Test bank auditing and assurance principles 5th by richiutte CH09

CHAPTER MULTIPLE CHOICE c After the auditor has prepared a flowchart of internal control for sales and cash receipts transactions and evaluated the design of the system, the auditor would perform tests of controls on all control procedures a Documented in the flowchart b Considered to be deficiencies that might allow errors to enter the accounting system c Considered to be strengths that the auditor plans to rely on in assessing control risk d That would aid in preventing irregularities (AICPA ADAPTED) b To determine whether internal control effectively minimized errors of failure to bill a customer for a shipment, the auditor would select a sample of transactions from the population represented by the a Customer order file b Shipping records file c Subsidiary customer accounts ledger d Sales invoice (AICPA ADAPTED) a Which of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom? a The cashier posts the receipts to the accounts receivable subsidiary ledger b The cashier makes the daily deposit at a local bank c The cashier prepares the daily deposit d The cashier endorses the checks (AICPA ADAPTED) c a b c d The least crucial element of control over cash is Separation of cash record keeping from custody of cash Preparation of the monthly bank reconciliation Batch processing of checks Separation of cash receipts from cash disbursements b a b c d Which of the following is not a universal rule for achieving control over cash? Separate the cash-handling and record-keeping functions Decentralize the receiving of cash as much as possible Deposit each day's cash receipts by the end of the day Have bank reconciliations performed by employees who not handle cash (AICPA ADAPTED) d At which point in an ordinary sales transaction of a wholesaling business is a lack of specific authorization of least concern to the auditor in the conduct of an audit? a Granting of credit b Shipment of goods c Determination of discounts d Selling of goods for cash (AICPA ADAPTED) 63 (AICPA ADAPTED) d To verify that all sales transactions have been recorded, a test of transactions should be completed on a representative sample drawn from a Entries in the sales journal b The billing clerk's file of sales orders c A file of duplicate copies of sales invoices for which all prenumbered forms in the series have been accounted d The shipping clerk's file of duplicate copies of shipping documents (AICPA ADAPTED) d a b c d a b c d Which of the following is not a primary objective of the auditor in tests of accounts receivable? Determine the approximate realizable value Determine the adequacy of internal controls Establish the validity of the receivables Determine the approximate time of collectibility of the receivables (AICPA ADAPTED) b 10 a b c d Tracing copies of sales invoices to shipping documents will provide evidence that all Shipments to customers were recorded as receivables Billed sales were shipped Debits to the subsidiary accounts receivable ledger are for sales shipped Shipments to customers were billed (AICPA ADAPTED) a 11 To gather audit evidence about the proper credit approval of sales, the auditor would select a sample of documents from the population represented by the a Customer order file b Bill of lading file c Subsidiary customers' accounts ledger d Sales invoice file (AICPA ADAPTED) b 12 a b c d Which of the following functions is common to the revenue/receipt cycle? Resources are acquired from vendors and employees in exchange for obligations to pay Resources are sold to customers in exchange for promises for future payments Resources are acquired from employees in exchange for obligations to pay Capital funds are received from investors and creditors c 13 a b c d Which of the following is not a common activity of the revenue/receipt cycle? Order entry Inventory control Receiving Cash collection The negative form of accounts receivable confirmation request is particularly useful except when Control procedures surrounding accounts receivable are considered to be effective A large number of small balances are involved The auditor has reason to believe the persons receiving the requests are likely to give them consideration d Individual account balances are relatively large (AICPA ADAPTED) 64 a 14 To achieve control when there is no Billing Department, the billing function should be performed by the a Accounting Department b Sales Department c Shipping Department d Credit and Collection Department (AICPA ADAPTED) b 15 The person who opens the mail commonly prepares a remittance advice when a customer fails to return one with a payment Consequently, mail should be opened by the: a Credit manager b Receptionist c Sales manager d Accounts receivable clerk (AICPA ADAPTED) a 16 Which of the following control procedures will likely prevent the concealment of a cash shortage that was perpetrated by improperly writing off a trade account receivable? a Write-offs must be approved by a responsible officer after reviewing Credit Department recommendations and supporting evidence b Write-offs must be supported by an aging schedule showing that only receivables months overdue have been written off c Write-offs must be approved by the cashier d Write-offs must be authorized by field sales representatives (AICPA ADAPTED) c 17 Which of the following would best protect a company that wishes to prevent lapping? a Segregate duties so that accounting has no access to incoming mail b Segregate duties so that no employee has access both to checks from customers and to currency from daily cash receipts c Have customers send payments directly to the company's bank d Request that customers checks be made payable to the company and be addressed to the treasurer (AICPA ADAPTED) c 18 During the review of a small owner-managed company's internal controls, the auditor discovers that the accounts receivable clerk approves credit memos and has access to cash Which of the following controls would offset this deficiency? a The owner reviews errors in billings to customers and postings to subsidiary records b The controller receives the monthly bank statement directly and reconciles the checking accounts c The owner reviews credit memos after they are recorded d The controller reconciles the detailed receivables records to the general ledger (AICPA ADAPTED) d 19 a b c d Defective merchandise returned by customers should be presented to Inventory control personnel Sales personnel Purchasing personnel Receiving personnel 65 (AICPA ADAPTED) c 20 a b c d A sales cutoff test complements tests of Sales returns Cash Accounts receivable Sales allowances (AICPA ADAPTED) b 21 In considering internal control within the revenue/receipt cycle, what is the purpose of a transaction walk-through? a To assure that employees are performing assigned functions accurately b To confirm the auditor's understanding of the internal control structure c To select documents for detailed tests of controls d To verify the results of the auditor's sampling plan c 22 Following are four steps an auditor undertakes in assessing control risk: A Determine what control procedures are used by the entity B Identify the system's control objectives C Design tests of controls D Consider the potential errors or irregularities that could result a b c d In what order would an auditor perform these steps? DBAC BCDA BDAC DCAB b 23 a b c d The purpose of tests of controls over shipping is to Determine whether billed goods have been shipped Determine whether shipments are billed Determine whether shipping department personnel are competent Determine whether credit is approved before goods are shipped a 24 a b c d The purpose of tests of controls over billing is to Determine whether billed goods have been shipped Determine whether shipments are billed Determine whether billing department personnel are competent Determine whether credit is approved before goods are billed SHORT ANSWER Name the two major business functions associated with the revenue/receipt cycle Answer: Resources (goods or services) are sold to customers in exchange for promises of future payment Cash is collected from customers 66 In considering revenue/receipt cycle controls, name two ways an auditor might document the system Answer: The student may list any two of the following procedures: • Flowchart selling activities from customer order acceptance through recording of the sale and related receivable • Document cash collection activities with a questionnaire • Prepare a narrative description of activities related to sales returns and allowances and write-offs of uncollectible accounts Once a system of control has been documented, what is the next step in testing an auditor's understanding of a system of control Answer: An auditor tests his or her understanding of a system by performing a transaction walk-through Define the fraud of lapping and how it is accomplished Answer: The fraud of lapping is when cash shortages are concealed due to delays in recording cash collections Lapping simultaneously involves both execution and recording functions and is most likely to occur when one employee is responsible both for cash collections and for receivables The employee retains a customer's payment for his or her personal use and covers the shortage with a payment from a second customer; the first customer's receivable balance is credited when the second customer’s check is received Within the revenue/receipt cycle, management attempts to safeguard assets, controlling against loss or diversion, and also against misstated cash balances How can this control be achieved? Answer: Management could establish procedures to: • Prenumbered and control remittance advices • Prepare separate lists of incoming mail receipts • Periodically reconcile cash receipts records to deposit slips and bank statements • Limit physical access within Shipping, Billing, and Inventory Control PROBLEMS Narrate the process an auditor would use in obtaining an understanding of a system of internal control Answer: An auditor would perform a preliminary review by developing a general understanding of the control environment; the control procedure; and how the entity identifies, captures, communicates, and monitors external and internal information in a form and time frame that enables employees to discharge their assigned duties Document the system with the use of flowcharts, questionnaires, and/or written narratives 67 Perform a transaction walk-through to trace an item through the system of control to expose and deviation from controls in place to prevent misstatements or fraud Determine whether existing control procedures are potentially reliable in assessing control risk below the maximum Once the controls are found potentially reliable in assessing control risk below the maximum, the auditor will continue to: • Identify the system's control objectives • Consider the potential errors or frauds that might reset if specific control objectives are not achieved • Determine what control procedures management uses to prevent or detect potentially material errors or frauds • Design tests of controls When testing the internal controls of the cash collection and deposit system, an auditor may use several tests Name four tests of the cash collection and deposit system Answer: The student may choose any of the following five tests discussed within the text: a On a surprise basis, take control of bank deposits (deposit slip and checks) just prior to delivery by client personnel to the bank b Compare the total dollar amount of checks to the total recorded on the deposit slip c Compare checks to details in cash receipts records and the accounts receivable subsidiary ledger and determine that the lapse of time between cash receipts and deposit is reasonable d Compare entries in the cash receipts journal with deposits listed on the monthly bank statement Determine that cash receipts not listed on the bank statement are listed as deposits in transit in the bank reconciliation and are included with deposits in the subsequent month’s bank statement e Trace totals in the cash receipts journal to postings in the general ledger 68 69 ... in testing an auditor's understanding of a system of control Answer: An auditor tests his or her understanding of a system by performing a transaction walk-through Define the fraud of lapping and. .. frauds • Design tests of controls When testing the internal controls of the cash collection and deposit system, an auditor may use several tests Name four tests of the cash collection and deposit... preliminary review by developing a general understanding of the control environment; the control procedure; and how the entity identifies, captures, communicates, and monitors external and internal