Module 2 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 most likely would select items for testing from the file of all:
*Receiving reports
*Cash disbursements
*Approved vouchers
*Vendors’ invoices
Cash disbursements
The primary reason for preparing a reconciliation between interest-bearing obligations outstanding during the year and interest expense presented in the financial statements is to:
*Evaluate internal control over securities
*Ascertain the reasonableness of imputed interest
*Determine the validity of prepaid interest expense
*Detect unrecorded liabilities
Detect unrecorded liabilities
Which of the following would generally not need to be approved by the board of directors?
*Payment of a Dividend declared
*Repurchasing capital stock
*Issuing capital stock
*Declaration of a Dividend
Payment of a Dividend declared
In testing the reasonableness of interest income, an auditor could most effectively use analytical tests involving
*The ending balance in the investments accounts for fixed income securities
*The beginning balance in the investments account for fixed income securities
*The average monthly balance in the investments account for fixed income securities
*Documentary support of specific entries in the account
The average monthly balance in the investments account for fixed income securities
An auditor is verifying a company’s ownership of equipment. What is the best evidence of ownership?
*An interview with the equipment custodian verifying company ownership
*The current year’s depreciation expense journal entry
*A canceled check written to acquire the equipment
*The presence of the equipment on the company’s
A canceled check written to acquire the equipment
A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and submission of coupons for periodic interest collections probably should be delegated to the
*CEO and Cashier
*President and Treasurer
*Chief accountant and Treasurer
*Internal auditor and Chief accountant
President and Treasurer
Which of the following controls would be appropriate regarding the release of materials from a stockroom?
*Production employer in need of materials should personally pick up needed materials from the stockroom
*Stockroom employees deliver materials to work areas throughout the day to maintain acceptable levels of safety stock — no written records are maintained
*Production employees submit approved requisition forms to the stockroom for materials needed
*Production employees request materials be delivered to their work areas as they need them
Production employees submit approved requisition forms to the stockroom for materials needed
The audit procedure “observe the client taking a physical inventory count and test the count” is sufficient to determine all of the following except:
*whether recorded inventory was properly counted by the client
*whether recorded inventory was properly valued by the client
*whether recorded inventory actually exists
*whether client inventory instruction had properly been followed
whether recorded inventory was properly valued by the client
A common inventory observation procedure is to select a random sample of tag numbers and identify the tag with that number attached to the actual inventory item. The audit objective being achieved by this procedure is:
*inventory as recorded on tags actually exists (existence).
*existing inventory is counted and tagged (completeness).
*inventory is classified correctly (classification)
*inventory is counted accurately (accuracy).
inventory as recorded on tags actually exists (existence).
In most manufacturing companies, the inventory and warehousing cycle begins with the:
*acquisition of raw materials for production of an order
*receipt of a customer’s order
*completion of production of a customer’s order
*initiation of production of a customer’s order
acquisition of raw materials for production of an order
Which of the following is a question that the auditor would expect to find on the production cycle section of an internal control questionnaire?
*Are all releases by storekeepers of raw materials from storage based on approved requisition documents?
*Are details of individual disbursements for raw materials balanced with the total to be posted to the appropriate general
ledger account?
*Are vendors’ invoices for raw materials approved for payment by an employee who is independent of the cash disbursements function?
*Are signed checks for the purchase of raw materials mailed directly after signing without being returned to the person who authorized the invoice processing?
Are all releases by storekeepers of raw materials from storage based on approved requisition documents?
Which of the following is a significant audit concern related to the transfer of inventory from one location to another?
*transfers were properly planned
*transfers represent efficient movement of a
*recorded transfers occurred
*transfers were properly transported
recorded transfers occurred
It is frequently possible to test the physical inventory prior to the balance sheet date when:
*there are accurate perpetual inventory master files
*the internal control system is no better at year-end than at an earlier point in time
*year-end sales are small
*the client counts inventory at interim dates
there are accurate perpetual inventory master files
Which of the following is not a function within the inventory and warehousing cycle?
*process invoices for shipped goods
*ship finished goods
*store raw materials
*process the goods
process invoices for shipped goods
Which of the following is not a control that is designed to protect investment securities?
*Custody over securities should be limited to individuals who have record-keeping responsibility over the securities.
*Securities should be registered in the name of the owner.
*Securities should be properly controlled physically in order to prevent unauthorized usage.
*Access to securities should be vested in more than one individual.
Custody over securities should be limited to individuals who have record-keeping responsibility over the securities.
Which of the following audit procedures would be the most effective in testing for nonexistent employees?
*Trace transactions recorded in the payroll journal to the HR department to determine employment status
*Recalculate net pay
*Examine cancelled checks for proper endorsement
*Reconcile the disbursements in the payroll journal with the disbursements on the payroll bank statements
Trace transactions recorded in the payroll journal to the HR department to determine employment status
The payroll and personnel cycle ends with which of the following events?
*issuance of paychecks
*interviewing job candidates
*hiring a new employee
*existing employees submitting requests for payment for work performed
issuance of paychecks
The total of the individual employee earnings in the payroll master file should equal the total:
*gross pay for the current week’s payroll
*total of the checks drawn to employees for payroll
*gross payroll plus the total contributed by the employer for payroll taxes
*balance of gross payroll in general ledger accounts
balance of gross payroll in general ledger accounts
Which of the following would have the least amount of importance regarding controls over the processing of payroll?
*Unclaimed paychecks should be immediately returned for redeposit
*Distribution of pay checks should be performed by someone who is not involved in the other payroll functions
*A check-signing machine should not be used to replace a manual signature
*The person authorized to sign paychecks should not be otherwise involved in the preparation of the payroll
A check-signing machine should not be used to replace a manual signature
Which of the following types of audit procedures is ordinarily emphasized the least when auditing payroll?
*Tests of transactions
*Tests of controls
*Tests of details of balances
*Analytical procedures
Tests of details of balances
Which of the following internal control objectives is likely to be the most important in the audit of the payroll cycle?
*Recorded transactions are recorded in the proper accounting period
*Payroll transactions are processed by an outside service provider
*Payroll transactions are properly disclosed and presented in the notes to the financial statements
*Recorded transactions represent valid payments
Recorded transactions represent valid payments
To minimize the opportunity for fraud, unclaimed salary checks should be:
*deposited in a special bank account.
*kept in the payroll department
*held for the employee in the personnel department
*left with the employee’s supervisor
deposited in a special bank account.
In determining the effectiveness of an entity’s controls relating to the existence or occurrence assertion for payroll transactions, an auditor most likely would inquire about and
*Inspect evidence of accounting for prenumbered payroll checks
*Recompute the payroll deductions for employee fringe benefits
*Verify the preparation of the monthly payroll account bank reconciliation
*Observe the segregation of duties concerning personnel (HR department) responsibilities and payroll disbursement (payroll department)
Observe the segregation of duties concerning personnel (HR department) responsibilities and payroll disbursement (payroll department)
Which of the following is a control that most likely could help prevent employee payroll fraud?
*Employee who distribute payroll checks forward unclaimed payroll checks to the absent employees’ supervisors
*The personnel department promptly sends employee termination notices to the payroll supervisor.
*Total hours used for determination of gross pay are calculated by the payroll supervisor
*Salary rates for new hires are approved by the payroll supervisor
The personnel department promptly sends employee termination notices to the payroll supervisor.
Most companies recognize sales revenue when:
*goods are received by the customer
*depends upon the company’s revenue recognition policies
*sales are invoiced
*goods are shipped
goods are shipped
Which of the following would least concern an auditor regarding the lack of a specific authorization to conduct the sales transaction?
*shipment of goods
*selling of goods for cash
*granting of credit
*determination of discounts
selling of goods for cash
In the accounts receivable subsidiary ledger the length of time the account has been due can be useful to the client and the auditor in preparing the:
*working trial balance
*accounts receivable trial balance
*trial balance
*aged accounts receivable trial balance
aged accounts receivable trial balance
The total of the individual account balances in the accounts receivable subsidiary ledger should equal the:
*total sales for the period
*total sales less the total cash received for the period
*balance of the accounts receivable account in the general ledger
*balance of the sales account in the general ledger
balance of the accounts receivable account in the general ledger
Which of the following is not a business function within the “Sales” class of transactions?
*processing customer orders
*shipping goods
*granting credit
*processing and recording sales returns and allowances
processing and recording sales returns and allowances
In designing audit procedures for the sales returns and allowances account, the auditor would primarily rely on the following accounts, except for:
*sales returns and allowances will be recorded in all of the above
*sales returns and allowances transaction file
*accounts receivable master file
*cash receipts journal
cash receipts journal
For a firm that practices good internal controls in the sales and collections cycle, the function of indicating credit approval should be recorded on which of the following documents?
*remittance advice
*sales invoice
*shipping document
*sales order
sales order
The auditor’s objectives for the sales and cash collections activities when the client is primarily an e-commerce business as compared to a “bricks and mortar” business are:
*decreased
*unchanged
*mitigated
*expanded
unchanged
What critical event must take place before goods can be shipped in order to assure payment can be reasonably expected?
*receipt of sales order from the customer
*credit approval
*determination of correct delivery address
*matching of shipping document with sales invoice
credit approval
One key internal control to prevent fictitious ransactions in the sales and collection cycle is:
*having bank reconciliations prepared by one who is independent of the treasury function
*assign a specific customer number for each customer in the computer files
*to include the sales price list of all products in the computer files
*to account for the integrity of the numerical sequence of sales orders
assign a specific customer number for each customer in the computer files
Which of the following is not an account affected by the sales and collection cycle?
*Accounts receivable
*Allowance for doubtful accounts
*Sales of Accounts Receivables
*Cash
Sales of Accounts Receivables
The document that requires adjustments to the customers subsidiary ledger account is the:
*credit memo
*monthly statement
*bill of lading
*sales invoice
credit memo
When designing audit procedures, tracing of source documents to the customers subsidiary ledger and subsequently to the general ledger is done to satisfy what assertion?
*classification
*valuation
*completeness
*cutoff
completeness
Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded?
*The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers
*The billing department supervisor matches prenumbered shipping documents with entries in the sales journal
*The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts
receivable control account monthly
*The billing department supervisor sends copies of approved sales orders to the credit department for comparison to authorized credit limits and current customer account balances.
The billing department supervisor matches prenumbered shipping documents with entries in the sales journal
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:
*Accounts receivable bookkeeper to update the subsidiary accounts receivable records
*Internal auditor to investigate the listing for unusual transactions
*Entity’s bank to compare the listing with the cashier’s deposit slip
*Treasurer to compare the listing with the monthly bank statement
Accounts receivable bookkeeper to update the subsidiary accounts receivable records
Which of the following is not one of the five classes of transactions included in the sales and collection cycle?
*Interest Income
*Write-off of uncollectible accounts
*Sales returns and allowances
*Bad debt expense
Interest Income
An entity’s internal control requires for every check request that there be an approved voucher, supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all:
*Canceled checks
*Receiving reports
*Approved vouchers
*Purchase orders
Canceled checks
Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable?
*Are the proceeds from notes payable used for the purchase of noncurrent assets?
*Are two or more authorized signatures required on checks that repay notes payable?
*Are assets that collateralize notes payable critically needed for the entity’s continued existence?
*Are direct borrowings on notes payable authorized by the board of directors?
Are direct borrowings on notes payable authorized by the board of directors?
A company has additional funds to invest. The Board decided to approve the purchase of marketable securities and assigned the future purchase and sale decisions to a responsible officer. The best person(s) to make periodic reviews of the investment activities should be
*Treasurer
*Board of Directors
*Internal audit
*Controller
Board of Directors
Company A does not employ an independent stock transfer agent, but rather issues its own stock and maintains its stock records. When outstanding shares are transferred from one holder to another the certificate of the selling shareholder should be:
*Retained by the selling shareholder
*Destroyed to prevent fraudulent reissuance
*Sent to the state’s registrar of investment securities
*Canceled (generally by perforation) and attached to the certificate book
Canceled (generally by perforation) and attached to the certified book
Which of the following most likely would approve the issuance of notes payable?
*Purchasing officer
*HR personnel
*Treasurer
*Controller
Treasurer
From which of the following evidence-gathering audit procedures would an auditor obtain most assurance concerning the existence of inventories?
*auditor’s recomputation of inventory extensions
*confirmation of inventories in a public warehouse
*observation of physical inventory counts
*written inventory representations from management
observation of physical inventory counts
Sound internal control dictates that defective merchandise returned by customers should be presented initially to the:
*Salesclerk
*Inventory control clerk
*Purchasing clerk
*Receiving clerk
Receiving clerk
Which of the following statements is false?
*Small companies usually have effective controls over payroll
*The payroll cycle consists of one class of transactions
*Balance sheet accounts related to payroll are generally more significant than related transactions
*Internal controls over payroll are effective for most companies
Balance sheet accounts related to payroll are generally more significant than related transactions
An auditor is vouching a sample of hourly employees from the payroll master file to approved time clock or time sheet data in order to provide evidence that:
*product cost information is accurate
*payments are made at the contractual rate
*employees work the number of hours for which they are paid
*segregation of duties is present between the payroll function and the payment function for cash disbursements
employees work the number of hours for which they are paid
For which of the following functions is the use of prenumbered documents least important?
*Use of prenumbered receiving reports in the acquisitions function
*Use of prenumbered deposit slips in the cash receipts function
*Use of prenumbered time cards in the payroll function
*Use of prenumbered sales invoices in the sales function
Use of prenumbered time cards in the payroll function
