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TESTS OF CONTROLS

1. Which of the following business functions is associated with the revenue/receipt cycle?
A. Obligations are paid to vendors and employees.
B. Resources are distributed to outsiders in exchange for promises of future payments.
C. Resources are used, held, or transformed.
D. Capital funds are received from investors and creditors.

2. Which of the following is not a common activity in the revenue/receipt cycle?


A. Order entry
B. Receiving
C. Inventory control
D. cash collection

3. The cash account is involved in which cycle?


A. Revenue and collection.
B. Acquisition and expenditure.
C. Production and conversion.
D. All of the given choices.

4. Which of the following is an appropriate audit procedure to test cancelled checks for authorized signatures?
A. Compare the check date with the first cancellation date.
B. Determine that all checks are to be signed by individual officers who are authorized by the board.
C. Examine a representative sample of signed checks and trace their signatures to the specimen signature book of
authorized signatories.
D. Confirm the signatures from a sample of checks directly with the bank.

5. Which of the following is not likely a source of information about the accounting system in the revenue area?
A. Direct inquiry of customers.
B. Prior experience with the client.
C. Systems flowcharts prepared by the EDP department.
D. Financial reporting manuals.

6. Which of the following gives an indication of a potential fraudulent activity?


A. Numerous credit memoranda have been issued to the company's biggest customer.
B. Internal auditor cannot locate several credit memoranda to support reductions of customers' balances.
C. The year-end bank reconciliation has no outstanding checks or deposits older than 15 days.
D. No one was absent the day the auditors handed out the paychecks.

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

8. Which of the following control procedures would most likely assure that access to shipping, billing, inventory
control, and accounting records is restricted to personnel authorized by management?
A. Segregate the responsibilities for authorization, execution, and recording, and prenumber and control the
custody of documents.
B. Establish the cash receipts function in a centralized location and require a daily reconciliation of cash receipts
records with deposit slips.
C. Establish policy and procedures manuals, organization charts, and supporting documentation.
D. Periodically substantiate and evaluate the recorded account balances.

9. An entity has implemented a control procedure which requires that authorized personnel reconcile the total of
individual customer accounts receivable with control totals. This control relates to which of the following control
objectives?
A. Sales, cash receipts, and related transactions should be recorded at the correct amounts, in the proper period,
and should be properly classified.
B. Recorded accounts receivable balances should reflect underlying transactions and events.
C. Billings, collections, and related adjustments transactions should be posted accurately to individual customer
accounts.
D. Access to cash and cash-related records should be restricted to personnel authorized by management.

10. Which of the following internal control procedures most likely would deter lapping of collections from customers?
A. Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash
summaries.
B. Authorization of writeoffs of uncollectible accounts by a supervisor who is independent of credit approval.
C. Segregation of duties between receiving cash and posting collections to the accounts receivable ledger.
D. Supervisor’s comparison of the daily cash summary with the sum of the cash receipts journal entries.

11. What sequence of steps does an auditor undertake when identifying control procedures that are potentially reliable
in assessing control risk below the maximum?
A. Consider the errors or frauds that might occur, determine control procedures, identify control objectives, and
design tests of controls.
B. Determine control procedures, design tests of controls, consider the errors or frauds that might occur, and
identify control objectives.
C. Identify control objectives, consider the errors or frauds that might occur, determine control procedures, and
design tests of controls.
D. Design tests of controls, determine control procedures, consider the errors or frauds that might occur, and
identify control objectives.

12. Assuming cash receipts from credit sales have been misappropriated, which of the following is likely to conceal
the misappropriation and unlikely to be detected?
A. Understating the sales journal.
B. Overstating the accounts receivable control account.
C. Overstating the accounts receivable subsidiary ledger.
D. Overstating the cash receipts journal.

13. Which of the following is most likely to provide management with incentives to overstate earnings?
A. Projected quarterly dividends.
B. Issuance of preferred stock.
C. Unbudgeted increase in materials prices.
D. A projected stock split.

14. Under which of the following circumstances does management have some discretion in timing the recognition of
revenue?
A. The timing of revenue is not reasonably determinable and the earnings process is not complete.
B. The amount and timing of revenue is reasonably determinable.
C. The earning process is complete or reasonably complete.
D. The transaction is at arm’s length.

15. After preparing a flowchart of internal control for sales and cash receipts transactions and evaluating the design of
the system, the auditor would perform tests of controls on all control procedures
A. That are documented in the flowchart.
B. that are considered to be deficiencies that might allow errors to enter the accounting system.
C. that are considered to be strengths that the auditor plans to rely on in assessing control risk.
D. that would help in preventing irregularities.

16. Which of the following would the auditor consider to be an incompatible operation if the cashier receives
remittances from the mail room?
A. The cashier posts the receipts to the accounts receivable subsidiary ledger.
B. The cashier makes the daily deposit at a local bank.
C. The cashier makes the daily deposit of cash collections.
D. The cashier endorses the checks.

17. Which of the following is not a universal rule for achieving control over cash?
A. Separate the cash-handling and record-keeping functions.
B. Decentralize the receiving of cash as much as possible.
C. Deposit each day’s cash receipts by the end of the day.
D. Have bank reconciliation prepared by employees who do not handle cash.

18. On conducting an audit in which point in an ordinary sales transaction of a wholesaling business is a lack of
specific authorization of least concern to the auditor?
A. Granting of credit.
B. Shipment of goods.
C. Determination of discounts.
D. Selling of goods for cash.

19. A company has computerized sales and cash receipts journals. The computer programs for these journals have
been properly debugged. The auditor discovered that the total of the accounts receivable subsidiary accounts
differs materially from the accounts receivable control account. This discrepancy could indicate
A. Lapping of receivables.
B. Credit memoranda being improperly recorded.
C. Receivables not being properly aged.
D. Statements being intercepted prior to mailing.

20. To achieve control when there is no billing department, the billing function should be performed by the
A. accounting department.
B. sales department.
C. shipping department.
D. credit and collection department.

21. The person who opens the mail commonly prepares a remittance advice when a customer fails to return one with
the payment. Consequently, mail should be opened by the
A. credit manager.
B. receptionist.
C. sales manager.
D. accounts receivable clerk.

22. Which of the following control procedures will likely prevent the concealment of a cash shortage that was
perpetrated by improperly writing off a trade account receivable?
A. Write off must be approved by a responsible officer after reviewing the credit department’s recommendations
and supporting evidence.
B. Write off must be supported by an aging schedule showing that only receivables that are several months
overdue have been written off.
C. Write off must be approved by the cashier.
D. Write off must be authorized by field sales representatives.

23. Which of the following would unlikely improve control over an entity’s cash?
A. Separating cash record keeping from the custody of cash.
B. Preparing the monthly bank reconciliation.
C. Processing of checks in batches, rather than intermittently.
D. Separating cash receipts from cash disbursements.

24. Which of the following would best protect a company that wishes to prevent lapping?
A. Segregating duties so that accounting staff has no access to an incoming mail.
B. Segregating duties so that no employee has access both to checks from customers and money from daily cash
receipts.
C. Arrange that customers send payments directly to the company’s bank.
D. Requesting that customers checks be made payable to the company and be addressed to the treasurer.

25. Which of the following is the greatest drawback of using subsequent collections that are evidenced only by a
deposit slip as an alternative procedure when responses to positive accounts receivable confirmations are not
received?
A. Checking of subsequent collections can never be used as an alternative auditing procedure.
B. A deposit slip is not received directly by the auditor.
C. A customer may not have made a payment on a timely basis.
D. By examining a deposit slip only, the auditor does not know whether the payment is for the receivable at the
balance sheet date or a subsequent transaction.

26. In considering internal control within the revenue/receipt cycle, what is the purpose of a transaction walk through?
A. To gain an assurance that employees are performing assigned functions accurately.
B. To confirm the results of the auditor’s understanding of the internal control structure.
C. To select documents for detailed tests of controls.
D. To verify the results of the auditor’s sampling plan.

27. Which of these assignments of duties would least likely lead to an embezzlement or theft?
A. Inventory warehouse manager has responsibility for making the physical inventory observation and
reconciling the discrepancies to the perpetual inventory records.
B. The cashier prepares the bank deposit, endorses the checks with a company stamp, takes the cash and checks
to the bank for deposit, and reconciles the bank statement.
C. Accounts receivable clerk opens customer payments so he could make entries in the customers' accounts
receivable subsidiary accounts.
D. Financial vice president receives the checks payable to suppliers and the supporting invoices, signs the checks,
and mails them to the payees.

28. Standard control procedures over customer remittances received through the mail include the policy that requires
the mailroom personnel to
A. Forward the remittances, unopened, directly to the cashier.
B. Open the mail, restrictively endorses the checks, and then prelist each remittance in triplicate copies.
C. Forward the remittances, unopened, directly to the accounts receivable clerk.
D. Open the mail, restrictively endorses the checks, then, forward the remittances directly to the accounts
receivable clerk.

29. After making the deposit, the daily cash summaries and the validated deposit slips should be forwarded by the
cashier directly to the:
A. Treasurer.
B. Accounts receivable clerk.
C. General accounting.
D. Internal auditor.

30. The accounting and the cash receipts functions should be handled by which department(s)?
A. Both functions should be under the control of the company Treasurer
B. Both functions should be under the control of the company Controller
C. The Controller should have control of accounting functions and the Treasurer should have control of cash
receipt functions.
D. The Treasurer should have control of accounting functions and the Controller should have control of cash
receipt functions.

31. When auditing cash, the auditor should mostly be concerned with:
A. Detective risk.
B. Inherent risk.
C. Adjunct risk.
D. Nonsampling risk.

32. Which of the following is most likely to indicate a fraud?


A. Several overpayments are made for goods received from a supplier.
B. The year end cash balance does not include cash in transit to the company at year-end.
C. A check received after year end is inadvertently recorded as if received before year-end.
D. A documented loan to an officer of the company.

33. Jolas embezzled P50,000 from the company's account in Bank A. At year-end he concealed the shortage by
drawing a check in Bank B and deposited it in Bank A. He has not recorded the transaction on the books. This is an
example of:
A. Lapping.
B. Kiting.
C. An effective cash management.
D. Related-party transactions.

34. A client maintains two bank accounts. One of the accounts, Bank A, has an overdraft of P10,000. The other
account, Bank B, has a positive balance of P5,000. To conceal the overdraft from the auditor, the client may decide
to
A. draw a check for at least P10,000 on Bank A for deposit in Bank B. Record the receipt but not the
disbursement and list the receipt as a deposit in transit. Record the disbursement at the beginning of the
following year.
B. draw a check for P10,000 on Bank B for deposit in Bank A. Record the disbursement but not the receipt. List
the disbursement as an outstanding check, but do not list the receipt as a deposit in transit. Record the receipt
at the beginning of the following period.
C. draw a check for at least P10,000 on Bank B for deposit in Bank A. Record the receipt but not the
disbursement and list the receipt as a deposit in transit. Record the disbursement at the beginning of the
following year.
D. draw a check for at least P10,000 on Bank A for deposit in Bank B. Record the disbursement but not the
receipt and list the disbursement as an outstanding check. Record the receipt at the beginning of the following
year.

35. A company has a policy of rotating employees’ assigned duties. This policy is most important for employees who:
A. are not bonded.
B. maintain the detailed accounting records.
C. handle cash receipts.
D. have access to the general ledger.

36. Alpha Company uses its sales invoices for posting to perpetual inventory records. Inadequate internal control
procedures over the invoicing function allow goods to be shipped that are not yet invoiced. The inadequate controls
could cause an
A. understatement of revenues, receivables, and inventory.
B. overstatement of revenues and receivables, and an understatement of inventory.
C. understatement of revenues and receivables, and an overstatement of inventory.
D. overstatement of revenues, receivables, and inventory.
37. Which of the following control procedures may prevent the failure to bill customers for some shipments?
A. Each shipment should be supported by a pre-numbered sales invoice that is accounted for.
B. Each sales order should be approved by authorized personnel.
C. Sales journal entries should be reconciled to daily sales summaries.
D. Each sales invoice should be supported by a shipping document.

38. The most effective control for ensuring that customers are billed only for goods shipped is to
A. require that carriers sign properly completed bills of lading.
B. implement a policy that prevents the mailing of sales invoices to customers in the absence of a properly
approved shipping order and a bill of lading signed by the carrier.
C. require that all shipments be approved by an accounting personnel.
D. prevent goods from leaving the warehouse without being accompanied by a signed bill of lading and a
properly approved shipping order.

39. A company policy should clearly indicate that defective merchandise returned by customers is to be delivered to
the
A. Sales clerk.
B. Receiving clerk.
C. Inventory control clerk.
D. Accounts receivable clerk.

40. During the review of a small business client's internal control system, the auditor discovered that the accounts
receivable clerk approves credit memos and has access to cash. Which of the following controls would be most
effective in offsetting this weakness?
A. The owner reviews errors in billings to customers and postings to the subsidiary ledgers.
B. The controller receives the monthly bank statement directly and reconciles the checking accounts.
C. The owner reviews credit memos after they are recorded.
D. The controller reconciles the total of the detailed accounts receivable to the amount shown in the ledger.

41. The most effective control to prevent unbilled and unrecorded shipments of finished goods is to
A. require all outgoing shipments to be accompanied by a prenumbered shipping order and bill of lading (signed
by the carrier). Forward a copy of these documents to accounting, to be placed in an open file awaiting receipt
of the customer invoice copy.
B. forward a copy of the shipping order and bill of lading to billing.
C. implement a policy that prevents sales invoices from being mailed to customers in the absence of a properly
approved shipping order and bill of lading signed by the carrier.
D. forward a copy of the signed bill of lading to the stores manager.

42. Controls over approving credit relate to the:


A. completeness assertion.
B. rights and obligation.
C. valuation or allocation.
D. occurrence.
43. To determine whether internal control operates effectively to minimize errors of failure to bill a customer for a
shipment, the auditor would select a sample of transactions from the population represented by the
A. customer order file.
B. shipping records file.
C. subsidiary customer accounts ledger.
D. sales invoice.

44. To verify that all sales transactions have been recorded, a test of transactions should be completed on a
representative sample drawn from
A. entries in the sales journal.
B. the billing clerk’s file of sales orders.
C. a file of duplicate copies of sales invoices for which all prenumbered forms in the series have been accounted
for.
D. the shipping clerk’s file of duplicate copies of shipping documents

45. To gather audit evidence about the proper credit approval of sales, the auditor would select sample of documents
from the population represented by the
A. customer order file.
B. bill of lading file.
C. subsidiary customers’ account ledger.
D. sales invoice file.

46. The purpose of tests of controls over shipping is to determine whether


A. billed goods have been shipped.
B. shipments are billed.
C. shipping department personnel are competent.
D. credit is approved before goods are shipped.

47. The purpose of tests of controls over billing is to determine whether


A. billed goods have been shipped.
B. shipments are billed.
C. billing department personnel are competent.
D. credit is approved before goods are billed.

48. An effective procedure to test for unbilled shipments is to trace from the
A. sales journal to the shipping documents.
B. shipping documents to the sales journal.
C. sales journal to the accounts receivable ledger.
D. sales journal to the general ledger sales account.

49. To determine whether refunds granted to customers were properly approved, the auditor should trace accounts
receivable entries to:
A. Sales invoices.
B. Remittance advices.
C. Shipping documents.
D. Credit memos.

50. The following are four steps that an auditor undertakes in assessing control risk:
A) Determine what control procedures are used by the entite
B) Identify the system’s control objectives
C) Design tests of controls
D) Consider the potential errors or irregularities that could result

In what order would an auditor perform these steps?


A. DBAC
B. BCDA
C. BDAC
D. DCAB

51. In order for the auditors to be able to recognize potential fraud, they must be aware of the basic characteristics of
fraud. Which of the following is a characteristic of fraud?
A. Unintentional deception.
B. Taking unfair or dishonest advantage of uninformed individuals.
C. Lack of training.
D. Negligence on the part of executive management.

52. Which of the following statements about "window dressing is correct?"


A. Window dressing involves an intentional overstatement of receivables and sales through decreases in the
percentage of completion of long-term construction projects.
B. An audit is not intended to provide assurance of detecting any forms of window dressing.
C. A number of window dressing practices represent proper and appropriate business practices.
D. Window dressing ordinarily involves the intentional overstatement of liability and equity accounts.