AUD 4 MCQ Notes for transactions cycles

Question 1

What is a characteristic that may be indicative of check kiting?

Answer 1

a high level of deposits coupled with a low average balance.

Question 2

In the cash disbursements cycle =

Answer 2

The person who signs the checks s/also be the one who mails them

Question 3

provide assurance that each voucher is submitted and paid only once, the check signer =?

Answer 3

By stamping the voucher “paid,” the check signer cancels the voucher so it cannot be resubmitted for payment.

Question 4

Why is reconciling control total for sales invoice with the AR sub ledger not an effective control related to the billing process?

Answer 4

Reconciling control totals for sales invoices with the accounts receivable subsidiary ledger is not an effective control related to the billing process, since errors that exist in the preparation of invoices would likely carry through to accounts receivable.

Question 5

What and who prints the sales summary

Answer 5

Biling/AR prints the summary and sends it to acctg.

Question 6

The 3-way match in A/P =

Answer 6

1. The matching is considered “authorization”.
2. Posting the accounts payable records is considered recording
3. The recon/review procedure (independent verification) s/be done by someone who is not the authorizer

Question 7

The inclusion of segment information is a GAAP requirement, and a separate opinion is not required.

Answer 7

The auditor’s objective of performing audit procedures to segment ifnormation is to provide a reasonable basis for concluding whether segment information is presented in conformity with GAAP

Question 8

Shipping documents provide evidence that a sale occurred, and therefore selecting from a population of shipping documents allows the auditor to test whether corresponding invoices exist for each sale.

Answer 8

The existence of customer orders and sales orders does not necessarily imply that a sale occurred. For example, the particular item requested may be out of stock. In such cases, there would properly be no sales invoice.

Question 9

Tracing from invoices to shipping documents would provide evidence that sales billed to customers were actually shipped. An invoice for which the corresponding shipping documents could not be located might be indicative of fictitious sales

Answer 9

An invoice may exist for which no entry was made in the accounts receivable subsidiary ledger. Therefore, the auditor would need to trace from entries in the accounts receivable subsidiary ledger (and not from invoices) to shipping documents, to obtain evidence that recorded receivables were for sales actually shipped.

Question 10

Ensuring that credit approval is obtained before goods are shipped does not support the rights and obligations assertion.

Answer 10

Ensuring that credit approval is obtained before goods are shipped does not support the rights and obligations assertion.

Question 11

An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing in order to identify potential liabilities for unpaid payroll taxes.

Answer 11

Payroll deductions are verified by inspecting the payroll register and, for a sample of employees, tracing deductions back to employee authorization forms held in the personnel department.

Question 12

To uncover fictitious employees receiving paychecks, the auditor would:

Answer 12

The auditor would need to observe payroll distribution (or examine direct deposits) to ensure that all personnel being paid are actually employed by the company.

Question 13

The independent auditor’s direct personal knowledge, based on personal inquiry and observation, are auditing procedures commonly used to test segregation of duties.

Answer 13

The independent auditor’s direct personal knowledge, based on personal inquiry and observation, are auditing procedures commonly used to test segregation of duties.

Question 14

Notes about payroll cycle substantive tests

Answer 14

If the control risk is assessed as low, less substantive testing is necessary. In such an instance, substantive testing would normally be limited to analytical procedures and recalculating year-end accruals.

Question 15

About testing the granting of stock options: =

Answer 15

Converted stock options may be distributed from authorized common shares rather than treasury stock.

In auditing the granting of stock options, the auditor would normally trace the transactions to approval by the board of directors.

Question 16

SODs w/the payroll cycle:

Answer 16

Unclaimed payroll checks should be returned to an independent party for follow up

Question 17

Notes about Derivatives and Securities

Answer 17

In auditing investments in securities and derivatives, the auditor must assess the reasonableness and appropriateness of assumptions, market variables, and valuation models. In order to do this, the auditor must consider whether the substance of transactions or events differs materially from their form. Remember that generally accepted accounting principles require transactions and events to be reported in accordance with their economic substance, even if this differs from their form.

Question 18

Notes about the recalculation of dividend investment income

Answer 18

Investment income from dividends is generally recalculated by comparing recorded income with dividend record books produced by investment advisory services such as “Moody’s Dividend Record.” These books state the dividend that was declared and paid by the investee

Question 19

Notes about Derivatives to hedge against risk

Answer 19

Generally accepted accounting principles specify that, in order to qualify for hedge treatment, the entity must demonstrate and disclose a number of transaction features including risk exposure. The auditor would therefore need to examine the contracts to evaluate the character of the hedge and the degree to which losses should be recognized in the determination of income, as well as the character of any disclosures.

Question 20

Notes about the auditor’s principal objective in analyzing repairs and maintenance expense accounts

Answer 20

The auditor reviews repair and maintenance expense accounts to test for completeness of asset additions (i.e., the auditor is looking for items recorded as repairs or maintenance that would more properly have been capitalized as betterment of an asset).

Question 21

In auditing an entity’s computerized payroll transactions, an auditor would be least likely to use test data to test controls concerning:

Answer 21

In auditing an entity’s computerized payroll transactions, an auditor would be least likely to use test data to test controls concerning control and distribution of unclaimed checks, since these sorts of controls are typically not automated. Controls surrounding unclaimed checks typically rely on proper segregation of duties, which is best evaluated through the auditor’s direct observation.

Test data w/be used tho for anything that would efficiently test automated controls. SODs are manual.
For example, the auditor might input fictitious additional hours to determine whether any controls identify the problem.

Question 22

What kind of test is this? Data in two or more fields are checked for consistency.

Answer 22

Reasonableness

Question 23

When deciding which procedures can be performed before year end, the auditor should?

Answer 23

he auditor should consider whether the year-end balances of the particular asset or liability accounts that might be selected for interim examination are reasonably predictable with respect to amount, relative significance, and composition.

Question 24

In performing a search for unrecorded retirements of fixed assets, an auditor most likely would:

Answer 24

Inspect the property ledger and the insurance and tax records, and then tour the client’s facilities.

Question 25

a procedure used to search for unrecorded additions.

Answer 25

touring the facility first, and then comparing assets found to those recorded on the property ledger, the auditor is testing the completeness of the property ledger,