AUD 4.6 - Other Transaction Cycles

Question 1

The major transactions associated with property plant and equipment cycle are:

Answer 1

Purchases
Repairs and maintenance
Depreciation
Disposal
Leasing

Question 2

The major internal control processes for property plant and equipment are:

Answer 2

Acquisition
Subsidiary ledgers
Physical security
Written policies
Dispositions

Question 3

What is generated for acquisitions of PPE?

Answer 3

Requisition forms

Question 4

Acquisitions of PPE are tied into what? The board of directors approves this and what else?

Answer 4

The capital budget
Approve acquisition of assets over a certain amount

Question 5

Information including the assets description, ID number, location, acquisition date, cost, depreciation method, and amount of depreciation can be found in what during the PPE internal controls?

Answer 5

The subsidiary ledger

Question 6

There should be segregation of duties in this internal control for PPE where cash is received and an asset and its accumulated depreciation is removed from the subsidiary ledger:

Answer 6

Segregation of those who authorize a disposal and those who actually dispose of the asset

Question 7

Retirements of assets are documented on what? This contains evidence o proper authorization and the reason for retirement.

Answer 7

On a sequentially numbered work order

Question 8

What assertions are covered when auditing the PPE balance?

Answer 8

Completeness
Valuation and allocation
Existence
Rights and obligations

Question 9

When auditing the completeness assertion of the PPE balance, the auditor should:

Answer 9

Obtain and foot fixed assets schedule and tie to the GL
Obtain and got schedule of additions/disposals and tie to the fixed assets schedule
Sample fixed assets and trace them to the fixed assets subsidiary ledger

Question 10

When auditing the valuation and allocation assertion of the PPE balance, the auditor should:

Answer 10

Recalculate accumulated depreciation
Evaluate fixed assets for impairment
Reperform the entity’s impairment analysis

Question 11

When auditing the existence assertion of the PPE balance, the auditor should:

Answer 11

Vouch additions to the fixed assets accounts by examining internal documents, external evidence, and inspecting actual assets
Test for unrecorded requirements

Question 12

When auditing the rights and obligations assertion of the PPE balance, the auditor should:

Answer 12

Examine invoices, deeds, and title documents to confirm ownership of fixed assets

Question 13

When auditing the completeness assertion of the PPE transactions, the auditor should:

Answer 13

Trace a sample of purchase requisitions to receiving reposts and the fixed assets subsidiary ledger
Review the related repair and maintenance expense accounts for items that should’ve been capitalized
Review lease and rental agreements

Question 14

When auditing the cutoff assertion of the PPE transactions, the auditor should:

Answer 14

Review purchases and dispositions from shortly before and after year end

Question 15

When auditing the valuation, allocation, and accuracy assertion of the PPE transactions, the auditor should:

Answer 15

Recalculate depreciation expense
Gains and losses and the removal of accumulated depreciation for fixed assets sold or retired should be tested for reasonableness

Question 16

When auditing the existence and occurrence assertion of the PPE transactions, the auditor should:

Answer 16

Vouch a sample of purchases to the receiving report then the vendor invoice and a sample of disposition to the asset retirement form and other supporting documents

Question 17

When auditing the understandability and classification assertion of the PPE transactions, the auditor should:

Answer 17

Examine a sample of significant charges to repairs and maintenance expense for items that should have been capitalized
Review lease transactions for proper classification as operating or capital lease

Question 18

What assertions are audited when testing PPE transactions?

Answer 18

Completeness
Cutoff
Valuation, allocation, and accuracy
Existence and occurrence
Understandability and classification

Question 19

The most significant payroll and personnel cycle risks are:

Answer 19

The creation of fictitious employees and the falsification of hours worked

Question 20

There should be proper segregation of duties between what steps of the payroll and personnel cycle?

Answer 20

Authorization and employ and pay
Supervision
Timekeeping and cost accounting
Payroll check preparation

Question 21

Who hires employees and maintains the personnel records, containing hire date, department, salary, and position?

Answer 21

The HR department

Question 22

Who approves pay base data (hours, absences, time off, etc)

Answer 22

Employees immediate supervisor

Question 23

Data on which pay is based such as hours worked or jobs completed should be accumulated by who?

Answer 23

Someone independent of any other function of the payroll and personnel cycle

Question 24

Who computes salary and issues the unsigned payroll checks to the treasurer for signature?

Answer 24

The payroll department or a service organization

Question 25

The payroll department is a record keeping department, they should not have authority or the ability to do what?

Answer 25

Change hours or rates or sign checks

Question 26

What is a paymaster?

Answer 26

The person responsible for distributing checks
They have no other payroll function

Question 27

The auditor should do what to evaluate the internal controls surrounding payroll and personnel cycle?

Answer 27

Observe segregation of duties
Compare personnel records to actual time cards
Observe payroll distribution
Observe the use of time-clocks
Test to ensure only employees existing in the computer data fils are accepted when entered

Question 28

The auditor generally focuses substantive procedures for the payroll and personnel cycle on:

Answer 28

Analytical procedures and the recalculation of payroll accruals

Question 29

Tests related to completeness, existence, and rights and obligations are performed in the payroll cycle only when:

Answer 29

Internal controls over payroll cannot be relied upon

Question 30

When testing the completeness assertion when auditing the payroll accrual, the auditor should:

Answer 30

Perform the search for unrecorded liabilities

Question 31

When testing the valuation and allocation assertion when auditing the payroll accrual, the auditor should:

Answer 31

Recalculate any year end payroll accrual and compare the calculated amount to the recorded amount

Question 32

When testing the existence assertion when auditing the payroll accrual, the auditor should:

Answer 32

Vouch amounts from the clients calculation of the payroll accrual to supporting documents

Question 33

When testing the rights and obligations assertion when auditing the payroll accrual, the auditor should:

Answer 33

Examine supporting documentation to verify that the payroll accrual is an obligation of the entity

Question 34

When testing the completeness assertion when auditing the payroll transactions, the auditor should:

Answer 34

Trace a sample of time cards to the payroll register

Question 35

When testing the cutoff assertion when auditing the payroll transactions, the auditor should:

Answer 35

Sample time cards from beginning and prior to year end and compare with the payroll report to ensure proper period recording

Question 36

When testing the valuation, allocation, and accuracy assertion when auditing the payroll transactions, the auditor should:

Answer 36

Compare recorded payroll with payroll checks issued
Verify pay rates and deductions with employees records
Recalculate gross and net pay
Compare payroll costs with standards or budgets
Recompute mathematical accuracy of a sample of paychecks

Question 37

When testing the existence and occurrence assertion when auditing the payroll transactions, the auditor should:

Answer 37

Vouch time on payroll summaries by selecting a sample of payroll register entries and comparing with time cards and approved time reports

Question 38

When testing the understandability and classification assertion when auditing the payroll transactions, the auditor should:

Answer 38

Examine a sample of paychecks for classification into proper expense accounts

Question 39

The financing cycle includes an entity’s:

Answer 39

Debt and equity

Question 40

This ensures that stock issuances comply with the articles of incorporation, prepares stock certificates, and maintains records of shares authorized, issued, and outstanding:

Answer 40

Stock transfer agent

Question 41

When testing the completeness assertion when auditing the debt balance, the auditor should:

Answer 41

Review board minutes, obtain debt agreements, and trace all new debt contracts into the financials
Agree total debt listing to the GL
Debt disclosed in the bank confirmation should be traced to the debt agreements and financials
Confirm notes and bonds with creditors

Question 42

When testing the valuation and allocation assertion when auditing the debt balance, the auditor should:

Answer 42

Examine new debt agreements to determine if recorded at proper amount
Recompute any interest payable and amortization of premiums and discounts

Question 43

When testing the existence assertion when auditing the debt balance, the auditor should:

Answer 43

Confirm notes and bonds directly with creditors

Question 44

When testing the rights and obligations assertion when auditing the debt balance, the auditor should:

Answer 44

Examine notes and bond agreements to verify that they are the obligations of the entity

Question 45

When testing the completeness assertion when auditing the debt transactions, the auditor should:

Answer 45

Examine new debt agreements and the board minutes for evidence of new debt
Review interest expense for payments to debt holders not included in the debt listing
Examine lease agreements for proper classification as operating or capital lease

Question 46

When testing the valuation, allocation, and accuracy assertion when auditing the debt transactions, the auditor should:

Answer 46

Sample debt receipts and payments and compare interest expense to the debt balance for reasonableness

Question 47

When testing the existence and occurrence assertion when auditing the debt transactions, the auditor should:

Answer 47

Review the board minutes for evidence of new debt agreements and inspect those agreements if any

Question 48

When testing the understandability and classification assertion when auditing the debt transactions, the auditor should:

Answer 48

Examine due dates of notes and bods to determine whether the debt should be classified as short or long term

Question 49

If the client uses a stock transfer agent, when testing the completeness assertion when auditing the equity balance and transactions, the auditor should:

Answer 49

Send third party confirms to confirm shares authorized, issued, and outstanding as well as to provide evidence of individual transactions

Question 50

If the client does not use a stock transfer agent, when testing the completeness assertion when auditing the equity balance and transactions, the auditor should:

Answer 50

Examine the stock certificate stubs from the “stock certificate book” for proper recording of any canceled certificates and for existence of remaining unissued certificates
Foot the shares outstanding in the stock certificate book an agree with the GL
Examine all shares of treasury stock and agree to GL

Question 51

When auditing equity, the auditor is mostly concerned with what assertions?

Answer 51

Completeness, valuation, existence and occurrence. Also classification and understandability

Question 52

When testing the valuation assertion when auditing the equity balance and transactions, the auditor should:

Answer 52

Recompute the value assigned to stock transactions during the period
Analyze the retained earnings account and review the propriety of any direct entries to retained earnings

Question 53

When testing the existence and occurrence assertion when auditing the equity balance and transactions, the auditor should:

Answer 53

Vouch transactions recorded during the period to board minutes
Confirming the stock transfer agent or stock certificate book also cover existence

Question 54

When testing the understandability and classification assertion when auditing the equity balance and transactions, the auditor should:

Answer 54

Determine whether there are restrictions on retained earnings resulting from loans, agreements, or laws.