CHAPTER 6

Question 1

The two Primary classes of transaction in the sales and collection cycle are:
a. Sales and sales discounts
b. sales and Sales receipts
C. Sales and sales returns
D. Sales and accounts receivable

Answer 1

b. Sales and Sales receipts

Question 2

Which of the following is not one of the five classes of transaction
included in the sales and collection cycle?
A. Sales returns and allowances
B. Charge-off of uncollectible accounts
C. Bad debt expense
d. Depreciation expense

Answer 2

d. Depreciation expense

Question 3

Which of the following is not a business-function within the “Sales”
class of transactions?
A. Processing customer orders
B. Granting credit
c. Processing and recording sales returns and allowances
D. Shipping goods

Answer 3

c. Processing and recording sales returns and allowances

Question 4

Which of the following documents is not commonly associated with the
“Cash Receipts” class of transactions?
A. Remittance advice
B. Sales order
C. Prelisting of cash receipts
D. Cash receipts journal or listing

Answer 4

B. Sales order

Question 5

Which one of the following is not an auditor’s concern about a key
authorization point in the sales/collection cycle?
A. Credit must be authorized before the sale.
B. Goods must be shipped after the authorization.
C. Prices must be authorized.
D. The receiving room must have authorization before releasing items to inventory control.

Answer 5

D. The receiving room must have authorization before releasing items to inventory control.

Question 6

What event initiates a transaction in the sales and collection cycle?
A. Customer request for goods.
B. Delivery of product to a customer.
C. Identification of a new customer.
D. Receipt of cash.

Answer 6

A. Customer request for goods.

Question 7

A ____________________ is a document that indicates a request for merchandise by a customer.
A. Customer order
B. Sales invoice
C. Sales order
D. Vendor invoice

Answer 7

A. Customer order

Question 8

A ____________________ is a document that communicates the description,
quantity, and related information for goods ordered by a customer.
A. Customer order
B. Sales invoice
C. Sales order
D. Vendor invoice

Answer 8

C. Sales order

Question 9

Before goods are shipped on account, a properly authorized person
must:
A. Approve the customer’s credit.
B. Approve the journal entry.
C. Prepare the sales invoice.
D. Verify that the unit price is accurate.

Answer 9

A. Approve the customer’s credit.

Question 10

For most firms, the function of indicating credit approval is recorded
on the:
A. Customer order
B. Remittance advice
C. Sales order
D. Sales invoice

Answer 10

C. Sales order

Question 11

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

Answer 11

C. Employees responsible for authorizing sales and bad debt write-offs denied access to cash.

Question 12

A ____________________ document that, is a contract between a carrier (e.g. a trucking company) and the seller of goods, initiates shipment of goods and indicates the description of the merchandise, the quantity shipped, and customer name and address is the:
A. Vendor invoice
B. Sales invoice
C. Picking ticket
d. Bill of lading

Answer 12

d. Bill of lading

Question 13

The document used as the basis for recording sales transactions and
updating the accounts receivable master file is the:
A. Sales order
B. Sales journal
C. Sales invoice
D. Bill of lading

Answer 13

C. Sales invoice

Question 14

Which of the following control procedures could prevent or detect errors or frauds arising from shipments made to unauthorized parties?
A. Documents policies and procedures for scheduling shipments
B. Establish procedures for reviewing and approving prices and sales terms before sale
C. Prenumbered bills of lading and assure that related billings are made on a periodic basis.
d. Prepare and periodically update lists of authorized customers.

Answer 14

d. Prepare and periodically update lists of authorized customers.

Question 15

Most companies recognize sales revenue when:
A. Sales are invoiced.
B. Goods are shipped.
C. Customer orders are received.
D. Customer orders are approved.

Answer 15

B. Goods are shipped.

Question 16

The classes of transactions in the acquisition and payment cyde
include acquisition of:
A. Goods
B. Goods and services
C. Goods and services and cash disbursement
D. Goods and services and cash disbursement, and purchase returns and allowances

Answer 16

D. Goods and services and cash disbursement, and purchase returns and allowances

Question 17

Debits to manufacturing equipment arise from which cycle(s)?
A. Sales and collection
B. Payroll
C. Acquisition and disbursement
D. Inventory and warehousing

Answer 17

C. Acquisition and disbursement

Question 18

It usually takes more time to audit the acquisition and payment cyde
than other cycles because:
A. There is a greater possibility of fraud in these transactions.
B. Internal controls in this area are usually the weakest.
C. Of the large number of accounts affected.
D. There is greater likelihood of lawsuits against the CPA relating to these accounts.

Answer 18

C. Of the large number of accounts affected.

Question 19

With respect to a small company’s system of purchasing supplies, an auditor’s primary concern should be to obtain satisfaction that supplies ordered and paid for have been
A. Requested by and approved by authorized individuals who have no incompatible duties
B. Used in the course of business and solely for business purposes during the year under audit
c. Received, counted, and checked to quantities and amounts on purchase orders and invoices.
D. Properly recorded as assets and systematically amortized over the estimated useful life of the supplies

Answer 19

c. Received, counted, and checked to quantities and amounts on purchase orders and invoices.

Question 20

To control purchasing and accounts payable, an information, must include certain source documents. For a manufacturing organization, these documents should include:
A. Purchase orders, receiving reports, and vendor invoices
B. Receiving reports and vendor invoices
C. Purchase requisitions, purchase orders, inventory reports of goods needed, and vendor invoices,
D. Purchase requisitions, purchase orders, receiving reports, and vendor invoices.

Answer 20

D. Purchase requisitions, purchase orders, receiving reports, and vendor invoices.

Question 21

Which of the following errors would be least likely to be discovered during the audit of the acquisitions and payments cyce?
A. Duplicate payments of a vendor’s invoice
B. Improper payments of officers’ personal expenditures
C. Payment for raw materials that were not received
D. Payment of interest to a related party for an amount in excess of the going rate.

Answer 21

D. Payment of interest to a related party for an amount in excess of the going rate.

Question 22

Which of the following is not a key control in the acquisition payment cycle?
A. Authorization of purchases.
B. Authorization of credit
C. Timely recording and independent review of transactions
D. Authorization of payments.

Answer 22

B. Authorization of credit

Question 23

What typically initiates the acquisitions and payment cycle?
A. Issuance of a purchase requisition or request for purchase of goods/services
B. Issuance of payment to vendor.
C. Approval of a new vendor.
D. Purchase requisition.

Answer 23

A. Issuance of a purchase requisition or request for purchase of goods/services

Question 24

After a purchase requisition is approved, what must be initiated to purchase the goods or services?
A. Purchase order
B. Vendor order
c. call order
d. vendor invoice

Answer 24

A. Purchase order

Question 25

Which of the following would be an appropriate initiation of a purchase
requisition?
a. One initiated based on a periodic count of raw materials and One initiated by stockroom personnel as raw materials are needed.
b. none
c. One initiated based on a periodic count of raw materials
d. One initiated by stockroom personnel as raw materials are needed.

Answer 25

a. One initiated based on a periodic count of raw materials and One initiated by stockroom personnel as raw materials are needed.

Question 26

Proper authorization for acquisition is essential because it
A. Ensures that goods/services were purchased from approved vendors
B. Ensures that goods/services are for authorized company purposes.
C. Ensures that goods/services were purchased at the lowest possible price
D. Ensures that goods/services are used efficiently by company
employees.

Answer 26

B. Ensures that goods/services are for authorized company purposes.

Question 27

One risk associated with the purchasing cycle is the possibility that quantities in excess of organizational needs may be ordered. Which of the following controls would address this exposure?
A. The warehouse delays the storage of all goods until the inspection department provides a receiving report that is consistent with the packing slip provided by the vendor.
B. The receiving department delays the unloading of each shipment presented for receipt until an originating purchase order is available.
C. The purchasing department places all orders when the computer
indicates allow inventory level.
D. A user department supervisor reviews each purchase requisition prior to its being forwarded to the purchasing department.

Answer 27

D. A user department supervisor reviews each purchase requisition prior to its being forwarded to the purchasing department.

Question 28

Which of the following acquisition transactions is likely to be covered by a
General authorization by company policy?
a. Purchase of office equipment maintenance services and Purchase of office buildings for company use.
b. none
c. Purchase of office equipment maintenance services
d. Purchase of office buildings for company use.

Answer 28

c. Purchase of office equipment maintenance services

Question 29

A written purchase order is a legal document that is
a. Not enforceable if it is not in writing.
b. an offer to buy.
C. An acceptance of a vendor’s catalog offer to sell
D. A binding agreement between purchases and vendor.

Answer 29

b. an offer to buy.

Question 30

For good internal control, the purchasing department should not be responsible for
A. Authorizing the acquisition of goods.
B. Designing the purchase order form.
C. Finding the lowest cost vendor.
D. Reviewing vendors’ catalog descriptions and prices for standardized items.

Answer 30

A. Authorizing the acquisition of goods.