Audit exam 2: IC

58. When a customer fails to include a remittance advice with a payment, it is common practice for the person opening the mail to prepare one. Consequently, mail should be opened by which of the following four company employees? a. Credit manager b. Receptionist c. Sales manager d. Accounts receivable clerk

B Receptionist is independent of the sales function

73. Which of the following controls most likely addresses the completeness assertion for inventory? a. Work in process account is periodically reconciled with subsidiary records b. Employees responsible for custody of finished goods do not perform the receiving function c. Receiving reports are prenumbered and periodically reconciled d. There is a separation of duties between payroll department and inventory accounting personnel

C By prenumbering receiving reports and reconciling them with inventory records, can test completeness by determining whether all receipts have been recorded

69. With well-designed internal control, employees in the same department most likely would approve purchase orders, and also a. Reconcile the open invoice file b. Inspect goods upon receipt c. Authorize requisitions of goods d. Negotiate terms with vendors

D Purchases department will normally approve purchase orders and negotiate terms of purchase with vendors

60. In testing controls over cash disbursements, an auditor most likely would determine that the person who signs checks also a. Reviews the monthly bank reconciliation b. Returns the checks to accounts payable c. Is denied access to the supporting documents d. Is responsible for mailing the checks

D Takes out the element that another employee could cash their check for themselves

55. Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments? a. Accounts receivable b. Credit c. Accounts payable d. Treasurer

D Treasurer is independent of the various functions, the treasurer's department is likely to have knowledge to help make proper decisions of this nature

10. An auditor suspects that certain client employees are ordering merchandise for themselves over the internet without recording the purchase or receipt of the merchandise. When vendors' invoices arrive, one of the employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all a. Cash disbursements b. Approved vouchers c. Receiving reports d. Vendors' invoices

A

42. Which of the following procedures concerning accounts receivable would an auditor most likely perform to obtain evidence in support of an assessed level of control risk below the maximum? A. Observing an entitys employee prepare rhe schedule of past due accounts receivable B. Sending confirmation requests to an entitys principal customers to verify the existence of accounts receivable C. Inspecting an entitys analysis of accounts receivable for unusual balances D. Comparing an entitys uncollectible accounts expense to actual uncollectible accounts receivable

A Auditor uses results of tests of controls to support assessing level of control risk below maximum; observing an entity's employee is a test of control to evaluate the effectiveness the process of preparing an accurate schedule of past due accounts

46. Which of the following controls most likely would reduce the risk of diversion of customer receipts by an entitys employees? A. A bank lockbox system B. Prenumbered remittance advices C. Monthly bank reconciliations D. Daily deposit of cash receipts

A Bank lockbox system eliminates employee contact with cash receipts D incorrect; may reduce the risk of diversion but is not as affective as a bank lockbox system

83. In meeting the control objective of safeguarding of assets, which department should be responsible for a. Distribution of paychecks: Treasurer, Custody of unclaimed paychecks: Treasurer b. Payroll, Treasurer c. Treasurer, Payroll d. Payroll, Payroll

A Custody function should not be performed by the payroll department (recordkeeping)

51. Which of the following controls most likely would assure that all billed sales are correctly posted to the accounts receivable ledger? A. Daily sales summaries are compared to daily postings to the accounts receivable ledger B. Each sales invoice is supported by a prenumbered shipping document C. The AR ledger is reconciled daily to the control account in the general ledger D. Each shipment on credit is supported by a prenumbered sales invoice

A Daily sales summary will include all billed sales, comparing this to the accounts receivable ledger will provide the evidence on whether billed sales are correctly posted

85. The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the a. Authorization of transactions from the custody of related assets b. Operational responsibility from the recordkeeping responsibility c. Human resources function from the controllership function d. Administrative controls from the internal accounting controls

A Hiring: authorization function, distribution; custody function; these two functions must be done by two different people or departments

47. An auditor suspects that a clients cashier is misappropriating cash receiprs for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the A. Dates checks are deposited per bank statements with the dates remittance credits are recorded B. Daily cash summaries with the sums of the cash receipts jornal entries C. Individual bank deposit slips with the details of the monthly bank statements D. Dates uncollectible accounts are authorized to be written off with the dates the write offs are actually recorded

A Lapping will result in a delay in the recording of specific remittance credits on the financial records, but the checks will be deposited in the bank as they are received Lapping: clerk steals money from one check and covers it up by stealing from the new customer, etc.

88. Which of the following departments most likely would approve changes in pay rates and deductions from employee salaries? a. Personnel b. Treasurer c. Controller d. Payroll

A Peronnel department, has the primary objective of planning, controlling and coordinationg employees, will determine that proposed salary increases are consistent with the company's salary guidlances and will approved changes in deductions

79. Which of the following is a control that most likely could help prevent employee payroll fraud? a. The personnel department promptly sends employee termination notices to the payroll supervisor b. Employees who distribute payroll checks forward unclaimed payroll checks to the absent employees' supervisors c. Salary rates resulting from new hires are approved by the payroll supervisor d. Total hours used for determination of gross pay are calculated by the payroll supervisor

A Prompt notification of the payroll supervisor concerning terminations will lead to timely removal of terminated employees from the payroll

80. In determining the effectiveness of an entity's controls relating to the existence or occurrence assertion for payroll transactions, an auditor most likey would inquire about and a. Observe the segregation of duties concerning personnel responsibilities and payroll disbursement b. Inspect evidence of accounting for prenumbered payroll checks c. Recompute the payroll deductions for employee fringe benefits d. Verify the preparation of the monthly payroll account bank reconciliation

A Proper segregation of duties between personnel and payroll disbursement eliminates many frauds in which fake employees are being paid

52. An auditor tests an entitys policy of obtaining credit approval before shipping goods to cusfomers in support of managements financial statement assertion of A. Valuation or allocation B. Completeness C. Existence or occurrence D. Rights and obligations

A Testing credit approval helps assure that goods are shipped to customers who are likely to be able to pay; the valuation assertion for receivables is being directly tested

43. Which of the followinf procedures would an auditor most likely perform to test controls relating to managements assertion about the completeness of cash receipts for cash sales at a retail outlet? A. Observe the consistency of the employees use of cash registers and tapes B. Inquire about employees access to recorded but undeposited cash C. Trace deposits in the cash receipts journal to the cash balance in the general ledger D. Compare the cash balance in the general ledger with the bank confirmation request

A Use of cash registers and tapes helps assure that all such sales are recorded

70. In obtaining an understanding of a manufacturing entity's internal control over inventory balances, an auditor most likely would a. Analyze the liquidity and turnover ratios of the inventory b. Perform analytical procedures designed to identify cost variances c. REview the entity's descriptions of inventory policies and procedures d. perform test counts of inventory during the entity's physical count

C

87. The auditor may observe the distribution of paychecks to ascertain whether a. Pay rate authorization is properly separated from the operating function b. Deductions from gross pay are calculated correctly and are properly authorized c. Employees of record actually exist and are employed by the client d. Paychecks agree with the payroll register and the time cards

C

56. Employers bond employees who handle cash receipts because fidelity bonds reduce the possibility of employing dishonest individuals and a. Protect employees who make unintentional misstatements from possible monetary damages resulting from their misstatements b. Deter dishonesty by making employees aware that insurance companies may investigate and prosecute dishonest acts c. Facilitate an independent monitoring of the receiving and depositing of cash receipts d. Force employees in positions of trust to take periodic vacations and rotate their assigned duties

B

59. To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is a. Supported by a vendors' invoice b. Stamped 'paid' by the check signer c. Prenumbered and accounted for d. Approved for authorized purchases

B

78. An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that a. Payments to employees are computed at authorized rates b. Employees work the number of hours for which they are paid c. Segregation of duties exist between the preparation and distribution of the payroll d. Controls relating to unclaimed payroll checks are operating effectively

B

61. In assessing control risk 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. Existence or occurrence c. Valuation or allocation d. Rights and obligations

B Existence or occurrence assertion addresses whether recorded entries are valid and the direction of this test is from the recorded entry in the voucher register to the supporting documents

77. The objective of internal control for a production cycle are to provide assurance that transactions are properly executed and recorded, and that a. Production orders are prenumbered and signed by a supervisor b. Custody of work in process and of finished goods is properly maintained c. Independent internal verification of activity reports is established d. Transfers to finished goods are documented by a completed prodcution report and a quality control report

B In addition to providing assurance as to proper execution and recording, an objective for the production cycle is the safeguarding of assets (WIP and FG)

48. Upon receipt of customers checks in the mailroom, a responsibke employee should prepare a remirtance listing that is forwarded ro the cashier. A copy of the listing should be sent to the A. Internal auditor to investigate the listing for unusual transactions B. Treasurer to compare the listing with the monthlt bank statement C. Accounts receivable bookkeeper ro update rhe subsidary accounts receivable records D. Entitys bank to compare the listimg with the cashiers deposit slip

C Accounts receivable bookkeeper will use the listing to update the subsidiary accounts receivable records

50. Which of the following audit procedures would an auditor most likely perform to test controls relating to managements assertion concerning the completeness of sales transacrions? A. Verify that extensions and footings on the entitys sales invoices and monthly customer statements have been recomputed B. Inspect the entitys reports of prenumbered shipping documents that have not been recorded in the sales journal C. Compare the invoiced pricws om prenumbered sales invoices to the entitys authorized price list D. Inquire anout the entitys credit granting policies and the consistent applicarion of credit checks

B Inspection of shipping documents that have not been recorded in the sales journal will possibly reveal items that have been sold but not recorded as sales

64. An entity's internal control requires for every check request that there be an approved voucher, supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all a. Purchase orders b. Cancelled checks c. Receiving reports d. Approved vouchers

B Sample of canceled checks should be compared with the rest of these documents. If a check does not have the support, it may be unauthorized

45. Tracing shipping documents to prenumbered sales invoices provides evidence that A. No duplicate shipments or billings occurred B. Shipments to customers were properly invoiced C. All goods ordered by customers were shipped D. All prenumbered sales invoices were accounted for

B Shipping documents relate to shipments to customers, tracing them to sales invoices will provide evidence on whether sales invoices were prepared

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

B Should ensure that amounts are correct

68. A client erroneously recorded a large purchase twice. Which of the following internal control measures would be most likely to detect this error in a timely and efficient manner? a. Footing the purchases journal b. Reconciling vendors' monthly statements with subsidiary payable ledger accounts c. Tracing totals from the purchases journal to the ledger accounts d. Sending written quarterly confirmations to all vendors

B This will disclose the error because the vendors' monthly statements are an outside source, where in (c) they are both internally produced documents

71. Which of the following controls most likely would be used to maintain accurate inventory records? a. Perpetual inventory records are periodically compared with the current cost of individual inventory items b. A just-in-time inventory ordering system keeps inventory levels to a desired minimum c. Requisitions, receiving reports, and purchase orders are independently matched before payment is approved d. Periodic inventory counts are used to adjust hte perpetual inventory records

D

72. A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably a. Insist that the client perform physical counts of inventory items several times during the year b. Apply gross profit tests to ascertain the reasonableness of the physical counts c. Increase the extent of tests of controls of the inventory cycle d. Request the client to schedule the physical inventory count at the year end

D

66. For effective internal control, the accounts payable department generally should a. Stamp, perforate, or otherwise cancel supporting documentation after payment is mailed b. Ascertain that each requisition is approved as to price, quantity, and quality by an authorized employee c. Obliterate the quantity ordered on the receiving department copy of the purchase order d. Establish the agreement of the vendor's invoice with the receiving report and purchase order

D AP department should establish the agreement in order to provide assurance that the item was both ordered and received

53. Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded? A. The billing department supervisor sends copies of approved sales orders to the credir departmemr for comparison to authorixed credit limits and current customer account balances B. The accounting department supervisor independently reconciles the accounts receivable subsidady ledger to the accounts receivable control account monthly C. The accountinf department supervisor controls the mailing of month,t statements to customers and investigates any differences reported by customers D. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal

D Matching of shipping documents with entries in the sales journal will provide assurance that all shipped items have been completely recorded

65. Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases? a. Is an authorized purchase order required before the receiving department can accept a shipment or the vouchers payable department can record a voucher? b. Are purchase requisitions prenumbered and independently matched with vendor invoices? c. Is the unpaid voucher file periodically reconciled with inventory records by an employee who does not have access to purchase requisitions? d. Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?

D Prenumbering and accounting for these documents will allow a company to determine that purchases are completely recorded

49. Which of the following procedures most likely would not be a control designed to reduce the risk of misstatemenrs in the billing process? A. Comparinf control totals for shipping documents with correspondinf totals for sales invoices B. Using computer programmed controls on thr pricing and mathematical accuracy of sales invoices C. Matchign shipping documents with approved sales orders before invoice preparation D. Reconciling the control totals for sales invoices with the accounts receivable subsidary ledger

D The reconciliation of the control totals for sales invoices with the accounts receivable subsidiary ledger will follow billing; thus billing errors have already occurred

62. Which of the following controls is not usually performed in the vouchers payable department? a. Matching the vendor's invoice with the related receiving report b. Approving vouchers for payment by having an authorized employee sign the vouchers c. Indication the asset and expense accounts to be debited d. Accounting for unused prenumbered purchase orders and receiving reports

D Vouchers payable department will not have access to unused prenumbered purchased orders and receiving reports

76. Which of the following is a question that the auditor would expect to find on the production cycle section of an internal control questionnaire? a. Are vendors' invoices for raw materials approved for payment by an employee who is inedependent of the cash disbursements function? b. Are signed checks for the purchase of raw materials mailed directly after signing without being returned to the person who authorized the invoice processing? c. Are all releases by storekeepers of raw materials from storage based on approved requisition documents? d. Are details of individual disbursements for raw materials balanced with the total to be posted to the appropriate general ledger account?

C Approved requisitions will help maintain control over raw materials released to be used in the production cycle

44. Sound internal control dictates that immediately upon receiving checks from customers by mail, a responsible employee should A. Add the checks to the daily cash summary B. Verify that each check is supports by a prenumbered sales invoice C. Prepare a duplicate listing of checks received D. Record the checks in the cash receipts journal

C For adequate documentation the preparation of the listing of checks received is used as a source document. The listing of checks received are the sent to employee responsible for depositing the checks at the end of the day and the other list is sent to the accounting department so they can post to the cash receipts journal

86. To minimize the opportunities for fraud, unclaimed cash payroll should be a. Deposited in a safe-deposit box b. Held by the payroll custodian c. Deposited in a special bank account d. Held by the controller

C Get unclaimed cash out of the fir'ms physical control

57. During the consideration of a small business clien'ts internal control, 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 ledger b. The controller receives the monthly bank statement directly and reconciles the checking accounts c. The owner reviews credit memos after they are recorded d. The controller reconciles the total of the detail accounts receivable accounts to the amount shown in the ledger

C Owner's review could help establish that fraudulent memos had not been issued for receivables which had in actuality been collected by the clerk When reviewing credit memos, there should be a receiving report for sales returns for which credit memos have been generated

81. An auditor most likely would assess control risk at a high level if the payroll department supervisor is responsible for a. Examining authorization forms for new employees b. Comparing payroll registers with original batch transmittal data c. Authorizing payroll rate changes for all employees d. Hiring all subordinate payroll department employees

C Payroll is a recordkeeping function, should not authorize payroll change rates. Recordkeeping, authorization and custody are major segregation of duties

74. Sound internal control dictates that defective merchandise returned by customers should be presented initially to the a. Salesclerk b. Purchasing clerk c. Receiving clerk d. Inventory control clerk

C Receiving department can count the goods, and list them on a sales return notice to ensure that returns are properly recorded

54. Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write offs? A. Employees responsible for authorizing sales and bad debt write offs are denied access to cash B. Shipping documents and sales invoices are matched by an employee who does not have authority to write off bad debts C. Employees involved in the credit granting function are separated from the sales function D. Subsidary accounts receivable records are reconciled to the control account by an employee independenr of the authorization of credit

C Segregation of the authorization of credit from the sales function will allow an independent review of the creditworthiness of customers Will not be allowed to make sales to those who have bad credit

84. Proper internal control over the cash payroll function would mandate which of the following? a. The payroll clerk should fill the envelope with cash and a computation of the net wages b. Unclaimed pay envelopes should be retained by the paymaster c. Each employee should be asked to sign a receipt d. A separate checking account for payroll be maintained

C Sign receipt to provide assurance correct amoutns were disbursed

82. Which of the following controls most likely would prevent direct labor hours from being charged to manufacturing overhead? a. Periodic independent counts of work in process for comparison to recorded amounts b. Comparison of daily journal entries with approved production orders c. Use of time tickets to record actual labor worked on production orders d. Reconciliation of work-in-process inventory with periodic cost budgets

C Time tickets are coded to the specific project direct labor should be charged to

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

C Understatement because accounting department will not be aware of sale, overstatement bc no entry to reduce inventory will be recorded

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

eB If receiving department is unaware of the correct quantity, the can provide an independent count of the quantities received