Chapter 5-7 MC Quizzes

Confirming accounts receivable primarily supports the assertion of A) Existence. B) Completeness. C) Valuation or allocation. D) Rights and obligations.

A) Existence. Confirmations insure the account exists.

Recording a sale while keeping the goods in your own warehouse is called: A) Invoice and keep. B) Bill and hold. C) Recognition. D) None of the above.

B) Bill and hold. "Bill" refers to creating an invoice and recording the sale and "hold" refers to keeping the goods.

A fraud technique whereby someone steals a cash receipt and uses a later cash receipt from another customer to cover the theft of the first receipt is called A) Kiting B) Lapping C) Bill and hold D) None of the above

B) Lapping This refers to lapping.

The primary responsibility for establishing and maintaining internal controls rests with A) The internal auditors. B) Management. C) The Public Company Accounting Oversight Board. D) The external auditors.

B) Management. Management has primary responsibility for maintaining internal control.

In order for internal auditors to be able to recognize potential fraud, they must be aware of the basic characteristics of fraud. Which of the following is a characteristic of fraud? A) Unintentional deception. B) Taking unfair or dishonest advantage of uninformed individuals. C) Lack of training. D) Negligence on the part of executive management.

B) Taking unfair or dishonest advantage of uninformed individuals. Taking advantage of uninformed individuals would be considered a basic characteristic of fraud.

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 the client uses a lockbox system.

B) to test the transactions process when controls over cash are weak. A proof of cash is an extended bank reconciliation that tests the transactions that were reported during the period. A proof of cash is only used when control risk is high.

Which of the accounts would not be included in the Revenue and Collection cycle? A) Cash in bank. B) Accounts Receivable. C) Raw Materials. D) Bad Debt Expense.

C) Raw Materials. Raw Materials is included in the production cycle.

Which of the following gives an indication of potential fraudulent activity? A) Credit memos have been issued to the company's biggest customer. B) Internal auditor cannot locate several credit memos 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.

C) The year-end bank reconciliation has no outstanding checks or deposits older than 15 days. The fact that there are no outstanding items, although unusual, would not necessarily be a red flag.

Approval of credit sales by the credit department supports the assertion of A) Existence or occurrence. B) Completeness. C) Valuation or allocation. D) Rights and obligations.

C) Valuation or allocation. This helps ensure the receivable will be collectible.

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

D) All of the above. Cash is involved in all of these cycles.

To be recognized, revenues must be A) Realized B) Realizable C) Earned D) All the above

D) All the above To be recognized revenues must be earned and realized or realizable

Which of the following factors are included in an entity's control environment? Internal Management Audit Audit Tone at the Committee Function Top A. Yes Yes No B. Yes No Yes C. No Yes Yes D. Yes Yes Yes

D) d. All three factors are part of the entity's control environment.

Which internal control documentation method provides the auditor with the best visual understanding of a system and can be used as a means for analyzing complex operations? A) A flowcharting approach. B) A questionnaire approach. C) A matrix approach. D) A detailed narrative approach.

A) A flowcharting approach. Flowcharts provide a diagrammatic representation of a client's system, facilitating analysis of complex operations.

Custody is transferred from the warehouse to the shipping department upon authorization of the A) Shipping order. B) Customer order. C) Purchase order. D) Invoice.

A) Shipping order. This tells the warehouse the goods have been approved for shipment

An entity's internal control consists of the policies and procedures established to provide reasonable assurance that specific entity objectives will be achieved. Only some of these objectives, policies, and procedures are relevant to a financial statement audit. Which one of the following would most likely be considered for testing in a financial statement audit? A) Timely reporting and review of quality control results. B) Maintenance of control over unused checks. C) Marketing analysis of sales generated by advertising projects. D) Maintenance of statistical production analyses.

B) Maintenance of control over unused checks. Financial statement auditors would be concerned over the control over unused checks as they may affect the fairness of the financial statements.

The most reliable evidence comes from A) A positive confirmation. B) A negative confirmation. C) A blank confirmation. D) Examining a sales invoice.

C) A blank confirmation. This is the most reliable because the customer has to look up the amount to fill in the blank.

When auditing with "fraud awareness," auditors should especially notice and follow up employee activities under which of these conditions? A) The company counts inventory on a cycle basis throughout the year without performing a complete inventory observation at year-end to improve efficiency. B) The petty cash box is always locked in the desk of the custodian to improve security. C) Cash disbursement and bank statement reconciliation responsibilities are restricted to the cashier to improve accountability. D) The board of directors reviews and approves all investment transactions to prevent unauthorized transactions.

C) Cash disbursement and bank statement reconciliation responsibilities are restricted to the cashier to improve accountability. Restricting these functions to one person increases that person's ability to commit fraud. Lack of segregation of duties in the cash disbursements area would be a red flag.

In addition to gaining an understanding of the internal controls for a private company, an external auditor, at minimum, would be expected to A) Evaluate the internal auditors' work as an important part of the accounting system element of the internal controls. B) Observe client employees to determine the extent of their compliance with quality control standards. C) Document their understanding of the internal control system. D) Study organization charts to obtain an understanding of the informal lines of communication.

C) Document their understanding of the internal control system. Professional standards require that external auditors gain an understanding of the client's internal control system and document that understanding on every audit engagement.

Which of the following is an appropriate audit program step for the review of canceled checks to ensure that only authorized check signers are actually signing checks? A) Compare the check date with the first cancellation date. B) Determine that all checks are to be signed by an individual authorized by the board. C) Examine a representative sample of signed checks and determine that the signatures are authorized in the corporate signature book. D) Confirm the signatures from a sample of checks directly with the bank.

C) Examine a representative sample of signed checks and determine that the signatures are authorized in the corporate signature book. This procedure would be the most appropriate to ensure that only authorized check signers are signing checks.

Which of the following statements is correct with respect to the elements of the "fraud triangle"? A) Opportunity is a cause that pressures people into action. B) Motive refers to a situation that allows someone with opportunity to carry out fraud. C) Fraud it most common when motive, opportunity and rationalization all occur together. D) Fraud is most common when motive and lack of integrity exist together.

C) Fraud it most common when motive, opportunity and rationalization all occur together. The answer contains all three conditions that make up the fraud triangle. By definition, this is the most common situation when fraud will occur.

When counting cash on hand the auditor must exercise control over all cash and other negotiable assets to prevent A) Theft. B) Collusion. C) Substitution of stolen funds. D) Kiting.

C) Substitution of stolen funds. Simultaneous custody of all liquid assets would prevent employees from replacing stolen money with money that had been counted by the auditor previously.

An internal control questionnaire (ICQ) contains the following question: "Does a single individual receive and list cash receipts and perform posting to sales and general ledgers?" What action should an auditor take if the manager of accounting responds "yes" to the question? A) No action is required because "yes" responses on an ICQ indicate the presence of good control. B) Statistically sample the response along with all other "yes" responses to verify their accuracy. C) Treat it as a potential control weakness and perform appropriate testing. D) Include it with other reportable findings in next year's audit report.

C) Treat it as a potential control weakness and perform appropriate testing. The lack of separation of duties (one individual has both custody and recording responsibilities) is a control weakness that may require the audit team to adjust its audit program.

Which of the following responses to a confirmation request at December 31 is most likely to indicate a misstatement? A) This amount was paid on December 30th. B) We are unable to confirm this account. C) We returned these items in November. D) We received these goods on January 4th.

C) We returned these items in November. This should have resulted in a credit to accounts receivable

A form signed by the carrier to verify goods are shipped is called the A) Shipping order. B) Receiving report. C) Carrier form. D) Bill of lading.

D) Bill of lading. This form indicates the items shipped and is signed by the carrier.

When a fraud perpetrator embezzles company funds for the purpose of buying gifts for co-workers, the fraudster's motive is said to be: A) Psychotic B) Egocentric C) Ideological D) Economic

D) Economic The fraudster's motive in this case is economic.

An enlightened management team can decrease the probability of fraud in the company best by: A) Restricting authority for profit objective determination to top management. B) Measuring performance and awarding bonuses on the basis of short-term operating results. C) Providing employees performance feedback that stresses negative observations on their work to increase performance. D) Establishing work teams that share responsibilities, performance, and bonuses based on collective efforts. Feedback: Correct. This procedure would best decrease the probability of fraud in an organization.

D) Establishing work teams that share responsibilities, performance, and bonuses based on collective efforts. This procedure would best decrease the probability of fraud in an organization.

Which of these arrangements 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 discrepancies to the perpetual inventory records. B) Cashier prepared the bank deposit, endorsed the checks with a company stamp, took the cash and checks to the bank for deposit, and reconciled the bank statement. C) Accounts receivable clerk opens customer payments so she could make entries in the customers' accounts receivable subsidiary accounts. D) Financial vice president received checks made out to suppliers and the supporting invoices, signed the checks, and put them in the mail to the payees.

D) Financial vice president received checks made out to suppliers and the supporting invoices, signed the checks, and put them in the mail to the payees. The vice president does not prepare the checks, and there is limited access to assets, thereby preventing an embezzlement or fraud.

An advantage of an internal control questionnaire is A) Flexibility in design and application. B) Its strict adherence to a yes/no format. C) That it always provides sufficient data for the assessment of control risk. D) Its relative ease of completion.

D) Its relative ease of completion. Internal control questionnaires, because of their yes/no format, are very easy to complete (efficient).

Internal controls are designed to provide reasonable assurance that A) Management's plans have not been circumvented by worker collusion. B) The internal auditing department's guidance and oversight of management's performance is accomplished effectively and efficiently. C) Management's planning, organizing, and directing processes are properly evaluated. D) Material errors or fraud would be prevented or detected and corrected within a timely period by employees in the course of performing their assigned duties.

D) Material errors or fraud would be prevented or detected and corrected within a timely period by employees in the course of performing their assigned duties. The purpose of internal controls is to prevent or detect and correct material errors or fraud in a timely fashion.

Which of the following is an inherent limitation of any client's internal control? A) The benefits expected to be derived from effective internal controls usually do not exceed the costs of effective internal controls. B) The competence and integrity of client personnel provide an environment conducive to control and provides assurance that effective control will be achieved. C) Procedures designed to assure the execution and recording of transactions in accordance with proper authorizations are effective against frauds perpetrated by management. D) Procedures whose effectiveness depends on separation of duties can be circumvented by collusion.

D) Procedures whose effectiveness depends on separation of duties can be circumvented by collusion. If there is collusion, separation of duties is ineffective.

An auditor would most likely be concerned with internal control policies and procedures that provide reasonable assurance about A) The efficiency of management's decision making process. B) Appropriate prices the entity should charge for its products. C) Methods of assigning production tasks to employees. D) The entity's ability to process and summarize financial data.

D) The entity's ability to process and summarize financial data. Auditors are most concerned with policies and procedures affecting the entity's ability to process and summarize financial data.