Certified Public Accountant CPA Questions + Answers Part 33
Posted: Tue Feb 22, 2022 6:41 pm
QUESTION 529
Payroll Data Co. (PDC) processes payroll transactions for a retailer. Cook, CPA, is engaged to express an opinion on a description of PDC's internal controls placed in operation as of a specific date. These controls are relevant to the retailer's internal control, so Cook's report may be useful in providing the retailer's independent auditor with information necessary to plan a financial statement audit. Cook's report should:
A. ContainadisclaimerofopinionontheoperatingeffectivenessofPDC'scontrols.
B. StatewhetherPDC'scontrolsweresuitablydesignedtoachievetheretailer'sobjectives. C. Identify PDC's controls relevant to specific financial statement assertions.
D. Disclose Cook's assessed level of control risk for PDC.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. There are two types of reports on the processing of transactions by service organizations: "reports on controls placed in operation" and "reports on controls placed in operation and tests of operating effectiveness." The former do not include tests of operating effectiveness and, therefore, are not intended to provide the user auditor with a basis for reducing the assessment of control risk. Accordingly, such reports should include a disclaimer of opinion regarding the operating effectiveness of the controls. Choice "b" is incorrect. The report should contain an indication that the controls were suitably designed to achieve specified control objectives, but it does not provide any assurance regarding the achievement of the user organization's (in this case, the retailer's) objectives. Choice "c" is incorrect. The service auditor (Cook) is not required to identify the service organization's (i.e., PDC's) controls relevant to specific financial statement assertions because this is not a financial statement audit.
Choice "d" is incorrect. The service auditor (Cook) is not required to disclose the assessed level of control risk for the service organization (PDC).
QUESTION 530
Computer Services Company (CSC) processes payroll transactions for schools. Drake, CPA, is engaged to report on CSC's internal controls placed in operation as of a specific date. These internal controls are relevant to the schools' internal control, so Drake's report will be useful in providing the schools' independent auditors with information necessary to plan their audits. Drake's report expressing an opinion on CSC's internal controls placed in operation as of a specific date should contain a(an):
A. DescriptionofthescopeandnatureofDrake'sprocedures.
B. StatementthatCSC'smanagementhasdisclosedtoDrakealldesigndeficienciesofwhichitisaware. C. Opinion on the operating effectiveness of CSC's internal controls.
D. Paragraph indicating the basis for Drake's assessment of control risk.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation: Explanation
Choice "a" is correct. A report on internal controls for a service organization should include a description of the scope and nature of Drake's procedures. Choice "b" is incorrect. No statement is made in the report that all design deficiencies have been disclosed. Choice "c" is incorrect. The service auditor's opinion is not intended to provide evidence of operating effectiveness.
Choice "d" is incorrect. No paragraph indicating the basis for the assessment of control risk is included in Drake's report.
QUESTION 531
A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor's:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. It is not appropriate for the successor auditor to request a review of the predecessor auditor's engagement letter. This is a business matter between the client and the predecessor auditor that has no impact on the successor's audit. Conversely, review of the predecessor auditor's audit documentation is appropriate and customary to facilitate the successor's audit.
Choices "a", "b", and "d" are incorrect, based on the above explanation.
QUESTION 532
When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the:
A. Extentoftestsofdetails. B. Levelofinherentrisk.
C. Extent of tests of controls.
D. Level of detection risk.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, detection risk must be reduced accordingly.
This may be accomplished by increasing the extent of tests of details. Choice "b" is incorrect. The level of inherent risk is not directly related to the planned level of control risk.
Choice "c" is incorrect. The auditor performs tests of controls to evaluate the operating effectiveness of those controls. Once they have been determined to be ineffective, there would be no reason to perform further tests of those controls. Choice "d" is incorrect. The level of detection risk that the auditor could accept would decrease if the planned level of control risk increased.
QUESTION 533
Lake, CPA, is auditing the financial statements of Gill Co. Gill uses the EDP Service Center, Inc. to process its payroll transactions. EDP's financial statements are audited by Cope, CPA, who recently issued a report on EDP's internal control structure. Lake is considering Cope's report on EDP's internal control structure in assessing control risk on the Gill engagement. What is Lake's responsibility concerning making reference to Cope as a basis, in part, for Lake's own opinion?
A. LakemayrefertoCopeonlyifLakeissatisfiedastoCope'sprofessionalreputationandindependence. B. LakemayrefertoCopeonlyifLakereliesonCope'sreportinrestrictingtheextentofsubstantivetests. C. Lake may refer to Cope only if Lake's report indicates the division of responsibility.
D. Lake may not refer to Cope under the circumstances above.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. The user auditor should not make reference to the report of the service auditor as a basis, in part, for his or her own opinion on the user organization's financial statements. Since the service auditor is not responsible for the examination of any part of the user organization's financial statements, division of responsibility would be inappropriate. Choices "a", "b", and "c" are incorrect, based on the above explanation.
QUESTION 534
Which of the following items does not pertain to the control environment?
A. Management'sphilosophyandoperatingstyle. B. Participationofthosechargedwithgovernance. C. The accounting records.
D. Personnel policies and practices.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. The accounting records pertain to the information and communication system, not to the control environment.
Choices "a", "b", and "d" are incorrect, as management's philosophy and operating style, participation of those charged with governance, and personnel policies and practices are all part of the control environment.
Transaction Cycles
QUESTION 535
On receiving a client's bank cutoff statement, an auditor most likely would trace:
A. Prior-yearcheckslistedinthecutoffstatementtotheyear-endoutstandingchecklist.
B. Depositsintransitlistedinthecutoffstatementtotheyear-endbankreconciliation.
C. Checks dated after year-end listed in the cutoff statement to the year-end outstanding checklist. D. Deposits recorded in the cash receipts journal after year-end to the cutoff statement.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The auditor should obtain bank cutoff statements that include transactions for 10 to 15 days after year-end. The outstanding checks and deposits in transit at year-end on the bank reconciliation should agree with the information in the bank cutoff statement. Choice "b" is incorrect. The deposits in transit are listed in the year-end bank reconciliation and traced to actual deposits appearing on the bank cutoff statement. The cutoff statement includes actual deposits received, not deposits in transit.
Choice "c" is incorrect. Checks dated after year-end would not be included in the year-end outstanding checklist.
Choice "d" is incorrect. Deposits recorded in the cash receipts journal after year-end do not affect the cash balance at year-end, and therefore the auditor would not
perform audit procedures with respect to those deposits.
QUESTION 536
Which of the following characteristics most likely would be indicative of check kiting?
A. Highturnoverofemployeeswhohaveaccesstocash.
B. ManylargechecksthatarerecordedonMondays.
C. Low average balance compared to high level of deposits. D. Frequent ATM checking account withdrawals.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Kiting occurs when a check drawn on one bank is deposited in another bank and no record is made of the disbursement in the balance of the first bank. Frequent kiting may result in a high level of deposits coupled with a low average balance. Choice "a" is incorrect. High turnover of employees who have access to cash may be normal in certain industries, or it may be indicative of poor hiring policies, but it would not be indicative of check kiting.
Choice "b" is incorrect. More checks may arrive on Mondays simply because Monday's mail includes the mail from over the weekend. This characteristic is not particularly indicative of check kiting.
Choice "d" is incorrect. Frequent ATM checking account withdrawals indicate a frequent need for cash, but this situation is not particularly indicative of check kiting.
QUESTION 537
Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?
A. Fictitioustransactionsmayberecordedthatcauseanunderstatementofrevenuesandoverstatementofreceivables. B. Claimsreceivedfromcustomersforgoodsreturnedmaybeintentionallyrecordedinothercustomers'accounts.
C. Authorizationofcreditmemosbypersonnelwhoreceivecashmaypermitthemisappropriationofcash.
D. The failure to prepare shipping documents may cause an overstatement of inventory balances.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The function of cash receipts is part of the treasurer's department and should be separate from the role of posting credits to the A/R ledger.
Failure to separate the recordkeeping function from the custodial function allows an individual to misappropriate cash and then cover up the theft by posting credits against the related A/R balance. Choice "a" is incorrect. If fictitious transactions in the revenue cycle are recorded, then the impact on revenues and receivables would be the same; either both would be overstated (the most likely case) or both would be understated.
Choice "b" is incorrect. Even the lack of effective internal controls would not allow this fraud to be perpetrated for long, since the customers that submitted the claim would complain that the credit was not properly applied as soon as they received their next statement or invoice. Choice "d" is incorrect. The failure to prepare shipping documents may cause inventory to be overstated, but it is unlikely to be perpetrated as a fraud since it does not allow theft of cash. In addition, the internal controls in the revenue cycle typically relate to sales, receivables, and cash, not to inventory.
QUESTION 538
Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity's employees?
A. Abanklockboxsystem.
B. Prenumberedremittanceadvices. C. Monthly bank reconciliations.
D. Daily deposit of cash receipts.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A lockbox system is the best means of preventing defalcation of cash by employees because the employees never have direct access to cash receipts. Choice "b" is incorrect. The use of prenumbered remittance advices is not effective in preventing theft of receipts by employees because it does not prevent employee access to cash receipts. Choice "c" is incorrect. While the performance of monthly bank reconciliations is a good control, it would not be effective in preventing the theft of receipts because it does not prevent employee access to cash receipts. (It might, however, be effective at detecting a theft that has already occurred).
Choice "d" is incorrect. Daily deposit of cash receipts is not an effective control for preventing theft of receipts by employees because it does not prevent employee access to cash receipts.
QUESTION 539
In testing controls over cash disbursements, an auditor most likely would determine that the person who signs checks also:
A. Reviewsthemonthlybankreconciliation.
B. Returnsthecheckstoaccountspayable.
C. Is denied access to the supporting documents. D. Is responsible for mailing the checks.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Once signed, the check should be mailed to the payee by the check signer or an employee operating under the supervision of the check signer to prevent defalcations of checks.
Generally this occurs in the treasurer's department. Choice "a" is incorrect. The check signer would not normally review bank reconciliations. Choice "b" is incorrect. Accounts payable personnel should not have custody of signed checks since this would constitute a lack of segregation of duties between recording and custody. Choice "c" is incorrect. The check signer should have access to supporting documentation so that it can be reviewed before the check is signed.
QUESTION 540
Which of the following sets of information does an auditor usually confirm on one form?
A. Accountspayableandpurchasecommitments.
B. Cashinbankandcollateralforloans.
C. Inventory on consignment and contingent liabilities. D. Accounts receivable and accrued interest receivable.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The standard AICPA bank confirmation form includes spaces for the bank to confirm both cash balances on deposit at the bank and collateral pledged on loans originating from the bank.
Choice "a" is incorrect. Purchase commitments are not typically confirmed on an accounts payable confirmation request.
Choice "c" is incorrect. Contingent liabilities (confirmed in a letter of inquiry to the client's attorney or bank) and inventory on consignment (confirmed with the consignee) are not confirmed together.
Choice "d" is incorrect. Accrued interest receivable (usually on investments held by a trust company) is not typically confirmed along with trade accounts receivable.
QUESTION 541
The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may:
A. Notbelievethatthebankisobligatedtoverifyconfidentialinformationtoathirdparty.
B. Signandreturntheformwithoutinspectingtheaccuracyoftheclient'sbankreconciliation. C. Not have access to the client's cutoff bank statement.
D. Be unaware of all the financial relationships that the bank has with the client.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A bank employee may not have access to all information about transactions with the audit client and thus may be unaware of all the financial relationships the bank has with the client.
Choice "a" is incorrect. Standard bank confirmations contain a signature from an authorized client employee and are a very commonly used audit procedure. It is unlikely that a bank would refuse the request since it has been authorized by the client. Choice "b" is incorrect. The confirmation is used to verify the bank balance as of year-end. Bank employees generally would not have access to the client's bank reconciliation. Choice "c" is incorrect. Even though it is likely that the bank would have access to a cutoff bank statement, the detail on this statement is unnecessary to confirm the final balance.
QUESTION 542
Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?
A. Vouchasampleofaccountspayableentriesrecordedjustbeforeyear-endtotheunmatchedreceivingreportfile. B. Compareasampleofpurchaseordersissuedjustafteryear-endwiththeyear-endaccountspayabletrialbalance. C. Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices.
D. Scan the cash disbursements entries recorded just before year-end for indications of unusual transactions.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The auditor is able to detect liabilities not recorded at year-end by comparing cash payments made after the balance sheet date to the related receiving reports and vendor invoices; any payments made on transactions dated before year-end reflect a liability that should have been recorded.
Choice "a" is incorrect. Vouching a sample of recorded accounts payable entries to unmatched receiving reports does not test the completeness of the listing. Unrecorded liabilities would not be included in recorded accounts payable entries.
Choice "b" is incorrect. Purchase orders issued after year-end should not be included in the year- end balance of accounts payable. This would be an example of an overstated liability, rather than an unrecorded one.
Choice "d" is incorrect. Examination of cash disbursements entries made just prior to the balance sheet date relates to liabilities that have been paid, which would not be considered to be outstanding liabilities at year-end.
QUESTION 543
An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to:
A. Identifyunusuallylargepurchasesthatshouldbeinvestigatedfurther. B. Verifythatcashdisbursementswereforgoodsactuallyreceived.
C. Determine that purchases were properly recorded.
D. Test whether payments were for goods actually ordered.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. In general, an audit procedure can be restated as the question to be answered. In this case, tracing a sample of purchase orders and related receiving reports to the purchases journal and the cash disbursements journal seeks to answer the question, "Were all purchases properly recorded?" (the completeness assertion). Choice "a" is incorrect. Tracing a sample of source documents to summary records would not identify unusually large transactions requiring additional attention. Choice "b" is incorrect. In order to verify that cash disbursements were for goods actually received, a sample of cash disbursements should be vouched back to receiving reports. Choice "d" is incorrect. In order to verify that cash disbursements were for goods actually ordered, a sample of cash disbursements should be vouched back to purchase orders.
QUESTION 544
Sound internal control dictates that, immediately upon receiving checks from customers by mail, a responsible employee should:
A. Addthecheckstothedailycashsummary.
B. Verifythateachcheckissupportedbyaprenumberedsalesinvoice. C. Prepare a duplicate listing of checks received.
D. Record the checks in the cash receipts journal.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Upon receipt of cash, a remittance listing should be prepared. Choice "a" is incorrect. Recording the check in the daily cash summary would ordinarily be done by a second party after the initial listing has been prepared. Choice "b" is incorrect. Verifying that each check is supported by a valid invoice is not necessary.
Choice "d" is incorrect. Recording the check in the cash receipts journal would ordinarily be done by a second party after the initial listing has been prepared.
QUESTION 545
To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is:
A. Supportedbyavendor'sinvoice.
B. Stamped"paid"bythechecksigner. C. Prenumbered and accounted for.
D. Approved for authorized purchases.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. By stamping the voucher "paid," the check signer cancels the voucher so it cannot be resubmitted for payment.
Choice "a" is incorrect. Even invoices that are supported by prenumbered sales invoices can be resubmitted for payment if they are not canceled, resulting in duplicate payments. Choice "c" is incorrect. Accounting for the sequence of prenumbered vouchers would only test whether all vouchers are present. It would not prevent a voucher from being paid twice. Choice "d" is incorrect. Proper authorization would help ensure that payments were properly authorized, but would not prevent duplicate payments.
QUESTION 546
Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments?
A. Accountsreceivable. B. Credit.
C. Accounts payable. D. Treasurer.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The treasurer does not perform duties that are incompatible with authorizing writeoffs since he or she is usually not involved with sales
transactions or recordkeeping.
Choice "a" is incorrect. Recording accounts receivable and authorizing write-offs would constitute an improper segregation of duties.
Choice "b" is incorrect. Granting credit and authorizing write-offs represents an improper segregation of duties since non-existent customers could have credit authorized and then have their accounts written off.
Choice "c" is incorrect. The accounts payable department is typically involved in the expenditure cycle, not the revenue cycle.
QUESTION 547
Which of the following procedures most likely would not be an internal control designed to reduce the risk of errors in the billing process?
A. Comparingcontroltotalsforshippingdocumentswithcorrespondingtotalsforsalesinvoices.
B. Usingcomputerprogrammedcontrolsonthepricingandmathematicalaccuracyofsalesinvoices. C. Matching shipping documents with approved sales orders before invoice preparation.
D. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Reconciling control totals for sales invoices with the accounts receivable subsidiary ledger is not an effective control related to the billing process, since errors that exist in the preparation of invoices would likely carry through to accounts receivable. Choice "a" is incorrect. Comparing shipping totals with sales invoice totals is an effective control to reduce billing errors.
Choice "b" is incorrect. Computer controls related to pricing and mathematical accuracy will reduce billing errors.
Choice "c" is incorrect. Matching shipping documents with approved sales orders ensures that invoices are properly authorized and only goods ordered have been shipped.
QUESTION 548
In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support?
A. Completeness.
B. Occurrence.
C. Accuracy.
D. Rights and obligations.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Vouching to supporting documents tests the occurrence assertion. Choice "a" is incorrect. Tracing from supporting documentation to the voucher register would support the completeness assertion.
Choice "c" is incorrect. The accuracy assertion would be tested by examining the details of the supporting documents.
Choice "d" is incorrect. The rights and obligations assertion does not relate to transactions and events.
QUESTION 549
Which of the following internal control activities is not usually performed in the vouchers payable department?
A. Matchingthevendor'sinvoicewiththerelatedreceivingreport.
B. Approvingvouchersforpaymentbyhavinganauthorizedemployeesignthevouchers. C. Indicating the asset and expense accounts to be debited.
D. Accounting for unused prenumbered purchase orders and receiving reports.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Accounting for unused prenumbered purchase orders and receiving reports is an effective control, but it would not typically be performed in the vouchers payable department.
Choice "a" is incorrect. Reconciling the vendor invoice with the related receiving report is typically performed by a vouchers payable clerk.
Choice "b" is incorrect. The vouchers payable department is responsible for approving vouchers for payment.
Choice "c" is incorrect. Indicating the asset and expense accounts to be debited is not an internal control procedure.
QUESTION 550
Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed?
A. Scanthesalesjournalforsequentialandunusualentries.
B. Examineshippingdocumentsformatchingsalesinvoices.
C. Compare the accounts receivable ledger to daily sales summaries. D. Inspect unused sales invoices for consecutive prenumbering.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C)
Explanation Explanation/Reference:
Explanation:
Choice "b" is correct. Tracing from a sample of shipping documents to matching sales invoices would provide support for the completeness assertion for billing. Choice "a" is incorrect. Scanning the sales journal for sequential and unusual entries tests the completeness and existence assertions for sales, but would not provide assurance that shipped goods were properly billed.
Choice "c" is incorrect. Comparing the accounts receivable ledger to the daily sales summary helps ensure that all sales were recorded as receivables and all receivables were recorded as sales, but it does not provide assurance that shipped goods were properly billed. Choice "d" is incorrect. Inspecting the consecutive numbering of unused sales invoices might identify fictitious sales, but it would not ensure that goods that have been shipped were properly billed.
QUESTION 551
An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about:
A. Valuationandallocation.
B. Understandabilityandclassification. C. Existence.
D. Rights and obligations.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Assertions about valuation and allocation deal with whether asset, liability, revenue, and expense components have been included in the financial statements at appropriate amounts, and any resulting valuation adjustments are appropriately recorded. For example, management asserts that trade accounts receivable included in the balance sheet are stated at net realizable value.
Choice "b" is incorrect. Assertions about understandability and classification deal with whether financial information is appropriately presented and described, and disclosures are clearly expressed. Reviewing credit ratings of delinquent customers does not provide evidence about this type of assertion.
Choice "c" is incorrect. Assertions about existence deal with whether assets, liabilities, and equity interest of the entity exist at a given date. Reviewing credit ratings of delinquent customers does not provide evidence about this type of assertion. Choice "d" is incorrect. Assertions about rights and obligations deal with whether assets are the rights of the entity and liabilities are the obligations of the entity at a given date. Reviewing credit ratings of delinquent customers does not provide evidence about this type of assertion.
QUESTION 552
Which of the following audit procedures would an auditor most likely perform to test controls relating to management's assertion concerning the completeness of sales transactions?
A. Verifythatextensionsandfootingsontheentity'ssalesinvoicesandmonthlycustomerstatementshavebeenrecomputed. B. Inspecttheentity'sreportsofprenumberedshippingdocumentsthathavenotbeenrecordedinthesalesjournal.
C. Compare the invoiced prices on prenumbered sales invoices to the entity's authorized price list.
D. Inquire about the entity's credit granting policies and the consistent application of credit checks.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Examination of reports of shipments not recorded in the sales journal is an appropriate test of controls to determine whether all sales have been recorded. Choice "a" is incorrect. Verification that extensions and footings on sales invoices and statements have been recomputed by client personnel ensures that independent checks are being performed, but does not address whether all sales transactions have been recorded. Choice "c" is incorrect. Comparison of invoiced prices with the client's authorized price list ensures that the prices charged are authorized, but does not address whether all sales transactions have been recorded.
Choice "d" is incorrect. Inquiring about credit policies is an appropriate audit procedure to verify authorization and valuation of sales transactions, not completeness.
QUESTION 553
Which of the following internal controls most likely would assure that all billed sales are correctly posted to the accounts receivable ledger?
A. Dailysalessummariesarecomparedtodailypostingstotheaccountsreceivableledger.
B. Eachsalesinvoiceissupportedbyaprenumberedshippingdocument.
C. The accounts receivable ledger is reconciled daily to the control account in the general ledger. D. Each shipment on credit is supported by a prenumbered sales invoice.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Comparison of daily sales summaries to daily postings to the accounts receivable ledger would ensure the completeness of the accounts receivable ledger. Choice "b" is incorrect. Comparison of sales invoices to shipping documents verifies occurrence of the sale, not completeness of the accounts receivable ledger. Choice "c" is incorrect. Reconciliation of the accounts receivable ledger to the general ledger would not assure the accuracy and completeness of the accounts receivable ledger because a sale which was improperly excluded from receivables would likely be omitted from both ledgers. Choice "d" is incorrect. Ensuring that all shipments are billed verifies completeness of sales transactions, but does not provide evidence that all sales are recorded in the
accounts receivable ledger. In other words, the fact that a shipment was billed does not mean that the invoice was also recorded in the accounts receivable ledger.
QUESTION 554
Under properly designed internal control, the same employee most likely would match vendors' invoices with receiving reports and also:
A. Postthedetailedaccountspayablerecords.
B. Recomputethecalculationsonvendors'invoices. C. Reconcile the accounts payable ledger.
D. Cancel vendors' invoices after payment.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Matching vendor's invoices with receiving reports provides authorization for payment and is generally performed in the accounts payable department. Recalculation of vendor invoices is compatible with this authorization function. Choice "a" is incorrect. Posting the accounts payable records (recording) is incompatible with matching (authorization). Generally these functions would be performed by two different employees.
Choice "c" is incorrect. This review procedure (independent verification) should be performed by someone independent of the employee who approved the invoice for payment. Choice "d" is incorrect. Payment and cancellation of vendor invoices should be performed by someone (generally the treasurer) other than the individual authorizing payment.
QUESTION 555
An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the:
A. Collectionofreceivables.
B. Purchaseofmerchandiseinventory. C. Payment of accounts payable.
D. Sale of long-term debt.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The revenue cycle includes sales, receivables, and cash receipts, so an auditor using a transaction cycle approach would be likely to test
sales and receivables together. Choice "b" is incorrect. Purchases are part of the expenditures cycle while sales are part of the revenue cycle, so an auditor using a transaction cycle approach would be unlikely to test these items together.
Choice "c" is incorrect. Payables are part of the expenditures cycle while sales are part of the revenue cycle, so an auditor using a transaction cycle approach would be unlikely to test these items together.
Choice "d" is incorrect. Sale of long-term debt falls within the "other liabilities" transaction cycle while sales are part of the revenue cycle, so an auditor using a transaction cycle approach would be unlikely to test these items together.
QUESTION 556
Tracing copies of computer-prepared sales invoices to copies of the corresponding computer- prepared shipping documents provides evidence that:
A. Shipmentstocustomerswereproperlybilled.
B. Entriesintheaccountsreceivablesubsidiaryledgerwereforsalesactuallyshipped. C. Sales billed to customers were actually shipped.
D. No duplicate shipments to customers were made.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Tracing from invoices to shipping documents would provide evidence that sales billed to customers were actually shipped. An invoice for which the corresponding shipping documents could not be located might be indicative of fictitious sales (i.e., sales that were recorded but never actually shipped). Choice "a" is incorrect. The auditor would need to start with shipping documents and trace to invoices to ensure that shipments were properly billed. Choice "b" is incorrect. An invoice may exist for which no entry was made in the accounts receivable subsidiary ledger. Therefore, the auditor would need to trace from entries in the accounts receivable subsidiary ledger (and not from invoices) to shipping documents, to obtain evidence that recorded receivables were for sales actually shipped. Choice "d" is incorrect. Tracing from invoices to shipping documents would not necessarily indicate when a duplicate shipment was made, as the auditor would not necessarily realize that two sets of shipping documents related to the same invoice.
Payroll Data Co. (PDC) processes payroll transactions for a retailer. Cook, CPA, is engaged to express an opinion on a description of PDC's internal controls placed in operation as of a specific date. These controls are relevant to the retailer's internal control, so Cook's report may be useful in providing the retailer's independent auditor with information necessary to plan a financial statement audit. Cook's report should:
A. ContainadisclaimerofopinionontheoperatingeffectivenessofPDC'scontrols.
B. StatewhetherPDC'scontrolsweresuitablydesignedtoachievetheretailer'sobjectives. C. Identify PDC's controls relevant to specific financial statement assertions.
D. Disclose Cook's assessed level of control risk for PDC.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. There are two types of reports on the processing of transactions by service organizations: "reports on controls placed in operation" and "reports on controls placed in operation and tests of operating effectiveness." The former do not include tests of operating effectiveness and, therefore, are not intended to provide the user auditor with a basis for reducing the assessment of control risk. Accordingly, such reports should include a disclaimer of opinion regarding the operating effectiveness of the controls. Choice "b" is incorrect. The report should contain an indication that the controls were suitably designed to achieve specified control objectives, but it does not provide any assurance regarding the achievement of the user organization's (in this case, the retailer's) objectives. Choice "c" is incorrect. The service auditor (Cook) is not required to identify the service organization's (i.e., PDC's) controls relevant to specific financial statement assertions because this is not a financial statement audit.
Choice "d" is incorrect. The service auditor (Cook) is not required to disclose the assessed level of control risk for the service organization (PDC).
QUESTION 530
Computer Services Company (CSC) processes payroll transactions for schools. Drake, CPA, is engaged to report on CSC's internal controls placed in operation as of a specific date. These internal controls are relevant to the schools' internal control, so Drake's report will be useful in providing the schools' independent auditors with information necessary to plan their audits. Drake's report expressing an opinion on CSC's internal controls placed in operation as of a specific date should contain a(an):
A. DescriptionofthescopeandnatureofDrake'sprocedures.
B. StatementthatCSC'smanagementhasdisclosedtoDrakealldesigndeficienciesofwhichitisaware. C. Opinion on the operating effectiveness of CSC's internal controls.
D. Paragraph indicating the basis for Drake's assessment of control risk.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation: Explanation
Choice "a" is correct. A report on internal controls for a service organization should include a description of the scope and nature of Drake's procedures. Choice "b" is incorrect. No statement is made in the report that all design deficiencies have been disclosed. Choice "c" is incorrect. The service auditor's opinion is not intended to provide evidence of operating effectiveness.
Choice "d" is incorrect. No paragraph indicating the basis for the assessment of control risk is included in Drake's report.
QUESTION 531
A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor's:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. It is not appropriate for the successor auditor to request a review of the predecessor auditor's engagement letter. This is a business matter between the client and the predecessor auditor that has no impact on the successor's audit. Conversely, review of the predecessor auditor's audit documentation is appropriate and customary to facilitate the successor's audit.
Choices "a", "b", and "d" are incorrect, based on the above explanation.
QUESTION 532
When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the:
A. Extentoftestsofdetails. B. Levelofinherentrisk.
C. Extent of tests of controls.
D. Level of detection risk.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, detection risk must be reduced accordingly.
This may be accomplished by increasing the extent of tests of details. Choice "b" is incorrect. The level of inherent risk is not directly related to the planned level of control risk.
Choice "c" is incorrect. The auditor performs tests of controls to evaluate the operating effectiveness of those controls. Once they have been determined to be ineffective, there would be no reason to perform further tests of those controls. Choice "d" is incorrect. The level of detection risk that the auditor could accept would decrease if the planned level of control risk increased.
QUESTION 533
Lake, CPA, is auditing the financial statements of Gill Co. Gill uses the EDP Service Center, Inc. to process its payroll transactions. EDP's financial statements are audited by Cope, CPA, who recently issued a report on EDP's internal control structure. Lake is considering Cope's report on EDP's internal control structure in assessing control risk on the Gill engagement. What is Lake's responsibility concerning making reference to Cope as a basis, in part, for Lake's own opinion?
A. LakemayrefertoCopeonlyifLakeissatisfiedastoCope'sprofessionalreputationandindependence. B. LakemayrefertoCopeonlyifLakereliesonCope'sreportinrestrictingtheextentofsubstantivetests. C. Lake may refer to Cope only if Lake's report indicates the division of responsibility.
D. Lake may not refer to Cope under the circumstances above.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. The user auditor should not make reference to the report of the service auditor as a basis, in part, for his or her own opinion on the user organization's financial statements. Since the service auditor is not responsible for the examination of any part of the user organization's financial statements, division of responsibility would be inappropriate. Choices "a", "b", and "c" are incorrect, based on the above explanation.
QUESTION 534
Which of the following items does not pertain to the control environment?
A. Management'sphilosophyandoperatingstyle. B. Participationofthosechargedwithgovernance. C. The accounting records.
D. Personnel policies and practices.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. The accounting records pertain to the information and communication system, not to the control environment.
Choices "a", "b", and "d" are incorrect, as management's philosophy and operating style, participation of those charged with governance, and personnel policies and practices are all part of the control environment.
Transaction Cycles
QUESTION 535
On receiving a client's bank cutoff statement, an auditor most likely would trace:
A. Prior-yearcheckslistedinthecutoffstatementtotheyear-endoutstandingchecklist.
B. Depositsintransitlistedinthecutoffstatementtotheyear-endbankreconciliation.
C. Checks dated after year-end listed in the cutoff statement to the year-end outstanding checklist. D. Deposits recorded in the cash receipts journal after year-end to the cutoff statement.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The auditor should obtain bank cutoff statements that include transactions for 10 to 15 days after year-end. The outstanding checks and deposits in transit at year-end on the bank reconciliation should agree with the information in the bank cutoff statement. Choice "b" is incorrect. The deposits in transit are listed in the year-end bank reconciliation and traced to actual deposits appearing on the bank cutoff statement. The cutoff statement includes actual deposits received, not deposits in transit.
Choice "c" is incorrect. Checks dated after year-end would not be included in the year-end outstanding checklist.
Choice "d" is incorrect. Deposits recorded in the cash receipts journal after year-end do not affect the cash balance at year-end, and therefore the auditor would not
perform audit procedures with respect to those deposits.
QUESTION 536
Which of the following characteristics most likely would be indicative of check kiting?
A. Highturnoverofemployeeswhohaveaccesstocash.
B. ManylargechecksthatarerecordedonMondays.
C. Low average balance compared to high level of deposits. D. Frequent ATM checking account withdrawals.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Kiting occurs when a check drawn on one bank is deposited in another bank and no record is made of the disbursement in the balance of the first bank. Frequent kiting may result in a high level of deposits coupled with a low average balance. Choice "a" is incorrect. High turnover of employees who have access to cash may be normal in certain industries, or it may be indicative of poor hiring policies, but it would not be indicative of check kiting.
Choice "b" is incorrect. More checks may arrive on Mondays simply because Monday's mail includes the mail from over the weekend. This characteristic is not particularly indicative of check kiting.
Choice "d" is incorrect. Frequent ATM checking account withdrawals indicate a frequent need for cash, but this situation is not particularly indicative of check kiting.
QUESTION 537
Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?
A. Fictitioustransactionsmayberecordedthatcauseanunderstatementofrevenuesandoverstatementofreceivables. B. Claimsreceivedfromcustomersforgoodsreturnedmaybeintentionallyrecordedinothercustomers'accounts.
C. Authorizationofcreditmemosbypersonnelwhoreceivecashmaypermitthemisappropriationofcash.
D. The failure to prepare shipping documents may cause an overstatement of inventory balances.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The function of cash receipts is part of the treasurer's department and should be separate from the role of posting credits to the A/R ledger.
Failure to separate the recordkeeping function from the custodial function allows an individual to misappropriate cash and then cover up the theft by posting credits against the related A/R balance. Choice "a" is incorrect. If fictitious transactions in the revenue cycle are recorded, then the impact on revenues and receivables would be the same; either both would be overstated (the most likely case) or both would be understated.
Choice "b" is incorrect. Even the lack of effective internal controls would not allow this fraud to be perpetrated for long, since the customers that submitted the claim would complain that the credit was not properly applied as soon as they received their next statement or invoice. Choice "d" is incorrect. The failure to prepare shipping documents may cause inventory to be overstated, but it is unlikely to be perpetrated as a fraud since it does not allow theft of cash. In addition, the internal controls in the revenue cycle typically relate to sales, receivables, and cash, not to inventory.
QUESTION 538
Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity's employees?
A. Abanklockboxsystem.
B. Prenumberedremittanceadvices. C. Monthly bank reconciliations.
D. Daily deposit of cash receipts.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A lockbox system is the best means of preventing defalcation of cash by employees because the employees never have direct access to cash receipts. Choice "b" is incorrect. The use of prenumbered remittance advices is not effective in preventing theft of receipts by employees because it does not prevent employee access to cash receipts. Choice "c" is incorrect. While the performance of monthly bank reconciliations is a good control, it would not be effective in preventing the theft of receipts because it does not prevent employee access to cash receipts. (It might, however, be effective at detecting a theft that has already occurred).
Choice "d" is incorrect. Daily deposit of cash receipts is not an effective control for preventing theft of receipts by employees because it does not prevent employee access to cash receipts.
QUESTION 539
In testing controls over cash disbursements, an auditor most likely would determine that the person who signs checks also:
A. Reviewsthemonthlybankreconciliation.
B. Returnsthecheckstoaccountspayable.
C. Is denied access to the supporting documents. D. Is responsible for mailing the checks.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Once signed, the check should be mailed to the payee by the check signer or an employee operating under the supervision of the check signer to prevent defalcations of checks.
Generally this occurs in the treasurer's department. Choice "a" is incorrect. The check signer would not normally review bank reconciliations. Choice "b" is incorrect. Accounts payable personnel should not have custody of signed checks since this would constitute a lack of segregation of duties between recording and custody. Choice "c" is incorrect. The check signer should have access to supporting documentation so that it can be reviewed before the check is signed.
QUESTION 540
Which of the following sets of information does an auditor usually confirm on one form?
A. Accountspayableandpurchasecommitments.
B. Cashinbankandcollateralforloans.
C. Inventory on consignment and contingent liabilities. D. Accounts receivable and accrued interest receivable.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The standard AICPA bank confirmation form includes spaces for the bank to confirm both cash balances on deposit at the bank and collateral pledged on loans originating from the bank.
Choice "a" is incorrect. Purchase commitments are not typically confirmed on an accounts payable confirmation request.
Choice "c" is incorrect. Contingent liabilities (confirmed in a letter of inquiry to the client's attorney or bank) and inventory on consignment (confirmed with the consignee) are not confirmed together.
Choice "d" is incorrect. Accrued interest receivable (usually on investments held by a trust company) is not typically confirmed along with trade accounts receivable.
QUESTION 541
The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may:
A. Notbelievethatthebankisobligatedtoverifyconfidentialinformationtoathirdparty.
B. Signandreturntheformwithoutinspectingtheaccuracyoftheclient'sbankreconciliation. C. Not have access to the client's cutoff bank statement.
D. Be unaware of all the financial relationships that the bank has with the client.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A bank employee may not have access to all information about transactions with the audit client and thus may be unaware of all the financial relationships the bank has with the client.
Choice "a" is incorrect. Standard bank confirmations contain a signature from an authorized client employee and are a very commonly used audit procedure. It is unlikely that a bank would refuse the request since it has been authorized by the client. Choice "b" is incorrect. The confirmation is used to verify the bank balance as of year-end. Bank employees generally would not have access to the client's bank reconciliation. Choice "c" is incorrect. Even though it is likely that the bank would have access to a cutoff bank statement, the detail on this statement is unnecessary to confirm the final balance.
QUESTION 542
Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?
A. Vouchasampleofaccountspayableentriesrecordedjustbeforeyear-endtotheunmatchedreceivingreportfile. B. Compareasampleofpurchaseordersissuedjustafteryear-endwiththeyear-endaccountspayabletrialbalance. C. Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices.
D. Scan the cash disbursements entries recorded just before year-end for indications of unusual transactions.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The auditor is able to detect liabilities not recorded at year-end by comparing cash payments made after the balance sheet date to the related receiving reports and vendor invoices; any payments made on transactions dated before year-end reflect a liability that should have been recorded.
Choice "a" is incorrect. Vouching a sample of recorded accounts payable entries to unmatched receiving reports does not test the completeness of the listing. Unrecorded liabilities would not be included in recorded accounts payable entries.
Choice "b" is incorrect. Purchase orders issued after year-end should not be included in the year- end balance of accounts payable. This would be an example of an overstated liability, rather than an unrecorded one.
Choice "d" is incorrect. Examination of cash disbursements entries made just prior to the balance sheet date relates to liabilities that have been paid, which would not be considered to be outstanding liabilities at year-end.
QUESTION 543
An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to:
A. Identifyunusuallylargepurchasesthatshouldbeinvestigatedfurther. B. Verifythatcashdisbursementswereforgoodsactuallyreceived.
C. Determine that purchases were properly recorded.
D. Test whether payments were for goods actually ordered.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. In general, an audit procedure can be restated as the question to be answered. In this case, tracing a sample of purchase orders and related receiving reports to the purchases journal and the cash disbursements journal seeks to answer the question, "Were all purchases properly recorded?" (the completeness assertion). Choice "a" is incorrect. Tracing a sample of source documents to summary records would not identify unusually large transactions requiring additional attention. Choice "b" is incorrect. In order to verify that cash disbursements were for goods actually received, a sample of cash disbursements should be vouched back to receiving reports. Choice "d" is incorrect. In order to verify that cash disbursements were for goods actually ordered, a sample of cash disbursements should be vouched back to purchase orders.
QUESTION 544
Sound internal control dictates that, immediately upon receiving checks from customers by mail, a responsible employee should:
A. Addthecheckstothedailycashsummary.
B. Verifythateachcheckissupportedbyaprenumberedsalesinvoice. C. Prepare a duplicate listing of checks received.
D. Record the checks in the cash receipts journal.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Upon receipt of cash, a remittance listing should be prepared. Choice "a" is incorrect. Recording the check in the daily cash summary would ordinarily be done by a second party after the initial listing has been prepared. Choice "b" is incorrect. Verifying that each check is supported by a valid invoice is not necessary.
Choice "d" is incorrect. Recording the check in the cash receipts journal would ordinarily be done by a second party after the initial listing has been prepared.
QUESTION 545
To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is:
A. Supportedbyavendor'sinvoice.
B. Stamped"paid"bythechecksigner. C. Prenumbered and accounted for.
D. Approved for authorized purchases.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. By stamping the voucher "paid," the check signer cancels the voucher so it cannot be resubmitted for payment.
Choice "a" is incorrect. Even invoices that are supported by prenumbered sales invoices can be resubmitted for payment if they are not canceled, resulting in duplicate payments. Choice "c" is incorrect. Accounting for the sequence of prenumbered vouchers would only test whether all vouchers are present. It would not prevent a voucher from being paid twice. Choice "d" is incorrect. Proper authorization would help ensure that payments were properly authorized, but would not prevent duplicate payments.
QUESTION 546
Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments?
A. Accountsreceivable. B. Credit.
C. Accounts payable. D. Treasurer.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The treasurer does not perform duties that are incompatible with authorizing writeoffs since he or she is usually not involved with sales
transactions or recordkeeping.
Choice "a" is incorrect. Recording accounts receivable and authorizing write-offs would constitute an improper segregation of duties.
Choice "b" is incorrect. Granting credit and authorizing write-offs represents an improper segregation of duties since non-existent customers could have credit authorized and then have their accounts written off.
Choice "c" is incorrect. The accounts payable department is typically involved in the expenditure cycle, not the revenue cycle.
QUESTION 547
Which of the following procedures most likely would not be an internal control designed to reduce the risk of errors in the billing process?
A. Comparingcontroltotalsforshippingdocumentswithcorrespondingtotalsforsalesinvoices.
B. Usingcomputerprogrammedcontrolsonthepricingandmathematicalaccuracyofsalesinvoices. C. Matching shipping documents with approved sales orders before invoice preparation.
D. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Reconciling control totals for sales invoices with the accounts receivable subsidiary ledger is not an effective control related to the billing process, since errors that exist in the preparation of invoices would likely carry through to accounts receivable. Choice "a" is incorrect. Comparing shipping totals with sales invoice totals is an effective control to reduce billing errors.
Choice "b" is incorrect. Computer controls related to pricing and mathematical accuracy will reduce billing errors.
Choice "c" is incorrect. Matching shipping documents with approved sales orders ensures that invoices are properly authorized and only goods ordered have been shipped.
QUESTION 548
In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support?
A. Completeness.
B. Occurrence.
C. Accuracy.
D. Rights and obligations.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Vouching to supporting documents tests the occurrence assertion. Choice "a" is incorrect. Tracing from supporting documentation to the voucher register would support the completeness assertion.
Choice "c" is incorrect. The accuracy assertion would be tested by examining the details of the supporting documents.
Choice "d" is incorrect. The rights and obligations assertion does not relate to transactions and events.
QUESTION 549
Which of the following internal control activities is not usually performed in the vouchers payable department?
A. Matchingthevendor'sinvoicewiththerelatedreceivingreport.
B. Approvingvouchersforpaymentbyhavinganauthorizedemployeesignthevouchers. C. Indicating the asset and expense accounts to be debited.
D. Accounting for unused prenumbered purchase orders and receiving reports.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Accounting for unused prenumbered purchase orders and receiving reports is an effective control, but it would not typically be performed in the vouchers payable department.
Choice "a" is incorrect. Reconciling the vendor invoice with the related receiving report is typically performed by a vouchers payable clerk.
Choice "b" is incorrect. The vouchers payable department is responsible for approving vouchers for payment.
Choice "c" is incorrect. Indicating the asset and expense accounts to be debited is not an internal control procedure.
QUESTION 550
Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed?
A. Scanthesalesjournalforsequentialandunusualentries.
B. Examineshippingdocumentsformatchingsalesinvoices.
C. Compare the accounts receivable ledger to daily sales summaries. D. Inspect unused sales invoices for consecutive prenumbering.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C)
Explanation Explanation/Reference:
Explanation:
Choice "b" is correct. Tracing from a sample of shipping documents to matching sales invoices would provide support for the completeness assertion for billing. Choice "a" is incorrect. Scanning the sales journal for sequential and unusual entries tests the completeness and existence assertions for sales, but would not provide assurance that shipped goods were properly billed.
Choice "c" is incorrect. Comparing the accounts receivable ledger to the daily sales summary helps ensure that all sales were recorded as receivables and all receivables were recorded as sales, but it does not provide assurance that shipped goods were properly billed. Choice "d" is incorrect. Inspecting the consecutive numbering of unused sales invoices might identify fictitious sales, but it would not ensure that goods that have been shipped were properly billed.
QUESTION 551
An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about:
A. Valuationandallocation.
B. Understandabilityandclassification. C. Existence.
D. Rights and obligations.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Assertions about valuation and allocation deal with whether asset, liability, revenue, and expense components have been included in the financial statements at appropriate amounts, and any resulting valuation adjustments are appropriately recorded. For example, management asserts that trade accounts receivable included in the balance sheet are stated at net realizable value.
Choice "b" is incorrect. Assertions about understandability and classification deal with whether financial information is appropriately presented and described, and disclosures are clearly expressed. Reviewing credit ratings of delinquent customers does not provide evidence about this type of assertion.
Choice "c" is incorrect. Assertions about existence deal with whether assets, liabilities, and equity interest of the entity exist at a given date. Reviewing credit ratings of delinquent customers does not provide evidence about this type of assertion. Choice "d" is incorrect. Assertions about rights and obligations deal with whether assets are the rights of the entity and liabilities are the obligations of the entity at a given date. Reviewing credit ratings of delinquent customers does not provide evidence about this type of assertion.
QUESTION 552
Which of the following audit procedures would an auditor most likely perform to test controls relating to management's assertion concerning the completeness of sales transactions?
A. Verifythatextensionsandfootingsontheentity'ssalesinvoicesandmonthlycustomerstatementshavebeenrecomputed. B. Inspecttheentity'sreportsofprenumberedshippingdocumentsthathavenotbeenrecordedinthesalesjournal.
C. Compare the invoiced prices on prenumbered sales invoices to the entity's authorized price list.
D. Inquire about the entity's credit granting policies and the consistent application of credit checks.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Examination of reports of shipments not recorded in the sales journal is an appropriate test of controls to determine whether all sales have been recorded. Choice "a" is incorrect. Verification that extensions and footings on sales invoices and statements have been recomputed by client personnel ensures that independent checks are being performed, but does not address whether all sales transactions have been recorded. Choice "c" is incorrect. Comparison of invoiced prices with the client's authorized price list ensures that the prices charged are authorized, but does not address whether all sales transactions have been recorded.
Choice "d" is incorrect. Inquiring about credit policies is an appropriate audit procedure to verify authorization and valuation of sales transactions, not completeness.
QUESTION 553
Which of the following internal controls most likely would assure that all billed sales are correctly posted to the accounts receivable ledger?
A. Dailysalessummariesarecomparedtodailypostingstotheaccountsreceivableledger.
B. Eachsalesinvoiceissupportedbyaprenumberedshippingdocument.
C. The accounts receivable ledger is reconciled daily to the control account in the general ledger. D. Each shipment on credit is supported by a prenumbered sales invoice.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Comparison of daily sales summaries to daily postings to the accounts receivable ledger would ensure the completeness of the accounts receivable ledger. Choice "b" is incorrect. Comparison of sales invoices to shipping documents verifies occurrence of the sale, not completeness of the accounts receivable ledger. Choice "c" is incorrect. Reconciliation of the accounts receivable ledger to the general ledger would not assure the accuracy and completeness of the accounts receivable ledger because a sale which was improperly excluded from receivables would likely be omitted from both ledgers. Choice "d" is incorrect. Ensuring that all shipments are billed verifies completeness of sales transactions, but does not provide evidence that all sales are recorded in the
accounts receivable ledger. In other words, the fact that a shipment was billed does not mean that the invoice was also recorded in the accounts receivable ledger.
QUESTION 554
Under properly designed internal control, the same employee most likely would match vendors' invoices with receiving reports and also:
A. Postthedetailedaccountspayablerecords.
B. Recomputethecalculationsonvendors'invoices. C. Reconcile the accounts payable ledger.
D. Cancel vendors' invoices after payment.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Matching vendor's invoices with receiving reports provides authorization for payment and is generally performed in the accounts payable department. Recalculation of vendor invoices is compatible with this authorization function. Choice "a" is incorrect. Posting the accounts payable records (recording) is incompatible with matching (authorization). Generally these functions would be performed by two different employees.
Choice "c" is incorrect. This review procedure (independent verification) should be performed by someone independent of the employee who approved the invoice for payment. Choice "d" is incorrect. Payment and cancellation of vendor invoices should be performed by someone (generally the treasurer) other than the individual authorizing payment.
QUESTION 555
An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the:
A. Collectionofreceivables.
B. Purchaseofmerchandiseinventory. C. Payment of accounts payable.
D. Sale of long-term debt.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The revenue cycle includes sales, receivables, and cash receipts, so an auditor using a transaction cycle approach would be likely to test
sales and receivables together. Choice "b" is incorrect. Purchases are part of the expenditures cycle while sales are part of the revenue cycle, so an auditor using a transaction cycle approach would be unlikely to test these items together.
Choice "c" is incorrect. Payables are part of the expenditures cycle while sales are part of the revenue cycle, so an auditor using a transaction cycle approach would be unlikely to test these items together.
Choice "d" is incorrect. Sale of long-term debt falls within the "other liabilities" transaction cycle while sales are part of the revenue cycle, so an auditor using a transaction cycle approach would be unlikely to test these items together.
QUESTION 556
Tracing copies of computer-prepared sales invoices to copies of the corresponding computer- prepared shipping documents provides evidence that:
A. Shipmentstocustomerswereproperlybilled.
B. Entriesintheaccountsreceivablesubsidiaryledgerwereforsalesactuallyshipped. C. Sales billed to customers were actually shipped.
D. No duplicate shipments to customers were made.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Tracing from invoices to shipping documents would provide evidence that sales billed to customers were actually shipped. An invoice for which the corresponding shipping documents could not be located might be indicative of fictitious sales (i.e., sales that were recorded but never actually shipped). Choice "a" is incorrect. The auditor would need to start with shipping documents and trace to invoices to ensure that shipments were properly billed. Choice "b" is incorrect. An invoice may exist for which no entry was made in the accounts receivable subsidiary ledger. Therefore, the auditor would need to trace from entries in the accounts receivable subsidiary ledger (and not from invoices) to shipping documents, to obtain evidence that recorded receivables were for sales actually shipped. Choice "d" is incorrect. Tracing from invoices to shipping documents would not necessarily indicate when a duplicate shipment was made, as the auditor would not necessarily realize that two sets of shipping documents related to the same invoice.