded in the proper period, and be properly classified. b. All payroll cash disbursements should be based upon a recognized liability. c. Payroll and personnel procedures should be established in accordance with management's authorization. d. Employees should be hired according to criteria authorized by management. 111. Which of the following control procedures is most likely to prevent errors or irregularities related to access to assets? a. Reconcile appropriate ledgers and journals. b. Prenumber and control forms and documents. c. Establish personnel and payroll procedures manuals. d. Verify employment applications. 112. Of the financial statement accounts listed below, which is not likely affected by the accuracy of payroll and account distribution? a. Cost of sales. b. Accrued taxes. c. Cash. d. Finished goods inventory. 113. In auditing postretirement healthcare benefits, auditors face what's called the attribution period, which is the period from the date the employee: a. Was hired to the date the employee terminated employment. b. Was hired to the date the employee is eligible to receive benefits. c. Was terminated to the date the employee is eligible to receive benefits. d. Was terminated to the date the employee receives benefits. 114. Effective controls over payroll would include which of t he following controls? a. Total time recorded on time cards should be reconciled with job reports by employees responsible for those specific jobs. b. Payroll department employees should be supervised by the management of the personnel department. c. Payroll department employees should be responsible for maintaining employee personnel records. d. Total time spent on jobs should be compared with total time indicated on time records. 115. One of the auditor's objectives in observing the actual distribution of payroll checks is to determine that every name on the payroll is that of a bona fide employee. The payroll observation is an auditing procedure that is generally performed for which of the following reasons? a. The professional standards that are generally accepted require the auditor to perform the payroll observation. b. The various phases of payroll work are not sufficiently segregated to afford effective control. c. The independent auditor uses personal judgment and decides to observe the payroll distribution on a particular audit. d. The standards that are generally accepted by the profession are interpreted to mean that payroll observation is expected on an audit unless circumstances dictate otherwise.
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