COLEGIO DE DAGUPAN AUDITING THEORY

Arellano St., Dagupan City Departmental Quiz (Finals)

School of Business and Accountancy 2nd Semester (2017-2018)

1. An auditor assess control risk in terms of

A. Types of potential fraud.

B. Financial statement assertions.
C. Specific control activities
D. Control environment elements.

2. The Preliminary assessment of control risk for a financial statement assertion should be high unless the auditor

I. Is able to identify controls relevant to the assertion which are likely to prevent, or detect and correct, material
statements
II. Plans to perform tests of controls to support the assessment.

A. I only.
B. II only
C. Both I and II
D. Neither I or II

3. In performing tests of the operating effectiveness of an entity’s controls, an auditor selects from a variety of techniques,
including

A. Performance and observation.

B. Inquiry and analytical procedures.
C. Comparison and confirmation.
D. Inspection and verification.

4. An auditor intends to perform tests of control on a client’s cash disbursement procedures. If the control procedures
leave no audit trail of documentary evidence, the auditor most likely will test the procedures by

A. Inquiry and analytical procedures.

B. Inquiry and observation
C. Analytical procedure and confirmation
D. Confirmation and observation.

5. Which of the following procedures concerning accounts receivable would an auditor most likely perform to obtain audit
evidence in support of an assessed of an level of control risk that is less than high?

A. Comparing an entity’s bad debt expense to actual bad debt losses.

B. Inspecting an entity’s analysis of accounts receivable for unusual balances.
C. Observing an entity’s staff prepare the schedule of past due accounts receivable.
D. Sending confirmation requests to an entity’s principal customers to verify the existence of accounts receivable.

6. The following statements relate to an auditor’s assessment of control risk. Which is true?

A. The lower the assessed level of control risk, the less assurance the audit evidence must provide about the operating
effectiveness of controls.
B. The bases for an auditor’s conclusions about the assessed level of control risk need not to be documented unless
control risk is assessed at the maximum level.
C. Assessing control risk and obtaining an understanding of an entity’s internal control may be performed
concurrently.
D. When assessing control risk, an auditor should not consider evidence obtained prior audits about the operation of
controls.

7. The following statement relate to the use of audit evidence when testing the operating effectiveness of relevant controls.
Which is false?

A. An auditor who obtains sufficient appropriate audit evidence about the operating effectiveness of controls
during the interim period should no longer obtain additional evidence of operating effectiveness for the
remaining period.
B. An auditor may plan to use audit evidence about the operating effectiveness of control obtained in prior audits.
C. If an auditor plans to rely on controls that have changed since they were last tested, the auditor should tests the
operating effectiveness of such controls in the current audit.
D. Audit evidence pertaining only to a point In time may be sufficient for the auditor’s purpose, for example, when
testing control over an entity’s physical count of inventories at year end.
8. According to PSA 330, an auditor who plans to rely on controls that have not change since they were last tested should
test the operating effectiveness of such controls at least once in every

A. Second audit
B. Third audit
C. Fourth audit
D. Fifth audit

9. Which of the following procedures are performed by an auditor who wants to detect material misstatements at the
assertion level?

A. Compliance tests
B. Tests of controls
C. Substantive tests
D. Dual-purpose tests

10. After gaining an understanding of internal control and assessing the risk of material misstatement, an auditor decided to
perform tests of controls. The auditor most likely decided that

A. Additional evidence to support a further reduction in control risk is not available.

B. It is not possible or practicable to reduce the risk of material misstatement at the assertion level to an
acceptably low level with audit evidence obtained only from substantive test procedures.
C. There were many internal control weaknesses that could allow misstatement to enter the accounting system.
D. An increase in the assessed level of control risk is justified for certain financial statement assertions.

11. In conducting an audit in accordance with PSAs, the auditor is required to identify and assess the risk of material
misstatement at the financial statement level, and at the assertion level for classes of transactions, account balances, and
disclosures. Some of these risks, in the auditor’s judgment, require special audit consideration, such as those that
involve fraud or complex transactions. Such risk are called

A. Business risks
B. Audit risks
C. Significant risks
D. Material risks

12. As a result of obtaining an understanding of an entity’s internal control system, the auditor may become aware of
material weaknesses in the design or implementation of internal control.
The auditor is required to communicate this matter to

A. Those charged with governance or management.

B. Chief executive officer.
C. Securities and Exchange Commission.
D. Board of accountancy.

13. The auditor’s final assessment of control risk for financial statement assertions is based on

A. Evaluating the evidence obtained from the entity’s management.

B. Evaluating the evidence obtained from third parties.
C. Evaluating the evidence obtained from an understanding of relevant internal control system components and
related tests of control.
D. Evaluating the evidence obtained from an understanding of relevant internal control system components.

14. Which of the following is not a source document for the revenue cycle?

A. Sales order
B. Receiving report
C. Credit memo
D. Delivery receipt

15. Which of the following activities is not part of the revenue cycle?

A. Sales order entry

B. Receiving
C. Billing
D. Shipping

16. In the revenue cycle, a customer places an order for a certain product. What step should be taken before the order is
checked for inventory availability?

A. A packing list should be generated for the warehouse.

B. The customer’s credit should be checked for a sale on account.
C. The sales order should be created and written to a file.
D. The shipping department should be notified of an order in process.
17. ____________ is the maximum allowable account balance for a given customer.

A. Credit limit
B. Reorder point
C. Credit checkpoint
D. Backorder point

18. An essential part of the revenue cycle is filling customer orders and shipping goods to customers. Automating warehouse
system cut costs. Improve efficiency, and enable more customer-responsive shipments. Which of the following
elements is required for an automated perpetual inventory system?

A. Forklifts
B. Conveyor belts
C. Bar-code scanner
D. Van

19. The basic document created in the billing process is the

A. Bill of lading
B. Purchase order
C. Sales invoice
D. Packing list
20. To ensure proper segregation of duties, who should make decisions concerning issuance of credit memos?

A. Warehouse manager
B. Credit manager
C. Cashier
D. Accounts receivable supervisor

21. Which of the following is not an objective of the revenue/receipt cycle?

A. Received goods are counted and inspected for quality.

B. Custody over assets resulting from the revenue/receipt cycle is properly maintained.
C. Transactions related to the revenue/receipt cycle are properly authorized, executed, and recorded.
D. Approved sakes order are shipped on a timely basis and accordance with customer specifications.

22. The following are directly involved in the revenue/receipt cycle, except

A. Treasurer and controller

B. Receiving department clerk
C. Billing clerk
D. Sales manager and the credit manager

23. Which of the following controls most likely would provide reasonable assurance that all credit sales transactions of an
entity are recorded?

A. The accounting department supervisor controls the mailing of monthly statement to customer and investigates any
differences reported by customers.
B. The accounting department supervisor independently reconciles, on a monthly basis, the accounts receivable
subsidiary ledger to the accounts receivable control account.
C. The billing department supervisor matches prenumbered shipping documents with entries in the sales
journal.
D. The billing department supervisor sends copies of approved sales orders to the credit department for comparison to
authorized credit limits and current customer account balances.

24. For effective internal control, employees maintaining the accounts receivable subsidiary ledger should not also approve

A. Cash disbursements.
B. Write-offs of Customer accounts.
C. Granting of credit to customers.
D. Employee overtime wages.

25. A sound internal control procedure should require that defective merchandise returned by customers be presented
initially to the

A. Receiving clerk
B. Accounts receivable supervisor
C. Billing clerk
D. Shipping department supervisor

26. An employee misappropriates cash receipts from sales on account. Which of the following acts would conceal this
defalcation and be least likely to be detected by an auditor?
 A. Understating the cash receipts journal.
B. Overstating the accounts receivable subsidiary ledger.
C. Overstating the accounts receivable control account
D. Understating the sales journal.

Questions 27 through 30 are based on the following information:

In connection with your audit of the financial statement of Tanya Company, you gathered the following information about its
sales procedures:

Customer orders are received by the sales-order department. A clerk computes the peso amount of the order and sends it to
the credit department for approval. Credit approval is stamped on the order and returned to the sales-order is filed in the
customer order file.

The customer copy of the sales invoice is sent to the billing department and held in the pending file awaiting notification that
the order has been shipped.

The shipping copy of the sales invoice is routed through the warehouse and the shipping department as authority for the
respective departments to release and ship the goods.

Shipping department personnel pack the order and prepare a three-copy bill of lading:
Original copy --- mailed to customer
Second copy --- sent with the shipment
Third copy --- filed in sequence in the bill of lading file

The shipping copy of the sales invoice is sent to the billing department.

The billing clerk matches the received shipping copy of the sales invoice with the customer copy from the pending file.
The customer copy is then mailed to the customer, and the shipping copy is sent to the accounts receivable clerk.

The accounts receivable clerk enters the sales invoice data in the sales journal, posts the customer’s account in the accounts
receivable subsidiary ledger, and files the shipping copy in the sales invoice file. The invoices are numbered and filed in
sequence.

27. To obtain evidence concerning the proper credit approval of sales, the auditor would select a sample of transaction
documents from the population presented by the

A. Bill of lading file

B. Accounts receivable subsidiary ledger.
C. Sales invoice file.
D. Customer order file.

28. In determining whether the internal control operated effectively to minimize errors of failure to post sales invoices to the
accounts receivable subsidiary ledger, the auditor should select a sample of transactions from the population
represented by the

A. Sales invoice file

B. Accounts receivable subsidiary ledger.
C. Customer order file.
D. Bill of lading file.

29. To effectively determine whether the entity’s control activities minimize errors of failure to invoice goods that have been
shipped, the auditor should select a sample of transactions from the population represented by the

A. Sales invoice file.

B. Bill of lading file.
C. Accounts receivable subsidiary ledger
D. Customer order file.

30. To obtain evidence that uncollected items in customers’ accounts represented valid trade receivable, the auditor should
select a sample of items from the population represented by the

A. Bill of lading file.

B. Customer order file.
C. Accounts receivable subsidiary ledger.
D. Sales invoice file.

31. Which of the following most likely would be the result of ineffective controls in the revenue/receipt cycle?

A. Omission of shipping documents could go undetected, causing an understatement of inventories.

B. Irregularities in recording transaction in the subsidiary accounts could result in a delay in goods shipped.
C. Final authorization of credit memos by sales department personnel could permit an employee defalcation
scheme.
D. Fictious transaction could be recorded causing an understatement of revenues and an overstatement of receivables.
32. At which point in an ordinary sales transaction of a wholesaling business is a lack of specific authorization of least
concern to the auditor in performing risk assessment procedures?

A. Granting of credit
B. Determination of discounts
C. Selling of goods for cash
D. Shipment of goods

33. Samantha Company uses its sales invoices for posting perpetual inventory records. Inadequate internal control over the
invoicing function allows goods to be shipped but not invoiced. The inadequate controls could cause what type of
misstatement in each of the following accounts?

Revenues Receivable Inventories

A. Understatement Understatement Understatement
B. Overstatement Overstatement Understatement
C. Understatement Understatement Overstatement
D. Overstatement Overstatement Overstatement

34. Which of the following controls is often lacking in a retail cash sales environment?

A. Segregation of function
B. Competent personnel
C. Monitoring
D. Access to assets limited to authorized personnel

35. An auditor’s risk assessment procedures disclosed 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 controller reconciles accounts to the amount shown in ledger.

B. The owner reviews credit memos after they are recorded.
C. The controller receives the monthly bank statement directly and reconciles the cash accounts.
D. The owner reviews errors in billing to customers and postings to the subsidiary ledger.

36. The following controls are ordinarily found in an entity’s revenue/receipt cycle. Which control most likely would be
effective in offsetting the tendency of sales personnel to maximize sales volume at the expenses of high bad debt write-
offs?

A. Employees responsible for authorizing sales and bad debts write-offs are denied access to cash.
B. Subsidiary account receivable ledgers are reconciled to the control account by an employee independent of the
authorization of credit.
C. Employees involved in the credit-granting function are separated from the sales function.
D. Shipping documents and sales invoices are matched by an employee who does not authorize write-offs of
customers’ accounts.

37. Which of the following control activities in an entity’s revenue/receipt cycle would provide reasonable assurance that all
billed sales are correctly posted to the accounts receivable ledger?

A. Each shipment of goods on credit is supported by a prenumbered sales invoice.

B. The accounts receivable subsidiary ledger is reconciled daily to the accounts receivable control account in general
ledger.
C. Daily sales summaries are compared to daily posting to the accounts receivable ledger.
D. Each sales invoice is supported by a pre-numbered shipping document.

38. Which of the following tests of controls would most likely be performed by an auditor to obtain evidence about
management’s assertion concerning the completeness of sales transactions?

A. Inquiries about the entity’s credit granting policies and whether credit checks are consistently applied.
B. Inspect the entity’s reports of prenumbered shipping documents that have not been recorded in the sales
journal.
C. Compare prices on prenumbered sales invoices to the entity’s authorized price list.
D. Verify the extensions and footings on sales invoices and monthly statements of customers’ accounts have been
checked.

39. An online sales order processing system most likely would have an advantage over a batch sales order processing
system by

A. Enabling shipment of customer orders to be initiated as the orders are received.

B. Maintaining more accurate records of accounts receivable and inventories.
C. Maintaining backup copies of the database.
D. Detecting errors in the data entry process by the use of edit checks.

40. When an office supply company is unable to fill an order completely, it marks the out-of-stock items as back ordered on
the customer’s order form and enters these items in a back order file that can be viewed or printed by management.
 Customers are becoming dissatisfied with the company because of its failure to keep track of and ship out-of-stock
items as soon as they are available. Which of the following is the best approach to ensure prompt delivery of out-of-
stock items?

A. Increase inventory levels to minimize the occurrence of stock outs.

B. Match the back order file to goods received daily
C. Reconcile the sum of filled and back orders with the total of all orders placed daily.
D. Implemented electronic data interchange (EDI) with supply vendors to decrease the time to replenish inventory.

41. Which of the following is a source document that would be found in the expenditure cycle?

A. Journal voucher
B. Purchase order
C. Time card
D. Delivery receipt

42. ____________ is a standing order to purchase specified items at a designated price, from a particular supplier for a set
period of time.

A. Set order
B. Blanket purchase order
C. Purchase order
D. Commodity order

43. Which of the following is probably the most effective control for the prevention of kickbacks to purchasing agents?

A. Review of vendor performance.

B. A corporate policy to prohibit purchasing agents from accepting kickbacks.
C. Purchasing from approved vendors.
D. Good supervision in the purchasing area.

44. The easiest way to prevent the acceptance of unordered goods is to

A. Always require that a valid purchase order exist before goods can be accepted at the time of delivery.
B. Order only from approved vendors.
C. Have an appropriate conflict of interest policy in place.
D. Require receiving department personnel to call the vendor before accepting any goods.

45. The auditor’s primary objective in obtaining an understanding of the client’s controls over the purchasing function is to

A. Investigate the recording of unusual transactions regarding raw materials.

B. Determine the reliability of financial reporting by the purchasing function.
C. Observe the annual physical count.
D. Ascertain that raw materials paid for are on hand.

46. In a well-designed internal control system, employees in the same department most likely would approve purchase
orders and also

A. Negotiate terms with vendors.

B. Authorize requisitions of goods.
C. Inspect and count goods upon receipt.
D. Reconcile the open invoice file.

47. Effective controls relevant to purchasing of raw materials should usually include all of the following, except

A. Determining the need for the raw material prior to preparing the purchase order.
B. Systematic reporting of product changes that will affect raw materials.
C. Obtaining financial approval prior to making a commitment.
D. Obtaining third-party written quality and quantity reports prior to payment for the raw materials.

48. As part of its purchasing system, an entity’s receiving department receives copies of purchase order for use in identifying
and recording goods received. The purchase orders list the name of the vendor and the quantities of the materials
ordered. A possible error that this system could allow is.

A. Payment for unauthorized purchases.

B. Payment to unauthorized vendors.
C. Overpayment of partial deliveries.
D. Delay in recording purchases.

49. Which of the following controls is not usually performed in the accounts payable department?

A. Indicating on the voucher the affected asset and expenses accounts to be debited.
B. Approving vouchers for payment by having an authorized employee sign the vouchers.
C. Accounting for unused prenumbered purchase orders and receiving reports.
 D. Matching the vendor’s invoice with the related purchase requisition, purchase order, and receiving report.

50. Which of the following procedures would best discourage the resubmission of vendor invoices after they have been
paid?

A. The mailing of payments directly to payees by accounts payable department personnel.

B. A requirement for double endorsement of checks.
C. The candidate of vouchers by accounting personnel.
D. The cancellation of vouchers by treasurer personnel.

51. A university does not have a centralized receiving function for departmental purchases of book, supplies, and
equipment. Which of the following controls would most effectively prevent payment for goods not received, if
performed prior to invoice payment?

A. Vendor invoices should be approved by a departmental supervisor other than the employee ordering the
goods.
B. Invoices over a specified amount should be approved by the vice president of finance.
C. Names and addresses on vendor invoices should be compared to a list of department-authorized vendors.
D. Vendor invoices should be matched with department purchase orders.

52. To minimize the risk that purchasing agents will use their positions for personal gain, an entity’s should

A. Direct the purchasing department to maintain records on purchase prices paid, to be reviewed every 6 months.
B. Request internal auditor s to send confirmation request to selected vendors.
C. Require competitive bidding.
D. Specify that all items purchased must pass quality control tests.

53. The following are appropriate questions on an internal control questionnaire concerning purchase transactions, except.

A. Are all goods received in a centralized receiving department counted, inspected, and compared with purchase
orders on receipt?
B. Are intact cash receipts deposited daily in the bank?
C. Are prenumbered purchase orders and receiving reports used and accounted for?
D. Are an approved purchase requisition and a signed purchase order required for each purchase?

54. The following questions ordinarily appear in an internal control questionnaire on cash disbursements, except

A. Are prelisting made of all cash receipts?

B. Is each check supported by an approved voucher?
C. Are imprinted and prenumbered checks used and is a check protection device used in printing the check amount?
D. Are all disbursements except for petty cash made by checks?

55. In a well-designed internal control, the same employee may be permitted to

A. Prepare receiving reports and also approve purchase orders.

B. Approve voucher for payment and also have access to unused purchase orders.
C. Mail signed checks and also cancel supporting documents
D. Mail signed checks and also prepare bank reconciliations.

56. Which of the following is of least concern to an auditor in assessing the risk of material misstatement?

A. Signed checks are distributed by the controller to approved payees.

B. Checks are signed by one person.
C. Cash receipts are not deposited intact daily.
D. Treasurer does not verify the names and addresses of check payees.

57. Under which of the following circumstances would an auditor be most likely to intensify an audit of a 20,000 petty cash
fund?

A. Petty cash voucher are not prenumbered.

B. The custodian endorsers reimbursement checks.
C. Reimbursement occurs twice each week.
D. The custodian occasionally uses the petty cash fund to cash employee checks.

58. In jervs Company’s accounting system the Quantities counted by the receiving department and entered at a terminal are
transmitted to the computer, which immediately transmits the amount back to the terminal for display to enable the
operator to.

A. Verify that the amount was entered accurately.

B. Establish the validity of the account number.
C. Verify the authorization of the disbursement.
D. Prevent the overpayment of the account.
59. What document is prepared to authorize the removal of the necessary quantity of raw materials from storeroom for
factory?

A. Production order
B. Materials requisition
C. Move ticket
D. Purchase invoice

60. Which of the following is an essential control procedure to ensure the accuracy of the recorded inventory quantities?

A. Calculating unit costs and valuing obsolete or damaged inventory items in accordance with inventory policy.
B. Testing inventory extensions.
C. Performing a gross profit test.
D. Establishing of cutoff for goods received and shipped.

61. The following question are appropriate for an internal control questionnaire concerning inventory, except

A. Are goods stored in locked storage areas?

B. Is access to the storage are limited to authorized personnel?
C. Are disbursement voucher approved before payment?
D. Are there independent, periodic comparisons of inventory records with goods on hand?

62. Effective internal controls over inventories are designed and implemented for the following reasons, except

A. Inventories typically represent a large component of an entity’s current assets.

B. Inventories are the most liquid asset.
C. Inventories directly affected the financial performance of an entity.
D. Inventories typically represent a large portion of an entity’s total assets.

63. Leonor Manufacturing Corporation mass produces ten different products. The company’s controller is interested in
strengthening internal control over the accounting for materials used in production. He\she would most likely design
and implement

A. An economic order quantity (EOQ) system.

B. A perpetual inventory system.
C. A separation of duties among production personnel.
D. A job-order cost accounting system.

64. Your client, a merchandising concern, has annual sales of P30,000,000 and a 40% gross profit rate. Tests reveal that 2%
of the peso amount of purchases do not get into inventory because of breakage and inventory pilferage by employees.
The company estimates that these losses could be reduced to 0.5% of purchase by designing and implementing certain
controls costing approximately P350,000. Should the controls be designed and implemented?

A. Yes, regardless of cost-benefit considerations, because the situation involves employee theft.
B. Yes, because the ideal system of internal control is the most expensive one.
C. No, because the cost of designing and implementing the added controls exceeds the projected savings.
D. Yes, because the expected benefits to be derived exceed the cost of the added controls.

65. The objectives of internal control for a production cycle are to provide assurance that transactions are properly executed
and recorded, and that

A. Production orders are prenumbered and signed by a supervisor

B. Custody of work-in-process and of finished goods is properly maintained.
C. Independent internal verification of activity reports is established
D. Transfers to finished goods are documented by a completed production report and a quality control report.

66. Which of the following controls most likely would be implemented to achieve the production cycle control objective of
maintaining accurate inventory records?

A. Periodic inventory counts are used to adjust the perpetual inventory records.
B. A just-in-time inventory ordering system keeps inventory levels to a desired minimum.
C. Perpetual inventory records are periodically compared with the net realizable value of individual inventory items.
D. Purchase requisitions, receiving reports, purchase orders, and vendor invoices are independently matched before
payment is approved.

67. Which of the following question would an auditor most likely include in the production cycle internal control
questionnaire?

A. Are details of individual disbursements of raw materials compared to the total for posting to the general ledger?
B. Are vendor invoices for raw materials to approve before payment?
C. Are all issuances of raw materials to production based on approved requisition forms?
D. Are signed checks for the purchase of raw materials sent directly to intended payees after signing, without being
returned to the person who authorized the invoice processing?
68. Which of the following is the most likely procedure an auditor would perform in obtaining an understanding of a
manufacturing entity’s internal control for inventory balances?

A. Perform test counts of inventory when observing the entity’s physical count.
B. Perform analytical procedures designed to identify significant cost variances.
C. Analyze the liquidity and turnover ratio of the inventory.
D. Review the entity’s description of inventory policies and procedures.

69. A properly designed internal control should require that defective merchandise returned by customers be presented
initially to the

A. Receiving clerk.
B. Purchasing clerk.
C. Billing clerk.
D. Inventory control clerk.

70. The following controls are appropriate for property, plant, and equipment (PPE), except

A. Written policies for capitalization and expenditure and review of application of depreciation methods.
B. Disposal of fully depreciated PPE items.
C. Proper authority for acquisition and retirement of PPE items.
D. Detailed PPE records and physical controls over PPE items.

71. The question that an auditor would likely least include on an internal control questionnaire concerning the initiation and
execution of equipment transactions is

A. Are requests for purchases of equipment reviewed for consideration of soliciting competitive bids?
B. Are request for major repairs approved at a higher level than the department initiating the request?
C. Are procedures in places to monitor and properly restrict access to equipment?
D. Are prenumbered purchase orders used for equipment and periodically accounted for?

72. Which of the following controls would most likely detect equipment acquisition that are mis classified as maintenance
expense?

A. Segregation of duties of employees in the accounts payable department.

B. Authorization by the board of directors of significant equipment acquisitions.
C. Independent verification of invoices for disbursements recorded as equipment acquisitions.
D. Investigation of variances within a formal budgeting system.

73. Which of the following control activities is most likely to prevent the improper disposition of equipment?

A. A periodic analysis of the scrap sales and the repairs and maintenance accounts.
B. Periodic comparison of removal work orders with authorizing documentation.
C. The use of serial numbers to identify equipment that could be sold.
D. A separation of duties between those authorized to dispose of equipment and those authorized to approve
removal work orders.

74. Which of the following control activities most likely would justify a reduced level of control risk concerning property,
plant, and equipment (PPE) acquisitions?

A. Periodic physical inspection of PPE by the internal audit staff.

B. Approval of periodic depreciation entries by a supervisor independent of the accounting department.
C. The review of prenumbered purchase orders to detect unrecorded trade-ins.
D. Comparison of current-year PPE account balances with prior-year figures.

75. An Internal control objective concerning property, plant and equipment (PPE) acquisition is that they be recorded at the
correct amounts and in the proper period, and properly classified. In which of the following conditions would an auditor
most likely assess a high level risk of material misstatement?

A. All material acquisitions of PPE are required to be approved by the board of directors.
B. Most additions are self-constructed by the entity.
C. Recently acquired loans include covenants that preclude further plant acquisitions for 5 years.
D. Gross PPE increase 30% during the current period.
76. Why is property, plant and equipment (PPE) typically considered to be one of the accounts least susceptible to fraud?

A. Internal control on this account is inherently effective.

B. The depreciated values are always smaller than cost.
C. The inherent risk of PPE is usually low.
D. For most companies, the recorded amounts of PPE are immaterial.

77. Which of the following misstatement or questionable practices may be uncovered if an auditor tours an entity’s
production facility?

A. Insurance coverage on the facility has lapsed.

 B. Overhead has been overapplied.
C. Depreciation expense on fully depreciated machinery has been recognized.
D. Necessary facility maintenance has not been performed.

78. Which of the following controls would an entity most likely use in safeguarding against the loss of trading securities?

A. The independent auditor traces all purchases and sales of trading securities through the subsidiary ledgers to the
general ledger.
B. An independent trust company that has no direct contract with the employees who have record-keeping
responsibilities has possession of the securities.
C. The internal auditor inspects the trading securities in the entity’s safe each year on the balance sheet date.
D. A designated member of the board of directors controls the securities in a bank safe-deposit box.

79. Which of the following controls would a company most likely use to safeguard marketable securities are not in the
custody of an independent trust agent?

A. The chairman of the board of directors verifies the marketable securities, which are kept in a bank safe-deposit box,
each year on the balance sheet date.
B. The internal auditor and the controller independently trace all purchases and sales of marketable securities from the
subsidiary ledger ledgers to the general ledger.
C. Two company officials have joint control of marketable securities, which are kept in a bank safe-deposit box.
D. The investment committee of the board of directors periodically reviews the investment decisions delegated to the
treasurer.

80. Which of the following internal control activities would an entity most likely implement to assist in satisfying the
completeness assertion related to noncurrent investments?

A. The internal auditor compares the securities in the bank safe-deposit box with recorded investments.
B. Senior management verifies that securities in the bank safe-deposit box are registered in the entity’s name.
C. The controller compares the current market prices of recorded investments with the brokers’ advices on file.
D. The treasurer vouches the acquisition of securities by comparing brokers’ advices with canceled checks.

81. Which of the following is not proper control over investment securities?

A. Separation of custodial and treasury functions.

B. Employing an independent trust agent.
C. Proper authorization of transaction.
D. Storage in a safe-deposit box.

82. The following controls are designed to protect investment securities, except

A. Investment securities should be properly controlled physically in order to prevent unauthorized usage.
B. Custody over investment securities should be limited to personnel having record-keeping responsibility over
the securities.
C. Securities should be registered in the entity’s name.
D. Access to securities should be vested in two individuals.

83. Which of the following questions is most likely to be included by an auditor on an internal control questionnaire for
notes payable?

A. Are direct borrowings on notes payable authorized by the board of directors?

B. Are assets that collateralize notes payable critically needed for the entity’s continued existence?
C. Are two or more authorized signatures required on checks that repay notes payable?
D. Are the proceeds from note payable used for the purchase of noncurrent assets?

84. The audit program for long term debt should include steps that require the

A. Verification of the existence of the bondholders.

B. Examination of any bond trust indenture.
C. Inspection of the accounts payable master file.
D. Investigation of credit to the bond interest income account.

85. During the year under audit, a company has completed a private placement of a substantial amount of bonds. Which of
the following is the most important step in the auditor’s program for the audit of bonds payable?

A. Confirming the amount issued with the bond trustee.

B. Tracing the cash received from the issue to the accounting records.
C. Examining the bond records maintained by the transfer agent.
D. Recomputing the annual interest cost and the effective yield.

86. Several years ago, Consuelo, Inc., secured a conventional real estate mortgage loan. Which of the following audit
procedures would be least likely to be performed by an auditor auditing the mortgage balance?

A. Examine the current year’s cancelled checks.

 B. Review the mortgage amortization schedule.
C. Inspect public records of lien balances.
D. Recompute mortgage interest expense.

87. During an audit of a publicy held company, the auditor should obtain written confirmation regarding debenture
transactions from the

A. Debenture holders
B. Client’s attorney
C. Internal auditors
D. Trustee

88. An audit program for the audit of the retained earnings account should include a step that requires verification of

A. Market value used to charge retained earnings to account for a 2-for-1 stocks split.
B. Approval of the adjustment to the beginning balances as a result of a write-down of an account receivable.
C. Authorization for both cash and stock dividends.
D. Gain or loss resulting from disposition of treasury shares.

89. Where no independent stock transfer agents are employed and the corporation issues its own stocks and maintains stock
records, cancelled stock certificates should

A. Be defaced to prevent reissuance and attached to their corresponding stubs.

B. Not be defaced, but segregated from other stock certificates and retained in a cancelled certificates file.
C. Be destroyed to prevent fraudulent reissuance.
D. Be defaced and sent to the secretary of the department of finance.

90. A potential threat to the payroll processing activity is theft or fraudulent distribution of payroll checks. One control that
can be implemented to help prevent paychecks being issued to “ghost” employees is

A. Use of a payroll clearing account.

B. Paychecks should be physically distributed by someone who does not authorize or record payroll
C. Periodic reconciliation of the payroll bank account.
D. The cashier should sign all payroll checks.

91. Effective controls over the payroll function may include

A. Custody of rate authorization records by the supervision of the payroll department.

B. Preparation of payroll transaction journal entries by an employee who reports to the supervisor of the personnel
department.
C. Verification of agreement of job time tickets with employee clock card hours by a payroll department
employee.
D. Reconciliation of totals on job time tickets with job reports by employees responsible for those specific jobs.

92. Employees of a manufacturing entity are often required to use time cards and job time tickets. Which of the following
statements concerning the use of these documents is incorrect?

A. Time reported on job time tickets should be reconciled to time cards

B. Payroll should be calculated based on job time tickets.
C. Each employee should have only one time card.
D. An employee should have one or many job time tickets in a day.

93. Organization independence in the processing of payroll can be achieved by segregating the functions of authorization,
record keeping, and custody of assets. Which one of the following functional separation is not required for internal
control purposes?

A. Separation of payroll preparation and paychecks distribution.

B. Separations of personnel function from payroll preparation.
C. Separation of timekeeping from payroll preparation
D. Separation of payroll preparation and maintenance of year-to-date records

94. Which of the following controls is most effective in providing reasonable assurance that salary, wage, and benefit
expenses are incurred only for work performed?

A. The payroll register is used as the source document for posting employee benefit cost to the general ledger.
B. All time cards and reports are reviewed and approved in writing by immediate line supervisors who do not
have responsibilities for paychecks distributed.
C. Actual payroll amounts are regularly compared against budgeted amounts by management, with all material budget
variances being investigated.
D. The accuracy of extensions of hours worked and pay rates is rechecked by an independent party, and pay rate
receipt of a written authorization form the personnel department.

95. The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the
 A. Authorization of transactions from the custody of related assets.
B. Operational responsibility from the record-keeping responsibility.
C. Human resources function from the controllership function.
D. Administrative controls from the internal accounting controls.

96. Which of the following departments most likely approves changes in pay rates and deductions from employee salaries?

A. Payroll
B. Personnel
C. Controller
D. Treasurer

97. Which of the following situations represents an internal control weakness in the payroll department?

A. The timekeeping function is independent of the payroll department.

B. Payroll records are periodically reconciled with tax reports.
C. Paychecks are distributed by the employees’ immediate supervisor.
D. Payroll department personnel are rotated in their duties.
98. Which of the following personnel department procedures reduces the risk of payroll fraud and represents an appropriate
responsibility for the department?

A. Authorizing the addition or deletion of employees from the payroll.

B. Authorizing overtime hours.
C. Collection and retention of unclaimed paychecks.
D. Distributing paychecks.

99. Each Saturday afternoon, paychecks are distributed by the production department’s shift supervisor. The company’s
production department is so large and the turnover of factory workers is so great that the supervisor does not know
many of the workers. Unclaimed paychecks are returned to the payroll clerk, from whom the factory workers can claim
them at some later time. The payroll clerk routinely continues the payroll record for workers one week after their
departure from the company and ultimately diverts the unclaimed paychecks. Which of the following controls would
most likely prevent this misappropriation?

A. Require the treasurer’s office to prepare checks only on the basis of supporting documentation from both
the timekeeper and payroll accounting.
B. Periodically rotate the shift supervisor.
C. Require the timekeeper to compute weekly pay of each factory worker and to make distribution of the checks
received from the treasurer’s office.
D. Require the shift supervisor to know all the workers by name.

100.Proper inter control over the cash payroll function mandates which of the following?

A. A separate checking account for payroll should be maintained.

B. Each employee should be asked to sign a receipt.
C. The payroll clerk should fill the envelopes with cash and a computation of the net pay.
D. Unclaimed pay envelopes should be retained by the pay masters.