ACC 580 SU 6,7, 11, 12

Fact Pattern: Listed below are four of a client's interbank cash transfers, indicated by the numbers 1, 2, 3, and 4, for late December and early in the following January. Your answer choice for each question should be selected from this list. Bank Account One Disbursing Date (Month/Day): 1. Per Bank 12/31 Per Books 12/30 2. Per Bank 1/2 Per Books 12/30 3. Per Bank 1/3 Per Books 12/31 4. Per Bank 1/3 Per Books 12/31 Bank Account Two Receiving Date (Month/Day): 1. Per Bank 12/31 Per Books 12/30 2. Per Bank 12/31 Per Books 12/31 3. Per Bank 1/2 Per Books 1/2 4. Per Bank 1/2 Per Books 12/31 Which of the cash transfers would appear as a deposit in transit on the December 31 bank reconciliation? a. 4 b. 3 c. 2 d. 1

a. 4 A deposit in transit is one recorded in the books as a receipt by the balance sheet date, but is not recorded as a deposit by the bank until the next period. Transfer (4) is a deposit in transit because it was recorded as a receipt in the books on 12/31 but not as a deposit by the bank until 1/2.

An entity with a large volume of customer remittances by mail most likely can reduce the risk of employee misappropriation of cash by using a. A bank lockbox system. b. Daily check summaries. c. Employee fidelity bonds. d. Independently prepared mail room prelists.

a. A bank lockbox system. A lockbox system assures that cash receipts are not stolen by mail clerks or other employees. This system provides for customer payments to be sent to a post office box and collected directly by the bank.

Fact Pattern: A sales transaction record designed to contain the information presented below. Column Information 1-10 Customer account number 11-30 Customer name 31-38 Amount of sale 39-44 Sales date 45-46 Store code number 47-49 Sales clerk number 50-59 Invoice number If the last letter of a customer's name is erroneously entered in column 31, which of the following is most likely to detect the error during an input edit run? a. A field check. b. A check digit. c. A limit check. d. A logic check.

a. A field check. The erroneous entry of a customer's name into the field that should contain the amount of the sale is detected by a field check. This control identifies an alphabetic character in a field that should contain only numeric characters.

Which of the following activities is most likely to prevent the improper disposition of equipment? a. A segregation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders. b. The use of serial numbers to identify equipment that could be sold. c. Periodic comparison of removal work orders with authorizing documentation. d. A periodic analysis of the scrap sales and the repairs and maintenance accounts.

a. A segregation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders. Segregation of duties reduces the opportunity for an individual both to perpetrate and to conceal fraud or error. Accordingly, the authorization, recording, and asset custody functions should be separated. Thus, the same individual should not approve removal work orders (authorization) and dispose of equipment (asset custody).

Which of the following activities performed by a department supervisor most likely would help in the prevention or detection of a payroll fraud? a. Approving a summary of hours each employee worked during the pay period. b. Distributing paychecks directly to department employees. c. Hiring employees and authorizing them to be added to payroll. d. Setting the pay rate for departmental employees.

a. Approving a summary of hours each employee worked during the pay period. The department supervisor is in the best position to determine that employees are present and performing the assigned functions.

In connection with the audit of a current issue of bonds payable, the auditor should a. Ascertain that the client has obtained the opinion of counsel on the legality of the issue. b. Conclude that no bondholders are owners, directors, or officers of the company issuing the bonds. c. Calculate the effective interest rate to see if it is substantially the same as the rates for similar issues. d. Decide whether the bond issue was made without violating state or local law.

a. Ascertain that the client has obtained the opinion of counsel on the legality of the issue. An audit of noncurrent debt (1) determines that all noncurrent debt has been recorded and constitutes bona fide liabilities; (2) verifies that federal and state laws relevant to financial reporting have been complied with; (3) determines that premium, discount, interest payable, and interest expense are accurately recorded; (4) monitors compliance with debt contracts; and (5) reviews proper presentation and disclosure in the financial statements. The auditor therefore should determine that the client has obtained the opinion of a lawyer on the legality of the bond issue.

An auditor should test bank transfers for the last part of the audit period and first part of the subsequent period to detect whether a. Cash balances were overstated because of kiting. b. Any unusual payments to or receipts from related parties occurred. c. The cash receipts journal was held open for a few days after year end. d. The last checks recorded before year end were actually mailed by year end.

a. Cash balances were overstated because of kiting. Kiting is the recording of a deposit from an interbank transfer in the current period while failing to record the related disbursement until the next period. This fraud exploits the lag (float period) between the deposit of a check in one account and the time it clears the bank on which it is drawn. To detect kiting, the auditor should examine a schedule of bank transfers for a period covering a few days before and after the balance sheet date. For the procedure to be effective, however, the auditor should be assured that all transfers have been identified.

During an audit of a company's equity accounts, the auditor determines whether restrictions have been imposed on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify relevant assertion about a. Classification and understandability. b. Completeness. c. Existence or occurrence. d. Valuation and allocation.

a. Classification and understandability. The presentation and disclosure assertions include assertions about classification and understandability. Financial information should be properly presented and disclosed, and disclosures should be clear (AU-C 315 and AS 1105). Thus, when restrictions have been placed on retained earnings, the auditor should determine that they are properly disclosed in the notes to the financial statements.

An employee in the receiving department keyed in a shipment from a remote terminal and inadvertently omitted the purchase order number. The best systems control to detect this error is a. Completeness test. b. Reasonableness test. c. Compatibility test. d. Sequence check.

a. Completeness test. A completeness test checks that all data elements are entered before processing. An interactive system can be programmed to notify the user to enter the number before accepting the receiving report.

When auditing a client's statement of cash flows, an auditor will rely primarily upon a. Cross-referencing to balances and transactions considered in connection with the audit of the other financial statements. b. Determination of the amount of cash at year-end. c. The standard bank confirmation. d. Analysis of significant ratios of prior years as compared to the current year.

a. Cross-referencing to balances and transactions considered in connection with the audit of the other financial statements. The statement of cash flows represents balances taken from the other statements as well as analysis of changes in those balances. Consequently, this statement is audited in conjunction with the balance sheet and income statement accounts.

Which of the following comparisons would be most useful to an auditor in evaluating the results of an entity's operations? a. Current-year revenue to budgeted current-year revenue. b. Prior-year accounts payable to current-year accounts payable. c. Prior-year payroll expense to budgeted current-year payroll expense. d. Current-year warranty expense to current-year contingent liabilities.

a. Current-year revenue to budgeted current-year revenue. Revenues result from an entity's ongoing major or central operations. These operations reflect numerous activities and affect many accounts. Consequently, comparing current-year revenue with the budgeted current-year revenue provides evidence as to the completeness of revenue. Revenue is a broad measure of the effects of the entity's main activities and is a primary component of the results of operations.

An auditor would consider a cashier's job description to contain compatible duties if the cashier receives remittances from the mail room and also prepares the a. Daily deposit slip. b. Remittance advices. c. Monthly bank reconciliation. d. Prelist of individual checks.

a. Daily deposit slip. Preparing the bank deposit slip is a part of the custodial function, which is the primary responsibility of a cashier. The cashier is an assistant to the CFO and thus performs an asset custody function. The preparation of a bank deposit slip is an integral part of the custodial function, along with the depositing of remittances daily at a local bank.

Fact Pattern: This flowchart depicts the processing of daily cash receipts for Rockmart Manufacturing. Please note that some procedures are not shown in this flowchart. IMAGE The customer checks accompanied by the control tape (refer to symbol A) should be a. Forwarded to the CFO for deposit daily. b. Taken by the mail clerk to the bank for deposit daily. c. Accumulated for a week and then forwarded to the CFO for deposit weekly. d. Forwarded daily to the billing department for deposit.

a. Forwarded to the CFO for deposit daily. Symbol A is a connector between a point on this flowchart and another part of the flowchart not shown. The checks and the adding machine control tape should flow through symbol A to the CFO's office. The CFO is the custodian of funds and is responsible for deposit of daily receipts.

Which of the following audit procedures would an auditor most likely perform to test controls relating to management's assertion concerning the completeness of sales transactions? a. Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal. b. Compare the invoiced prices on prenumbered sales invoices to the entity's authorized price list. c. Verify that extensions and footings on the entity's sales invoices and monthly customer statements have been recomputed. d. Inquire about the entity's credit granting policies and the consistent application of credit checks.

a. Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal. The completeness assertion relates to whether all transactions that should have been recorded in the accounting records were included. Thus, unrecorded shipping documents would indicate that not all transactions are being properly recorded.

Which of the following is an operating control over the staffing function? a. Making background checks on all new hires. b. Maintaining records of the department's accomplishments. c. Encouraging new hires to participate in professional organizations. d. Requiring personnel to participate in firm-sponsored external activities.

a. Making background checks on all new hires. Staffing provides the necessary personnel to achieve organizational objectives efficiently. Because honest and capable personnel also help create an environment that promotes effective internal control, hiring policies and procedures are crucial. Background checks, for example, may screen out potential hirees of questionable character.

Which of the following internal control activities most likely justifies reducing the assessment of the risks of material misstatement for plant and equipment acquisitions? a. Periodic physical inspection of plant and equipment by the internal audit staff. b. Comparison of current-year plant and equipment account balances with prior-year actual balances. c. Approval of periodic depreciation entries by a supervisor independent of the accounting department. d. The review of prenumbered purchase orders to detect unrecorded trade-ins.

a. Periodic physical inspection of plant and equipment by the internal audit staff. A periodic physical inspection by the internal audit staff is the best activity for verifying the existence of plant and equipment. Direct observation by an independent, competent, and objective internal audit staff helps to reduce the potential for fictitious acquisitions or other fraudulent activities. The result is a lower assessment of the RMMs.

In a properly designed internal control system, the same employee most likely would match vendors' invoices with receiving reports and also a. Recompute the calculations on vendors' invoices. b. Cancel vendors' invoices after payment. c. Post the detailed accounts payable records. d. Reconcile the accounts payable ledger.

a. Recompute the calculations on vendors' invoices. The vouchers payable clerk (1) matches purchase orders, vendors' invoices, and receiving reports; (2) tests the calculations and terms on the vendors' invoices; and (3) prepares a disbursement voucher.

Fact Pattern: Sales procedures that were encountered during the regular annual audit of Marvel Wholesale Distributing Company are described below. Customer orders are received by the sales-order department. A clerk computes the dollar amount of the order and sends it to the credit department for approval. Credit approval is stamped on the order and returned to the sales-order department. An invoice is prepared in two copies, and the order is filed in the customer order file. The customer copy of the invoice is sent to the billing department and held in the pending file, awaiting notification that the order has been shipped. The shipping copy of the invoice is routed through the warehouse, and the shipping department has authority for the respective departments to release and ship the merchandise. Shipping department personnel pack the order and prepare a three-copy bill of lading: The original copy is mailed to the customer, the second copy is sent with the shipment, and the other is filed in sequence in the bill of lading file. The invoice shipping copy is sent to the billing department. The billing clerk matches the received shipping copy with the customer copy from the pending file. Both copies of the invoice are priced, extended, and footed. The customer copy is then mailed directly to the customer, and the shipping copy is sent to the accounts receivable clerk. The accounts receivable clerk enters the invoice data in a sales-accounts receivable journal, posts the customer's account in the subsidiary customers' accounts ledger, and files the shipping copy in the sales invoice file. The invoices are numbered and filed in sequence. To determine whether Marvel Company's internal control operated effectively to minimize errors of failure to post invoices to the customers' accounts ledger, the auditor should select a sample of transactions from the population represented by the a. Sales invoice file. b. Subsidiary customers' accounts ledger. c. Customer order file. d. Bill of lading file.

a. Sales invoice file. The auditor should trace sales according to the sales invoices to the accounts receivable subsidiary ledger. Sales invoices in the sales invoice file without corresponding entries in the subsidiary ledger represent transactions not posted.

What is a possible consequence of an employee's being able to visit the safe-deposit box unaccompanied? a. The employee could pledge corporate investments as security for a short-term personal bank loan. b. There would be no record of when company personnel visited the safe-deposit box. c. The employee could steal securities, and the theft would never be discovered. d. It would be impossible to obtain a fidelity bond on the employee.

a. The employee could pledge corporate investments as security for a short-term personal bank loan. The bank should maintain a record, which can be inspected by company personnel, of all safe-deposit box visits. Access should be limited to authorized officers. Firms typically require the presence of two authorized persons for access to the box. This precaution provides supervisory control over, for example, the temporary removal of the securities to serve as a pledge for a loan (hypothecation of securities).

Before goods can be shipped, which of the following steps in the sales-receivables process must occur? a. The shipping copy of the sales order is matched to the packing slip. b. Billing completes an invoice for the goods and mails it to the customer. c. Accounts receivable posts the transaction to the accounts receivable subsidiary ledger. d. Inventory control updates inventory records for the goods to be shipped.

a. The shipping copy of the sales order is matched to the packing slip. Matching of the packing slip copy held by shipping can ensure that all goods released from the inventory warehouse are received by shipping on a timely basis. This must be done before goods are shipped.

An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion of a. Valuation. b. Occurrence. c. Completeness. d. Rights and obligations.

a. Valuation. The proper approval of credit provides assurance that the account receivable is collectible. Thus, it is related to the valuation assertion that balances are reported at appropriate amounts, e.g., accounts receivable at net realizable value.

Which of the following control objectives is achieved by reviewing and testing control procedures over physical inventory count? a. Verification of existence of inventory. b. Posting and summarization of inventory transactions. c. Validation of purchase transactions. d. Authorization of the manufacturing orders.

a. Verification of existence of inventory. Observation tests the assertion of existence. The auditor should observe and make test counts but is not responsible for taking inventory.

During the process of confirming receivables as of December 31, Year 1, a positive confirmation was returned indicating the "balance owed as of December 31 was paid on January 9, Year 2." The auditor would most likely a. Verify that the amount was received. b. Determine whether any changes in the account occurred between January 1 and January 9, Year 2. c. Reconfirm the zero balance as of January 10, Year 2. d. Determine whether a customary trade discount was taken by the customer.

a. Verify that the amount was received. Responses to confirmation requests that involve significant differences are investigated by the auditor. Others are delegated to client employees with a request that explanations be given to the auditor. Such differences often arise because of recent cash payments. In that event, the auditor should trace remittances to verify that stated amounts were received.

Fact Pattern: The following was taken from the bank transfer schedule prepared during the audit of Fox Co.'s financial statements for the year ended December 31, Year 1. Assume all checks are dated and issued on December 30, Year 1. Check No.: 101/202/303/404 Bank Accounts From: National/County/Federal/State To: Federal/State/American/Republic Disbursement Date: Per Books: Dec. 30/Jan. 3/Dec. 31/Jan. 2 Per Bank: Jan. 4/Jan. 2/Jan. 3/Jan. 2 Receipt Date: Per Books: Dec. 30/Dec. 30/Jan. 2/Dec. 31 Per Bank: Jan. 3/Dec. 31/Jan. 2/Jan. 2 Which of the following checks might indicate kiting? a. #101 and #303. b. #202 and #404. c. #202 and #303. d. #101 and #404.

b. #202 and #404. Kiting is the recording of a deposit from an interbank transfer in the current period while failing to record the related disbursement until the next period. It is a fraud that exploits the lag (float period) between the deposit of a check in one account and the time it clears the bank on which it is drawn. Checks #202 and #404 may indicate kiting. They were recorded as receipts on the books in the current period. However, they were recorded as disbursements on the books in the next year.

To safeguard the assets through effective internal control, accounts receivable that are written off should be transferred to a. A tax deductions file. b. A separate ledger. c. A credit manager, since customers may seek to reestablish credit by paying. d. An attorney for evidence in collection proceedings.

b. A separate ledger. Accounts receivable that are written off should be transferred to a separate ledger. This ledger should be maintained by the accounting department and periodically reviewed to determine if any of the accounts have become collectible.

Which of the following situations most likely could lead to an embezzlement scheme? a. Each vendor invoice is matched with the related purchase order and receiving report by the vouchers payable clerk who personally approves the voucher for payment. b. Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statement. c. Vouchers and supporting documentation are examined and then canceled by the CFO who personally mails the checks to vendors. d. The accounts receivable bookkeeper receives a list of payments prepared by the cashier and personally makes entries in the customers' accounts receivable subsidiary ledger.

b. Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statement. Sufficient segregation of duties should exist to prevent embezzlement (a fraudulent appropriation to one's own use of property entrusted to one's care). The cash disbursements bookkeeper has an asset custody function. (S)he signs checks prepared by the accounts payable function after inspecting the supporting documents. (S)he then cancels those documents and mails the checks. The cash disbursements bookkeeper's access to blank checks and ability to reconcile the monthly bank statement are inappropriate. (S)he can perpetrate and conceal fraud.

An inappropriate audit procedure relative to accounts receivable is to determine that the a. Accounts represent the complete transaction process. b. Accounts are collected by the balance sheet date. c. Accounts exist and are properly valued. d. Client has rights in the accounts receivable.

b. Accounts are collected by the balance sheet date. Accounts receivable represent the amounts due the client at the balance sheet date. The auditor should not expect the accounts to be collected at the balance sheet date.

Fact Pattern: A flowchart of a client's revenue cycle appears below. IMAGE Symbol A most likely represents a. Cash disbursements transaction file. b. Accounts receivable master file. c. Receiving report file. d. Remittance advice file.

b. Accounts receivable master file. During the processing of sales orders and remittances from customers, as well as sales returns and write-off authorizations, the accounts receivable master file is accessed and updated. Thus, symbol A represents the accounts receivable master file.

Which of the following is a standard control over cash disbursements? a. Checks should be sent directly to the payee by the employee who prepares them b. Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations. c. Checks should be signed by the controller and at least one other employee of the company. d. Checks and supporting documents should be marked "Paid" immediately after the check is returned with the bank statement.

b. Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations. The sequential numbering of checks provides a standard control over cash disbursements. The numerical sequence of canceled checks should be accounted for by the person preparing bank reconciliations. Physical control over blank checks should be maintained by the CFO. A major objective is to detect unrecorded and unauthorized checks.

An essential procedural control to ensure the accuracy of the recorded inventory quantities is a. Calculating unit costs and valuing obsolete or damaged inventory items in accordance with inventory policy. b. Establishing a cutoff for goods received and shipped. c. Performing a gross profit test. d. Testing inventory extensions.

b. Establishing a cutoff for goods received and shipped. A proper cutoff point for goods received and shipped assures that only goods owned by the client are included in inventory.

When few property and equipment transactions occur during the year, the continuing auditor usually obtains an understanding of the related internal controls and performs a. A thorough examination of the balances at the beginning of the year. b. Extensive tests of current year property and equipment transactions. c. Tests of controls. d. Analytical procedures to verify current year additions to property and equipment.

b. Extensive tests of current year property and equipment transactions. Testing the details of transactions is the preferable procedure for property, plant, and equipment. The beginning balance has been audited, and subsequent transactions in the account ordinarily are few. The auditor also may not rely on controls after obtaining an understanding of internal control because (s)he believes that (1) no effective controls are relevant to the assertion or (2) testing controls would be inefficient.

Which of the following audit procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories? a. Inspect the open purchase order file for significant commitments that should be considered for disclosure. b. Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens. c. Trace test counts noted during the entity's physical count to the entity's summarization of quantities. d. Select the last few shipping advices used before the physical count and determine whether the shipments were recorded as sales.

b. Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens. Testing the assertion of rights and obligations for inventories determines that the entity has legal title or similar rights to the inventories. Typically, the auditor examines paid vendors' invoices, consignment agreements, and contracts.

In performing a search for unrecorded retirements of fixed assets, an auditor most likely would a. Tour the client's facilities, and then analyze the repair and maintenance account. b. Inspect the property ledger and the insurance and tax records, and then tour the client's facilities. c. Tour the client's facilities, and then inspect the property ledger and the insurance and tax records. d. Analyze the repair and maintenance account, and then tour the client's facilities.

b. Inspect the property ledger and the insurance and tax records, and then tour the client's facilities. In a search for unrecorded retirements, that is, a test of the completeness assertion, the auditor should first determine from the property ledger what assets are recorded and then tour the facilities to determine whether those assets are physically present. The completeness assertion addresses whether all transactions that should be presented (e.g., retirements) are included in the statements. However, in this case, the completeness assertion is closely related to the existence assertion.

The auditing standards define external confirmation as "a direct written response to the auditor from a third party (the confirming party), either in paper form or by electronic or other medium." The assertions for which confirmation of accounts receivable balances provides primary evidence are a. Existence and completeness. b. Rights and obligations and existence. c. Completeness and valuation. d. Valuation and rights and obligations.

b. Rights and obligations and existence. Confirmation by means of direct (independent) communication with debtors is the generally accepted auditing procedure for accounts receivable. Properly designed requests may address any assertion in the financial statements, but they are most likely to be effective for the existence and rights and obligations assertions. Thus, confirmation provides evidence that (1) receivables are valid, (2) the client has ownership of the accounts and the right of collection, and (3) the debtor has the obligation to pay.

Which of the following best represents a key control for ensuring sales are properly authorized when assessing risks of material misstatement for sales? a. The segregation of duties between the billing department and the cash receipts approval department. b. Sales orders are sent to the credit department for approval. c. Copies of approved sales orders sent to the shipping, billing, and accounting departments. d. The use of an approved price list to determine unit selling price.

b. Sales orders are sent to the credit department for approval. The credit department should investigate potential customers and approve sales orders.

To conceal defalcations involving receivables, the auditor would expect an experienced bookkeeper to charge which of the following accounts? a. Miscellaneous income. b. Sales returns. c. Petty cash. d. Miscellaneous expense.

b. Sales returns. To conceal a theft of customer payments on account, a bookkeeper debits sales returns and credits accounts receivable. If accounts receivable are not credited, the customer will continue to be billed and will complain.

An internal control narrative indicates that an approved voucher is required to support 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 canceled checks and ascertain that the related vouchers are dated no earlier than the checks. b. Select and examine canceled checks and ascertain that the related vouchers are dated no later than the checks. c. Select and examine vouchers and ascertain that the related canceled checks are dated no earlier than the vouchers. d. Select and examine vouchers and ascertain that the related canceled checks are dated no later than the vouchers.

b. Select and examine canceled checks and ascertain that the related vouchers are dated no later than the checks. Payment vouchers bearing the required approvals should be supported by a properly authorized purchase requisition, a purchase order executing the transaction, a receiving report indicating all goods ordered have been received in good condition, and a vendor invoice confirming the amount owed. To determine that check requests are valid, the appropriate audit procedure is therefore to compare checks and the related vouchers. The direction of testing should be from a sample of checks to the approved vouchers. If the date of a voucher is later than the date of the related check, the inference is that a check was issued without proper support.

A CPA is engaged in the annual audit of a calendar year client. The client took a complete physical inventory under the CPA's observation on December 15 and adjusted its inventory account and detailed perpetual inventory records to agree with the physical inventory. The client considers a sale to be made in the period that goods are shipped. Listed below are four items taken from the CPA's sales cutoff test worksheet. Which item does not require an adjusting entry on the client's books? a. Shipped 1/2 Recorded as Sale 12/31 Credited to Inventory 12/31 b. Shipped 12/10 Recorded as Sale 12/19 Credited to Inventory 12/12 c. Shipped 12/31 Recorded as Sale 1/2 Credited to Inventory 12/31 d. Shipped 12/14 Recorded as Sale 12/16 Credited to Inventory 12/16

b. Shipped 12/10 Recorded as Sale 12/19 Credited to Inventory 12/12 Goods shipped on 12/10 would have been properly recorded as a sale on 12/19, a date within the same accounting period. Moreover, the credit to inventory on 12/12 preceded the physical count on 12/15. No adjustment is necessary.

Which of the following observations made during the preliminary survey of a local department store's disbursement cycle reflects a control strength? a. Individual department managers use prenumbered forms to order merchandise from vendors. b. The CFO's office prepares checks for suppliers based on vouchers prepared by the accounts payable department. c. The receiving department is given a copy of the purchase order complete with a description of goods, quantity ordered, and extended price for all merchandise ordered. d. Individual department managers are responsible for the movement of merchandise from the receiving dock to storage or sales areas as appropriate.

b. The CFO's office prepares checks for suppliers based on vouchers prepared by the accounts payable department. Accounting for payables is a recording function. The matching of the supplier's invoice, the purchase order, and the receiving report (and usually the purchase requisition) should be the responsibility of the accounting department. These are the primary supporting documents for the payment voucher prepared by the accounts payable section that will be relied upon by the CFO in making payment.

The element of the audit-planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the a. Evidence to be gathered to provide a sufficient basis for the auditor's opinion. b. Timing of inventory observation procedures to be performed. c. Procedures to be undertaken to discover litigation, claims, and assessments. d. Pending legal matters to be included in the inquiry of the client's attorney.

b. Timing of inventory observation procedures to be performed. The client is responsible for taking the physical inventory. The auditor is responsible for observing this process and performing test counts. The audit procedures are dependent upon management's plans. Thus, the auditor must coordinate the collection of this evidence with management.

Which of the following activities most likely would detect whether payroll data were altered during processing? a. Segregating duties between approval of hardware and software specifications. b. Using test data to verify the performance of edit routines. c. Monitoring authorized distribution of data control sheets. d. Examining source documents for approval by supervisors.

b. Using test data to verify the performance of edit routines. The test data approach uses the computer to test the processing logic and controls within the system and the records produced. The auditor prepares a set of dummy transactions specifically designed to test the control activities that management claims to have incorporated into the processing programs. The auditor can expect the controls to be applied to the transactions in the prescribed manner. Thus, the auditor is testing the effectiveness of the controls over the payroll data.

Effective internal control activities over the payroll function may include a. Preparation of payroll transaction journal entries by an employee who reports to the supervisor of the human resources department. b. Verification of agreement of job time tickets with employee time clock card hours by a timekeeping department employee. c. Custody of rate authorization records by the supervisor of the payroll department. d. Reconciliation of totals on job time tickets with job reports by employees responsible for those specific jobs.

b. Verification of agreement of job time tickets with employee time clock card hours by a timekeeping department employee. The total time spent on jobs should approximate the total time indicated on time clock cards. Timekeeping's comparison of these records should provide an independent check of the accuracy of time reported on the time clock cards.

Which of the following sets of information does an auditor usually confirm on one form? a. Accounts receivable and accrued interest receivable. b. Inventory on consignment and contingent liabilities. c. Cash in bank and collateral for loans. d. Accounts payable and purchase commitments.

c. Cash in bank and collateral for loans. The AICPA Standard Form to Confirm Account Balance Information with Financial Institutions is used by auditors to confirm the deposit balance held by the bank for a client. In addition, this confirmation requests loan information, such as a description of the collateral securing the loan.

During the audit of a construction contract, it was discovered that the contractor was being paid for each ton of dirt removed. The contract called for payment based on cubic yards removed. Which internal control might have prevented this error? a. Comparison of invoices with receiving reports. b. Comparison of actual costs with budgeted costs. c. Comparison of invoices with purchase orders or contracts. d. Extension checks of invoice amounts.

c. Comparison of invoices with purchase orders or contracts. The contractor's invoice would have stated a unit of measure different from that in the contract. Thus, a comparison of the invoice with the original contract would have disclosed the error.

Inspecting the stock certificates of a client tests which of the following? a. Occurrence of a bond issuance. b. Completeness of sales of common stock. c. Existence of treasury stock. d. Accuracy of stock price per share.

c. Existence of treasury stock. Auditors can inspect their clients' stock certificates to ensure that all recorded treasury stock actually exists and is in the possession of the company.

Which of the following combinations of procedures would an auditor most likely perform to obtain evidence about fixed asset additions? a. Confirming ownership and corroborating transactions through inquiries of client personnel. b. Recomputing calculations and obtaining written management representations. c. Inspecting documents and physically examining assets. d. Observing operating activities and comparing balances with prior-period balances.

c. Inspecting documents and physically examining assets. The auditor's direct observation of fixed assets is one means of determining whether additions have been made. Tracing to the detailed records determines whether additions have been recorded. Inspection of deeds, lease agreements, insurance policies, invoices, canceled checks, and tax notices may also reveal additions.

A CPA auditing an electric utility wishes to determine whether all customers are being billed. The CPA's best direction of test is from the a. Accounts receivable ledger to the billing (sales) register. b. Billing (sales) register to the accounts receivable ledger. c. Meter department records to the billing (sales) register. d. Billing (sales) register to the meter department records.

c. Meter department records to the billing (sales) register. The best direction of testing is to proceed from the meter department records, which indicate those customers who have received service, to the billing (sales) register. Comparing services rendered with billings is the best way to detect omitted billings.

An auditor who has confirmed accounts receivable may discover that the sales journal was held open past year end if a. Most of the returned negative confirmation requests indicate that the debtor owes a larger balance than the amount being confirmed. b. Positive confirmation requests sent to debtors are not returned. c. Most of the returned positive confirmation requests indicate that the debtor owes a smaller balance than the amount being confirmed. d. Negative confirmation requests sent to debtors are not returned.

c. Most of the returned positive confirmation requests indicate that the debtor owes a smaller balance than the amount being confirmed. When the majority of the returned positive confirmation requests indicate smaller balances at year end than those in the client's records, the client may have held open the sales journal after year end. Thus, the client debited customers' accounts for the period under audit rather than for the subsequent period. The effect is to overstate sales and receivables.

Which of the following procedures would an auditor most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet? a. Compare the cash balance in the general ledger with the bank confirmation request. b. Inquire about employee's access to recorded but undeposited cash. c. Observe the consistency of the employee's use of cash registers and tapes. d. Trace the deposits in the cash receipts journal to the cash balance in the general ledger.

c. Observe the consistency of the employee's use of cash registers and tapes. An assertion about completeness of transactions addresses whether all transactions that should be presented are included in the financial statements. To determine that controls are operating effectively to ensure that all cash receipts are being recorded for cash sales in a retail environment, the auditor may observe the activities of the employees. Controls should provide assurance that employees use cash registers that contain internal functions (e.g., tapes) to record all sales.

A receiving department receives copies of purchase orders for use in identifying and recording inventory receipts. The purchase orders list the name of the vendor and the quantities of the materials ordered. A possible error that this system could allow is a. Payment to unauthorized vendors. b. Delay in recording purchases. c. Overpayment for partial deliveries. d. Payment for unauthorized purchases.

c. Overpayment for partial deliveries. To ensure a fair count, the copy of the purchase order sent to the receiving clerk should not include quantities. The receiving clerk should count the items in the shipment and prepare a receiving report. Copies are sent to inventory control and accounts payable.

Internal control is strengthened when the quantity of merchandise ordered is omitted from the copy of the purchase order sent to the a. Purchasing agent. b. Department that initiated the requisition. c. Receiving department. d. Accounts payable department.

c. Receiving department. A receiving department should accept merchandise only if a purchase order or approval granted by the purchasing department is on hand. A standard control is to delete the quantity from the receiving department's copy of the purchase order. If the receiving clerk does not know the quantity ordered, an independent count is more likely.

Which of the following is the most effective audit procedure for verification of dividends earned on investments in marketable equity securities? a. Comparing the amounts received with preceding year dividends received. b. Recomputing selected extensions and footings of dividend schedules and comparing totals to the general ledger. c. Reconciling amounts received with published dividend records. d. Tracing deposit of dividend checks to the cash receipts book.

c. Reconciling amounts received with published dividend records. Standard investment advisory services publish dividend records for all listed stocks. They show amounts and payment dates for dividend declarations and permit the auditor to recompute the client's reported dividend income.

Which of the following activities most likely would not be an internal control activity designed to reduce the risk of errors in the billing process? a. Comparing control totals for shipping documents with corresponding totals for sales invoices. b. Matching shipping documents with approved sales orders before invoice preparation. c. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger. d. Using computer programmed controls over the pricing and accuracy of sales invoices.

c. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger. The accounts receivable subsidiary ledger contains all receivables outstanding to date. It is not feasible to attempt to reconcile current sales invoices with the accounts receivable subsidiary ledger. However, the accounts receivable subsidiary ledger should be reconciled to the general ledger control account periodically.

An auditor would be most likely to learn of slow-moving inventory through a. Inquiry of sales personnel. b. Physical observation of inventory. c. Review of perpetual inventory records. d. Inquiry of stores personnel.

c. Review of perpetual inventory records. To identify slow-moving inventory, the auditor should review perpetual inventory records. In a perpetual system, receipts and issuances of goods are recorded as the transactions occur, both as to quantities and prices. By comparing the dates of receipt and issuance, the auditor is able to readily identify slow-moving and possibly obsolete inventory.

An auditor confirmed accounts receivable as of an interim date, and all confirmations were returned and appeared reasonable. Which of the following additional procedures most likely should be performed at year end? a. Resend confirmation requests for any significant customer balances remaining at year end. b. Send confirmation requests for all new customer balances incurred from the interim date to year end. c. Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year end. d. Review cash collections subsequent to the interim date and the year end.

c. Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year end. If incremental RMMs can be controlled, procedures to cover the remaining period ordinarily include (1) comparing information at the interim date with information at the balance sheet date to identify and investigate unusual amounts (e.g., new large balances) and (2) other analytical procedures or tests of details.

Florida Corporation declared a 100% stock split-up effected in the form of a dividend. In connection with the audit of Florida's financial statements, Florida's auditor should determine that a. Shareholders received their additional shares by confirming year-end holdings with them. b. Florida's shareholders have authorized the issuance. c. The additional shares issued do not exceed the number of authorized but previously unissued shares. d. The issuance was properly recorded at fair value.

c. The additional shares issued do not exceed the number of authorized but previously unissued shares. The auditor should gather evidence that the stock split-up effected in the form of a dividend was properly authorized by the board of directors and does not result in the issuance of shares in excess of the number permitted by the articles of incorporation. The auditor also must verify that the amounts transferred from retained earnings were equal to the legal requirements of the state of incorporation. However, for an issuance of no more than 20 to 25% of the outstanding shares (a stock dividend), the amount capitalized should be the fair value. If the split-up is not effected as a dividend, that is, when the intent is solely to reduce the unit price of the shares, no amount is capitalized.

The procedure that best discourages the resubmission of vendor invoices after they have been paid is a. The cancelation of vouchers by accounting personnel. b. The mailing of payments directly to payees by accounting personnel. c. The cancelation of vouchers by CFO personnel. d. A requirement for double endorsement of checks.

c. The cancelation of vouchers by CFO personnel. Canceling vouchers and supporting papers (with perforations, ink, etc.) upon payment prevents the payment of a duplicate voucher. If the person signing the check does the canceling, the documents cannot be recycled for duplicate payments. Securing the paid-voucher file from access by the accounts payable clerk is another effective control.

Which of the following could indicate source document fraud? a. The same customer purchase order number appears on different customer invoices. b. The same item code appears on different invoices. c. The same invoice number appears on different invoices. d. The same invoice date appears on different invoices.

c. The same invoice number appears on different invoices. Each invoice should have a unique invoice number. The duplication of an invoice number can signify source document fraud.

Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate internal control over the invoicing function allows goods to be shipped that are not invoiced. The inadequate controls could cause an a. Overstatement of revenues and receivables and an understatement of inventory. b. Overstatement of revenues, receivables, and inventory. c. Understatement of revenues and receivables and an overstatement of inventory. d. Understatement of revenues, receivables, and inventory.

c. Understatement of revenues and receivables and an overstatement of inventory. If goods are shipped before the sales are invoiced, inventory will not be credited for the shipments, thus overstating inventory. Moreover, if the accounting function does not receive copies of the invoices, sales and receivables will not be recorded, with the consequent understatement of those accounts.

Which of the following is the most important control over acquisitions of property, plant, and equipment? a. Establishing a written company policy distinguishing between capital and revenue expenditures. b. Analyzing monthly variances between authorized expenditures and actual costs. c. Using a budget to forecast and control acquisitions and retirements. d. Requiring acquisitions to be made by user departments.

c. Using a budget to forecast and control acquisitions and retirements. The use of a budget to forecast and control acquisitions and retirements alerts management to any transactions that are unusual, appear unnecessary, or are unauthorized.

One of two office clerks in a small company prepares a sales invoice for $4,300; however, the invoice is incorrectly entered by the bookkeeper in the general ledger and the accounts receivable subsidiary ledger as $3,400. The customer subsequently remits $3,400, the amount on the monthly statement. Assuming there are only three employees in the department, the most effective control to prevent this type of error is a. Requiring the bookkeeper to perform periodic reconciliations of the accounts receivable subsidiary ledger and the general ledger. b. Assigning the second office clerk to independently check the sales invoice prices, discounts, extensions, and footings and to account for the invoice serial number. c. Using predetermined totals to control posting routines. d. Requiring that monthly statements be prepared by the bookkeeper and verified by one of the other office clerks prior to mailing.

c. Using predetermined totals to control posting routines. A control total should be generated for the transactions to be posted. It then should be compared with the total of items posted to the individual accounts.

Fact Pattern: Listed below are four of a client's interbank cash transfers, indicated by the numbers 1, 2, 3, and 4, for late December and early in the following January. Your answer choice for each question should be selected from this list. Bank Account One Disbursing Date (Month/Day): 1. Per Bank 12/31 Per Books 12/30 2. Per Bank 1/2 Per Books 12/30 3. Per Bank 1/3 Per Books 12/31 4. Per Bank 1/3 Per Books 12/31 Bank Account Two Receiving Date (Month/Day): 1. Per Bank 12/31 Per Books 12/30 2. Per Bank 12/31 Per Books 12/31 3. Per Bank 1/2 Per Books 1/2 4. Per Bank 1/2 Per Books 12/31 Which of the cash transfers would not appear as an outstanding check on the December 31 bank reconciliation? a. 2 b. 3 c. 4 d. 1

d. 1 An outstanding check is written on the disbursing bank in the current period, but does not clear the bank until the subsequent period. Transfer (1) does not reflect an outstanding check because the disbursement was recorded in the books on 12/30 and by the bank on 12/31.

Which of the following audit procedures is least likely to detect an unrecorded liability? a. Mailing of standard bank confirmation forms. b. Reading of the minutes of meetings of the board of directors. c. Analysis and recomputation of interest expense. d. Analysis and recomputation of depreciation expense.

d. Analysis and recomputation of depreciation expense. The analysis and recomputation of depreciation expense is useful in determining whether the expense and asset accounts have been properly stated. Because liabilities are not part of the depreciation recording process, analysis and recomputation of depreciation would not detect unrecorded liabilities.

A company owns a 30% voting interest in another entity. Assuming the investor did not elect the fair value option, which of the following provides the best form of audit evidence pertaining to the annual measurement of the investment? a. Market quotations of the investee's stock. b. Current fair value of the investee's assets. c. Historical cost of the investee's assets. d. Audited financial statements of the investee.

d. Audited financial statements of the investee. A 30% voting interest creates a presumption that the investor is able to exercise significant influence over the investee. Thus, the equity method of accounting for the investment must be used if the FVO has not been elected. This method requires the investor to recognize the appropriate percentage of the investee's earnings as a debit to the investment and a credit to income. Dividends reduce the investment. Audited financial statements of the investee are usually sufficient appropriate evidence regarding the investor's equity. However, the auditor should satisfy the requirements either for (1) referring to the component auditor in the auditor's report or (2) assuming responsibility for the work of the component auditor (AU-C 600).

The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may a. Sign and return the form without inspecting the accuracy of the client's bank reconciliation. b. Not have access to the client's cutoff bank statement. c. Not believe that the bank is obligated to verify confidential information to a third party. d. Be unaware of all the financial relationships that the bank has with the client.

d. Be unaware of all the financial relationships that the bank has with the client. The standard form is designed to substantiate only the information that is stated on the confirmation request. Thus, the auditor should be aware that the standard form is not intended to elicit evidence about the completeness assertion. The individual completing the form may not be aware of all the financial relationships that the bank has with the client.

An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of a. Valuation and allocation. b. Occurrence. c. Rights and obligations. d. Completeness.

d. Completeness. The completeness assertion concerns whether all transactions (or assets, liabilities, and equity interests) that should be recorded are recorded. Testing the numerical sequence of shipping documents and invoices is a means of detecting omitted items.

In connection with an audit of the prepaid insurance account, which of the following procedures is usually not performed by the auditor? a. Examine support for premium payments. b. Prepare excerpts of insurance policies for audit documentation. c. Recompute the portion of the premium that expired during the year. d. Confirm premium rates with an independent insurance broker.

d. Confirm premium rates with an independent insurance broker. An audit of prepayments includes determining that amounts shown reflect all prepayments and that they (1) are properly valued according to the applicable reporting framework, (2) apply to future periods, (3) are expected to be realized (to provide future benefits), and (4) are accurately classified. Determining that a prepayment is properly valued involves verifying the amount of the expenditure by examining invoices from insurers, canceled checks, and the insurance policy. But the auditor does not confirm premium rates with an independent insurance broker. Paid checks and other documents are sufficient appropriate evidence of the amounts paid by the client.

Tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of a. Rights and obligations. b. Existence. c. Classification and understandability. d. Cutoff.

d. Cutoff. The cutoff assertion is that transactions and events have been recorded in the correct accounting period. It is tested by examining recorded sales for several days before and after the balance sheet date and comparing them with sales invoices and shipping documents. The auditor may detect the recording of a sale in a period other than that in which title passed.

The billing department matches the invoice copy of the sales order to the shipping copy. This procedure ensures that all a. Shipments are made only to customers with sufficient credit. b. Shipments contain the correct goods. c. Goods shipped are charged to the proper accounts receivable account. d. Goods shipped are invoiced to customers.

d. Goods shipped are invoiced to customers. The billing department should receive the shipping department's copy of the sales order and compare that to the invoice copy of the sales order to ensure that the invoice has the correct information and that all goods shipped are billed to customers appropriately.

Which of the following would an auditor ordinarily consider the greatest risk regarding an entity's use of electronic data interchange (EDI)? a. Elimination of paper documents. b. Authorization of EDI transactions. c. Duplication of EDI transmissions. d. Improper distribution of EDI transactions.

d. Improper distribution of EDI transactions. Transactions in an EDI system are communicated from computer to computer, often without human intervention. In some cases an EDI system uses a value-added network (VAN) that forwards transactions from the sender to the receiver. Both of these situations increase the risk of miscommunications and improper distribution of messages.

Which of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance? a. Inventory is properly valued. b. The entity has rights to the inventory. c. Inventory is properly presented in the financial statements. d. Inventory is complete.

d. Inventory is complete. The completeness assertion about account balances at the end of a period is that all assets, liabilities, and equity interests that should have been recorded have been recorded. The completeness assertion for inventory is to determine whether the balance contains inventory (1) on hand and (2) owned by the entity that is in transit or stored at outside locations.

In assessing risks of material misstatement for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support? a. Completeness. b. Classification. c. Accuracy. d. Occurrence.

d. Occurrence. A voucher signifies a liability. Its issuance is recorded in the voucher register after comparison of the vendor's invoice with the purchase requisition, purchase order, and receiving report. The direction of testing is an important consideration in determining the relevant assertion. Selecting a sample of recorded entries in the voucher register and vouching them to the supporting documentation provides evidence that the transactions occurred.

The safeguarding of inventory most likely includes a. Analytical procedures for raw materials, goods in process, and finished goods that identify unusual transactions, theft, and obsolescence. b. Application of established overhead rates on the basis of direct labor hours or direct labor costs. c. Comparison of the information contained on the purchase requisitions, purchase orders, receiving reports, and vendors' invoices. d. Periodic reconciliation of detailed inventory records with the actual inventory on hand by taking a physical count.

d. Periodic reconciliation of detailed inventory records with the actual inventory on hand by taking a physical count. The recorded accountability for inventory should be compared with existing inventory at reasonable intervals by taking a physical count. If inventory is susceptible to loss through fraud or error, the comparison should be made independently. An independent comparison is one made by persons not having responsibility for inventory custody or the authorization or recording of transactions.

After receiving responses to accounts receivable confirmations, the auditor determined that the evidence was not sufficient to form a conclusion regarding the accounts receivable balance. Which of the following actions should the auditor take next concerning the accounts receivable balance? a. Issue a qualified audit opinion on the client's financial statements. b. Withdraw from the engagement and issue a disclaimer of opinion. c. Ask the internal auditor to evaluate the valuation of accounts receivable. d. Request additional confirmations and perform alternative procedures.

d. Request additional confirmations and perform alternative procedures. After confirming accounts receivable, the auditor may conclude that evidence is not sufficient to form a conclusion. For example, when customers fail to answer a second request for a positive confirmation, the accounts may be in dispute, uncollectible, or fictitious and cause auditor concern. The auditor should then apply alternative procedures (e.g., examination of subsequent cash receipts, shipping documents, and other client documentation of existence) to obtain evidence about the validity of nonresponding accounts.

A client has a large and active investment portfolio that is kept in a bank safe-deposit box. If the auditor is unable to count the securities at the balance sheet date, the auditor most likely will a. Request the bank to confirm to the auditor the contents of the safe-deposit box at the balance sheet date. b. Examine supporting evidence for transactions occurring during the year. c. Count the securities at a subsequent date and confirm with the bank whether securities were added or removed since the balance sheet date. d. Request the client to have the bank seal the safe-deposit box until the auditor can count the securities at a subsequent date.

d. Request the client to have the bank seal the safe-deposit box until the auditor can count the securities at a subsequent date. Securities should be inspected simultaneously with the verification of cash and the count of other liquid assets to prevent transfers among asset categories for the purpose of concealing a shortage. If this procedure is not possible but the securities are kept by a custodian in a bank safe-deposit box, the client may instruct the custodian that no one is to have access to the securities unless in the presence of the auditor. Thus, when the auditor finally inspects the securities, (s)he may conclude that they represent what was on hand at the balance sheet date.

Which of the following audit procedures is best for identifying unrecorded trade accounts payable? a. Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports. b. Examining unusual relationships between monthly accounts payable balances and recorded cash payments. c. Reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date. d. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

d. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period. The greatest risk in the audit of payables is that unrecorded liabilities exist. Omission of an entry to record a payable is a misstatement that is more difficult to detect than an inaccurate or false entry. The search for unrecorded payables should (1) include examining cash payments made after the balance sheet date and comparing them with the accounts payable trial balance, (2) sending confirmations to vendors with small and zero balances, and (3) reconciling payable balances with vendors' documentation.

Fact Pattern: Sales procedures that were encountered during the regular annual audit of Marvel Wholesale Distributing Company are described below. Customer orders are received by the sales-order department. A clerk computes the dollar amount of the order and sends it to the credit department for approval. Credit approval is stamped on the order and returned to the sales-order department. An invoice is prepared in two copies, and the order is filed in the customer order file. The customer copy of the invoice is sent to the billing department and held in the pending file, awaiting notification that the order has been shipped. The shipping copy of the invoice is routed through the warehouse, and the shipping department has authority for the respective departments to release and ship the merchandise. Shipping department personnel pack the order and prepare a three-copy bill of lading: The original copy is mailed to the customer, the second copy is sent with the shipment, and the other is filed in sequence in the bill of lading file. The invoice shipping copy is sent to the billing department. The billing clerk matches the received shipping copy with the customer copy from the pending file. Both copies of the invoice are priced, extended, and footed. The customer copy is then mailed directly to the customer, and the shipping copy is sent to the accounts receivable clerk. The accounts receivable clerk enters the invoice data in a sales-accounts receivable journal, posts the customer's account in the subsidiary customers' accounts ledger, and files the shipping copy in the sales invoice file. The invoices are numbered and filed in sequence. To gather audit evidence that uncollected items in Marvel Company's customers' accounts represented valid trade receivables, the auditor should select a sample of items from the population represented by the a. Customer order file. b. Bill of lading file. c. Sales invoice file. d. Subsidiary customers' accounts ledger.

d. Subsidiary customers' accounts ledger. The auditor should sample from records of open accounts receivable to determine if they represent valid assets. The open accounts receivable are maintained in the subsidiary customers' accounts ledger. Items would be confirmed directly with the debtors.

The accounts receivable turnover ratio increased significantly over a two-year period. This trend could indicate that a. The accounts receivable aging has deteriorated. b. The company has eliminated its discount policy. c. Customer sales have substantially decreased. d. The company is more aggressively collecting customer accounts.

d. The company is more aggressively collecting customer accounts. The accounts receivable turnover ratio equals net credit sales divided by average accounts receivable. Thus, the ratio increases if the entity more effectively collects accounts while holding other factors, such as credit policy, constant.

Which of the following procedures represents a weakness in internal control for payroll? a. The accounting department prepares the electronic transfer of funds to the payroll bank account. The transfer is based on totals from the payroll department summary. b. The payroll department prepares checks using a signature plate. The CFO supervises the process before payroll checks are distributed. c. The payroll department prepares checks. The CFO signs the payroll checks. d. The payroll clerk distributes signed payroll checks. Undistributed checks are returned to the payroll department.

d. The payroll clerk distributes signed payroll checks. Undistributed checks are returned to the payroll department. Separating paycheck preparation from distribution makes it more difficult for fictitious employees to receive payment. In principle, the payroll function should be divided into its authorization, recording, and custody functions. Authorization of hiring, wage rates, and deductions is provided by personnel. Authorization of hours worked is provided by production. Based upon these authorizations, accounting (the payroll department) calculates and records the payroll and prepares checks. The CFO signs and distributes payroll checks. Consistent with its asset custody function (possession of checks, cash, or electronic transfer codes), the CFO should distribute paychecks or cash in a manual system (or make EFTs in a computerized system) so as to prevent payments to fictitious employees. Furthermore, the CFO rather than the payroll department should receive unclaimed paychecks (or cash) for safeguarding. Moreover, incomplete EFTs should not be returned to any of the other functions.

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle? a. Obsolete items included in inventory balances are rarely reduced to the lower of cost or market value. b. Fictitious transactions are recorded that cause an understatement of revenue and overstatement of receivables. c. Merchandise received is not promptly reconciled to the outstanding purchase order file. d. The write-off of receivables by personnel who receive cash permits the misappropriation of cash.

d. The write-off of receivables by personnel who receive cash permits the misappropriation of cash. Authorization of transactions (write-offs of receivables) and custody of assets (cash) are incompatible duties.