Which of the following control procedures will likely prevent the concealment?

MODULE 10

TESTS OF CONTROLS AND SUBSTANTIVE

PROCEDURES

REVENUE AND RECEIPTS CYCLE

Test of Controls

1. Which of the following business functions is associated with the revenue/receipt cycle? A. Obligations are paid to vendors and employees. B. Resources are distributed to outsiders in exchange for promises of future payments. C. Resources are used, held, or transformed. D. Capital funds are received from investors and creditors.

2. Which of the following is not a common activity in the revenue/receipt cycle? A. Order entry B. Receiving C. Inventory control D. cash collection

3. The cash account is involved in which cycle? A. Revenue and collection. B. Acquisition and expenditure. C. Production and conversion. D. All of the given choices.

4. Which of the following is an appropriate audit procedure to test cancelled checks for authorized signatures?

A. Compare the check date with the first cancellation date. B. Determine that all checks are to be signed by individual officers who are authorized by the board. C. Examine a representative sample of signed checks and trace their signatures to the specimen signature book of authorized signatories. D. Confirm the signatures from a sample of checks directly with the bank.

1. Which of the following is not likely a source of information about the accounting system in the revenue area? A. Direct inquiry of customers. B. Prior experience with the client. C. Systems flowcharts prepared by the EDP department. D. Financial reporting manuals.

2. Which of the following gives an indication of a potential fraudulent activity? A. Numerous credit memoranda have been issued to the company's biggest customer. B. Internal auditor cannot locate several credit memoranda to support reductions of customers' balances. C. The year-end bank reconciliation has no outstanding checks or deposits older than 15 days. D. No one was absent the day the auditors handed out the paychecks.

A. Sales, cash receipts, and related transactions should be recorded at the correct amounts, in the proper period, and should be properly classified. B. Recorded accounts receivable balances should reflect underlying transactions and events. C. Billings, collections, and related adjustments transactions should be posted accurately to individual customer accounts. D. Access to cash and cash-related records should be restricted to personnel authorized by management.

1. Which of the following internal control procedures most likely would deter lapping of collections from customers? A. Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries. B. Authorization of writeoffs of uncollectible accounts by a supervisor who is independent of credit approval. C. Segregation of duties between receiving cash and posting collections to the accounts receivable ledger. D. Supervisor’s comparison of the daily cash summary with the sum of the cash receipts journal entries.

2. What sequence of steps does an auditor undertake when identifying control procedures that are potentially reliable in assessing control risk below the maximum? A. Consider the errors or frauds that might occur, determine control procedures, identify control objectives, and design tests of controls.

B. Determine control procedures, design tests of controls, consider the errors or frauds that might occur, and identify control objectives. C. Identify control objectives, consider the errors or frauds that might occur, determine control procedures, and design tests of controls. D. Design tests of controls, determine control procedures, consider the errors or frauds that might occur, and identify control objectives.

1. Assuming cash receipts from credit sales have been misappropriated, which of the following is likely to conceal the misappropriation and unlikely to be detected? A. Understating the sales journal. B. Overstating the accounts receivable control account. C. Overstating the accounts receivable subsidiary ledger. D. Overstating the cash receipts journal.

2. Which of the following is most likely to provide management with incentives to overstate earnings? A. Projected quarterly dividends. B. Issuance of preferred stock. C. Unbudgeted increase in materials prices. D. A projected stock split.

3. Under which of the following circumstances does management have some discretion in timing the recognition of revenue? A. The timing of revenue is not reasonably determinable and the earnings process is not complete.

C. Deposit each day’s cash receipts by the end of the day. D. Have bank reconciliation prepared by employees who do not handle cash.

1. On conducting an audit in which point in an ordinary sales transaction of a wholesaling business is a lack of specific authorization of least concern to the auditor? A. Granting of credit. B. Shipment of goods. C. Determination of discounts. D. Selling of goods for cash.

2. A company has computerized sales and cash receipts journals. The computer programs for these journals have been properly debugged. The auditor discovered that the total of the accounts receivable subsidiary accounts differs materially from the accounts receivable control account. This discrepancy could indicate A. Lapping of receivables. B. Credit memoranda being improperly recorded. C. Receivables not being properly aged. D. Statements being intercepted prior to mailing.

3. 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.

4. The person who opens the mail commonly prepares a remittance advice when a customer fails to return one with the payment. Consequently, mail should be opened by the A. credit manager. B. receptionist. C. sales manager. D. accounts receivable clerk.

5. 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 off must be approved by a responsible officer after reviewing the credit department’s recommendations and supporting evidence. B. Write off must be supported by an aging schedule showing that only receivables that are several months overdue have been written off. C. Write off must be approved by the cashier. D. Write off must be authorized by field sales representatives.

6. Which of the following would unlikely improve control over an entity’s cash? A. Separating cash record keeping from the custody of cash. B. Preparing the monthly bank reconciliation. C. Processing of checks in batches, rather than intermittently. D. Separating cash receipts from cash disbursements.

7. Which of the following would best protect a company that wishes to prevent lapping?

D. To verify the results of the auditor’s sampling plan.

1. Which of these assignments of duties would least likely lead to an embezzlement or theft? A. Inventory warehouse manager has responsibility for making the physical inventory observation and reconciling the discrepancies to the perpetual inventory records. B. The cashier prepares the bank deposit, endorses the checks with a company stamp, takes the cash and checks to the bank for deposit, and reconciles the bank statement. C. Accounts receivable clerk opens customer payments so he could make entries in the customers' accounts receivable subsidiary accounts. D. Financial vice president receives the checks payable to suppliers and the supporting invoices, signs the checks, and mails them to the payees.

2. Standard control procedures over customer remittances received through the mail include the policy that requires the mailroom personnel to A. Forward the remittances, unopened, directly to the cashier. B. Open the mail, restrictively endorses the checks, and then prelist each remittance in triplicate copies. C. Forward the remittances, unopened, directly to the accounts receivable clerk. D. Open the mail, restrictively endorses the checks, then, forward the remittances directly to the accounts receivable clerk.

3. After making the deposit, the daily cash summaries and the validated deposit slips should be forwarded by the cashier directly to the: A. Treasurer. B. Accounts receivable clerk. C. General accounting. D. Internal auditor.

4. The accounting and the cash receipts functions should be handled by which department(s)? A. Both functions should be under the control of the company Treasurer B. Both functions should be under the control of the company Controller C. The Controller should have control of accounting functions and the Treasurer should have control of cash receipt functions. D. The Treasurer should have control of accounting functions and the Controller should have control of cash receipt functions.

5. When auditing cash, the auditor should mostly be concerned with: A. Detective risk. B. Inherent risk. C. Adjunct risk. D. Nonsampling risk.

6. Which of the following is most likely to indicate a fraud? A. Several overpayments are made for goods received from a supplier. B. The year end cash balance does not include cash in transit to the company at year-end.

D. draw a check for at least P10,000 on Bank A for deposit in Bank B. Record the disbursement but not the receipt and list the disbursement as an outstanding check. Record the receipt at the beginning of the following year.

1. A company has a policy of rotating employees’ assigned duties. This policy is most important for employees who: A. are not bonded. B. maintain the detailed accounting records. C. handle cash receipts. D. have access to the general ledger.

2. Alpha Company uses its sales invoices for posting to perpetual inventory records. Inadequate internal control procedures over the invoicing function allow goods to be shipped that are not yet invoiced. The inadequate controls could cause an A. understatement of revenues, receivables, and inventory. B. overstatement of revenues and receivables, and an understatement of inventory. C. understatement of revenues and receivables, and an overstatement of inventory. D. overstatement of revenues, receivables, and inventory.

3. Which of the following control procedures may prevent the failure to bill customers for some shipments? A. Each shipment should be supported by a pre- numbered sales invoice that is accounted for. B. Each sales order should be approved by authorized personnel.

C. Sales journal entries should be reconciled to daily sales summaries. D. Each sales invoice should be supported by a shipping document.

1. The most effective control for ensuring that customers are billed only for goods shipped is to A. require that carriers sign properly completed bills of lading. B. implement a policy that prevents the mailing of sales invoices to customers in the absence of a properly approved shipping order and a bill of lading signed by the carrier. C. require that all shipments be approved by an accounting personnel. D. prevent goods from leaving the warehouse without being accompanied by a signed bill of lading and a properly approved shipping order.

2. A company policy should clearly indicate that defective merchandise returned by customers is to be delivered to the A. Sales clerk. B. Receiving clerk. C. Inventory control clerk. D. Accounts receivable clerk.

3. During the review of a small business client's internal control system, the auditor discovered that the accounts receivable clerk approves credit memos and has access to cash. Which of the following controls would be most effective in offsetting this weakness? A. The owner reviews errors in billings to customers and postings to the subsidiary ledgers.

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.

1. 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 for which all prenumbered forms in the series have been accounted for. D. the shipping clerk’s file of duplicate copies of shipping documents

2. To gather audit evidence about the proper credit approval of sales, the auditor would select sample of documents from the population represented by the A. customer order file. B. bill of lading file. C. subsidiary customers’ account ledger. D. sales invoice file.

3. The purpose of tests of controls over shipping is to determine whether A. billed goods have been shipped. B. shipments are billed. C. shipping department personnel are competent. D. credit is approved before goods are shipped.

4. The purpose of tests of controls over billing is to determine whether

A. billed goods have been shipped. B. shipments are billed. C. billing department personnel are competent. D. credit is approved before goods are billed.

1. An effective procedure to test for unbilled shipments is to trace from the A. sales journal to the shipping documents. B. shipping documents to the sales journal. C. sales journal to the accounts receivable ledger. D. sales journal to the general ledger sales account.

2. To determine whether refunds granted to customers were properly approved, the auditor should trace accounts receivable entries to: A. Sales invoices. B. Remittance advices. C. Shipping documents. D memos.

3. The following are four steps that an auditor undertakes in assessing control risk: A) Determine what control procedures are used by the entite 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

1. Which of the following statements about "window dressing is correct?" A. Window dressing involves an intentional overstatement of receivables and sales through decreases in the percentage of completion of long-term construction projects. B. An audit is not intended to provide assurance of detecting any forms of window dressing. C. A number of window dressing practices represent proper and appropriate business practices. D. Window dressing ordinarily involves the intentional overstatement of liability and equity accounts.

SUBSTANTIVE TESTS

1. As one of the year-end audit procedures, the auditor instructed the client's personnel to prepare a standard bank confirmation request for a bank account that had been closed during the year. After the client's treasurer had signed the request, it was mailed by the assistant treasurer. What is the major flaw in this audit procedure? A. The confirmation request was signed by the treasurer. B. Sending the request was meaningless because the account was closed. C. The request was mailed by the assistant treasurer. D. The CPA did not sign the confirmation request before it was mailed.

2. A proof of cash is normally used A. for all engagements.

B. to test the transactions process when controls over cash are weak. C. when control risk for cash is low. D. when lapping is suspected.

1. To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine all of the following except: A. cutoff bank statement. B. year-end bank statement. C. bank confirmation. D ledger.

2. An auditor requests a cutoff bank statement primarily to: A. verify the cash balance reported on the bank confirmation. B. verify reconciling items on the client’s bank reconciliation. C. detect lapping. D. detect kiting.

3. An auditor gathers evidence regarding the validity of deposits in transit by examining the A. bank confirmation. B. cutoff bank statement. C. year-end bank statement. D. bank reconciliation.

4. Which of the following audit procedures is most likely to detect a cash balance that is restricted as to withdrawal? A. Review the cutoff bank statement. B. Prepare an interbank transfer schedule. C. Make inquiries of management.

Which of the following control procedures will likely prevent the concealment of a cash?

Which of the following controls will most likely prevent the concealment of cash shortage resulting from the improper write

Which of the following internal control procedures most likely would ensure that all billed sales are correctly posted to the accounts receivable ledger?

Which of the following internal control activities most likely would deter lapping of collections from customers?