IC - Transaction Cycles Flashcards
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 would most likely select items for testing from the file of all A. Cash disbursements. B. Approved vouchers. C. Receiving reports. D. Vendors' invoices
A - If the auditor is concerned that invoices and vouchers are being paid and destroyed, the most appropriate population for testing is cash disbursements.
The auditor would select a sample of inventory disbursements and trace to the vendor invoice, approved voucher, and receiving report
Tracing bills of lading to sales invoices provides evidence that
A. Shipments to customers were invoiced.
B. Shipments to customers were recorded as sales.
C. Recorded sales were shipped.
D. Invoiced sales were shipped
A
Sound internal control procedures dictate that defective merchandise returned by customers should be presented initially to the A. Accounts receivable supervisor. B. Receiving clerk. C. Shipping department supervisor. D. Sales clerk
B
An auditor would consider a cashier's job description to contain compatible duties if the cashier receives remittances from the mailroom and also prepares the A. Prelist of individual checks. B. Monthly bank reconciliation. C. Daily deposit slip. D. Remittance advices
C - Adequate segregation of duties provides for the separation of authorizing, recording, and custodial duties. Receiving remittances from the mailroom is a custodial duty. It may properly be combined with preparation of the daily deposit slip which would also require custody of the asset
Upon receipt of customers’ checks in the mailroom, a responsible employee should prepare a remittance listing that is forwarded to 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 monthly bank statement.
C. Accounts receivable bookkeeper to update the subsidiary accounts receivable records.
D. Entity’s bank to compare the listing with the cashier’s deposit slip
C
Employers bond employees who handle cash receipts because fidelity bonds reduce the possibility of employing dishonest individuals and
A. Protect employees who make unintentional errors from possible monetary damages resulting from their errors.
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 - Fidelity bonding insures the company against loss from illegal acts by employees. Bonded employees must be approved by the bonding company and claims filed against the bonding company are investigated before settlement occurs. As a result, fidelity bonding reduces the possibility of employing dishonest individuals and deters dishonesty by making employees aware that insurance companies may investigate and prosecute dishonest acts.
An auditor wishes to perform tests of controls on a client’s cash disbursements procedures. If the control procedures leave no audit trail of documentary evidence, the auditor will be most likely to test the procedures by
A. Confirmation and observation.
B. Observation and inquiry.
C. Analytical procedures and confirmation.
D. Inquiry and analytical procedures.
B
Which of the following internal control procedures is not usually performed in the treasurer’s department?
A. Verifying the accuracy of checks and vouchers.
B. Controlling the mailing of checks to vendors.
C. Approving vendors’ invoices for payment.
D. Canceling payment vouchers when paid
C - Approval of vendor invoices for payment is usually performed in accounts payable. Such approval represents an authorization function, which should be segregated from the custodial functions typically performed by the treasurer’s office.
Mailing disbursement checks and remittance advices should be controlled by the employee who
A. Matches the receiving reports, purchase orders, and vendors’ invoices.
B. Signs the checks last.
C. Prepares the daily voucher summary.
D. Agrees the check register to the daily check summary
B
When the shipping department returns nonconforming goods to a vendor, the purchasing department should send to the accounting department the A. Unpaid voucher. B. Debit memo. C. Vendor invoice. D. Credit memo
B - A debit memo advises accounting that the vendor invoice should not be paid in full due to returned goods. When the shipping department returns nonconforming goods to a vendor, purchasing should send accounting a debit memo
Equipment acquisitions that are misclassified as maintenance expense would most likely be detected by an internal control procedure that provides for
A. Segregation of duties of employees in the accounts payable department.
B. Independent verification of invoices for disbursements recorded as equipment acquisitions.
C. Investigation of variances within a formal budgeting system.
D. Authorization by the board of directors of significant equipment acquisitions
C - Misclassification of equipment acquisitions as maintenance expenses would most likely be detected through investigation of variances. Equipment acquisitions tend to be large dollar purchases which would distort normal maintenance expenses and thus create variances. Investigation of the variances would then reveal the misclassification
Which of the following controls would be most effective in assuring that the proper custody of assets in the investing cycle is maintained.
A. Direct access to securities in the safety deposit box is limited to only one corporate officer.
B. Personnel who post investment transactions to the general ledger are not permitted to update the investment subsidiary ledger.
C. The purchase and sale of investments are executed on the specific authorization of the board of directors.
D. The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safety deposit box by independent personnel
D - The most effective control for assuring the proper custody of securities is to independently reconcile recorded balances in the investment subsidiary ledger with the physical assets per the safe deposit box. The physical existence and presence of the recorded assets will thus be verified
When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs
A. Tests of controls and extensive tests of property and equipment balances at the end of the year.
B. Analytical procedures for current year property and equipment transactions.
C. Tests of controls and limited tests of current year property and equipment transactions.
D. Analytical procedures for property and equipment balances at the end of the year.
C - The assessment of control risk at a low level requires that the auditor provide the basis for reducing the assessment. The basis is provided by performing tests of controls and documenting the results which support a lowered control risk assessment. In turn, the low control risk assessment enables the auditor to reduce the amount of substantive testing in that area, thus limiting the testing of current year property and equipment transactions.
