Specific Transaction Cycles Flashcards

1
Q

Tracing bills of lading to sales invoices provides evidence that

Shipments to customers were invoiced.

Shipments to customers were recorded as sales.

Recorded sales were shipped.

Invoiced sales were shipped.

A

Shipments to customers were invoiced.

This answer is correct because by tracing bills of lading to sales invoices, the auditor obtains evidence that merchandise which has been shipped (as evidenced by a bill of lading) has been invoiced.

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2
Q

Which of the following sets of duties would ordinarily be considered basically incompatible in terms of good internal control?

Preparation of monthly statements to customers and maintenance of the accounts receivable subsidiary ledger.

Posting to the general ledger and approval of additions and terminations relating to the payroll.

Custody of unmailed signed checks and maintenance of expense subsidiary ledgers.

Collection of receipts on account and maintaining accounts receivable records.

A

Collection of receipts on account and maintaining accounts receivable records.

This answer is correct because collection of receipts on account and maintaining accounts receivable records combine both custody and recording of assets.

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3
Q

Proper segregation of functional responsibilities calls for separation of the

Authorization, approval, and execution functions.

Authorization, execution, and payment functions.

Receiving, shipping, and custodial functions.

Authorization, recording, and custodial functions.

A

Authorization, recording, and custodial functions.

This answer is correct because proper segregation of the functional responsibilities requires separation of (1) authorization, (2) recording, and (3) custodial functions. Incompatible functions are those that place any person in a position both to perpetrate and to conceal errors and irregularities. Thus, those that authorize transactions should be separated from those who account for the transactions and from those who have custody of any related assets.

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4
Q

Effective internal control requires organizational independence of departments. Organizational independence would be impaired in which of the following situations?

The internal auditors report to the audit committee of the board of directors.

The controller reports to the vice president of production.

The payroll accounting department reports to the chief accountant.

The cashier reports to the treasurer.

A

The controller reports to the vice president of production.

This answer is correct because the controller, who is in charge of accounting, should be independent of the production function. Since the accounting function reports on the production function, there would be a conflict of interest if the controller reported to the vice president of production.

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5
Q

Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both

Journalize cash receipts and disbursements and prepare financial statements.

Monitor internal control and evaluate whether the controls are operating as intended.

Adopt new accounting pronouncements and authorize the recording of transactions.

Record and conceal fraudulent transactions in the normal course of assigned tasks.

A

Record and conceal fraudulent transactions in the normal course of assigned tasks.

This answer is correct because a proper segregation should be designed to attempt to prevent any employee from recording and concealing fraudulent transactions.

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6
Q

Proper segregation of duties reduces the opportunities to allow persons to be in positions to both

Journalize entries and prepare financial statements.

Record cash receipts and cash disbursements.

Establish internal controls and authorize transactions.

Perpetrate and conceal errors and irregularities.

A

Perpetrate and conceal errors and irregularities.

Segregation of duties involves the separation of the responsibilities of authorizing transactions, recording transactions, and maintaining custody of assets. It is intended to reduce the opportunities for any person to be in a position to both perpetrate and conceal errors or irregularities in the normal course of his/her duties.

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7
Q

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

Cash disbursements.
Approved vouchers.
Receiving reports.
Vendors’ invoices.

A

Cash disbursements.

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.

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