AUDIT 2A

Midterm Exams
Instructions:
 Choose the best answer for each question. Two point each.
 Summarize your answers and send it on my messenger account (JOSEPHINE BALBINES
GALAMAY)
 You are given two hours two accomplish this task. Exam will start at 8:30 and will end at
10:30; therefore, you should submit before 10:30.
 There will be a 5% deduction for each hour of late submission, but the total score of those
who will submit late shall not exceed the score of those who submitted on time.
 The exam consists of 55 items only.

1. After the auditor has prepared a flowchart of internal control for sales and cash receipts
transactions and evaluated the design of the system, the auditor would perform tests of controls on all
control procedures
a. Documented in the flowchart.
b. Considered to be deficiencies that might allow errors to enter the accounting system.
c. Considered to be strengths that the auditor plans to rely on in assessing control risk.
d. That would aid in preventing irregularities.

2. To determine whether internal control effectively minimized 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.

3. The least crucial element of control over cash is

a. Separation of cash record keeping from custody of cash.
b. Preparation of the monthly bank reconciliation.
c. Batch processing of checks.
d. Separation of cash receipts from cash disbursements.

4. 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 reconciliations performed by employees who do not handle cash.

5. 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 the conduct of an audit?
a. Granting of credit.
b. Shipment of goods.
c. Determination of discounts.
d. Selling of goods for cash.
6. The negative form of accounts receivable confirmation request is particularly useful except
when
a. Control procedures surrounding accounts receivable are considered to be effective.
b. A large number of small balances are involved.
c. The auditor has reason to believe the persons receiving the requests are likely to give them
consideration.
d. Individual account balances are relatively large.

7. Which of the following is not a primary objective of the auditor in tests of accounts receivable?
a. Determine the approximate realizable value.
b. Determine the adequacy of internal controls.
c. Establish the validity of the receivables.
d. Determine the approximate time of collectability of the receivables.

8. Tracing copies of sales invoices to shipping documents will provide evidence that all
a. Shipments to customers were recorded as receivables.
b. Billed sales were shipped.
c. Debits to the subsidiary accounts receivable ledger are for sales shipped.
d. Shipments to customers were billed.

9. Which of the following functions is common to the revenue/receipt cycle?

a. Resources are acquired from vendors and employees in exchange for obligations to pay.
b. Resources are sold to customers in exchange for promises for future payments.
c. Resources are acquired from employees in exchange for obligations to pay.
d. Capital funds are received from investors and creditors.

10. Which of the following is not a common activity of the revenue/receipt cycle?
a. Order entry.
b. Inventory control.
c. Receiving.
d. Cash collection.

11. During the review of a small owner managed company's internal controls, the auditor discovers
that the accounts receivable clerk approves credit memos and has access to cash. Which of the following
controls would offset this deficiency?
a. The owner reviews errors in billings to customers and postings to subsidiary records.
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 detailed receivables records to the general ledger.

12. Defective merchandise returned by customers should be presented to

a. Inventory control personnel.
b. Sales personnel.
c. Purchasing personnel.
d. Receiving personnel.
13. A sales cutoff test complements tests of
a. Sales returns.
b. Cash.
c. Accounts receivable.
d. Sales allowances.

14. Following are four steps an auditor undertakes in assessing control risk:
A. Determine what control procedures are used by the entity.
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.

15. The purpose of tests of controls over shipping is to

a. Determine whether billed goods have been shipped.
b. Determine whether shipments are billed.
c. Determine whether shipping department personnel are competent.
d. Determine whether credit is approved before goods are shipped.

16. The purpose of tests of controls over billing is to

a. Determine whether billed goods have been shipped.
b. Determine whether shipments are billed.
c. Determine whether billing department personnel are competent.
d. Determine whether credit is approved before goods are billed.

17. An auditor should perform alternative procedures to substantiate the existence of accounts
receivable when
a. No reply to a positive confirmation request is received.
b. No reply to a negative confirmation request is received.
c. Collectability of the receivables is in doubt.
d. Pledging of the receivables is probable.

18. Auditors may use positive and/or negative forms of confirmation requests for accounts
receivable. An auditor most likely will use
a. The positive form to confirm all balances, regardless of size.
b. A combination of the two forms, with the positive form used for large balances and the negative
form for small balances.
c. A combination of the two forms, with the positive form used for trade receivables and the
negative form for other receivables.
d. The positive form when the control structure related to receivables are satisfactory, and the
negative form when controls are unsatisfactory.
19. Which of the following would most likely be detected by an auditor's review of a client's sales
cutoff?
a. Unrecorded sales for the year.
b. Lapping of year end accounts receivable.
c. Excessive sales discounts.
d. Unauthorized goods returned for credit.

20. The auditor should ordinarily mail confirmation requests to all banks with which the client has
conducted any business during the year, regardless of the year-end balance, since
a. The confirmation form also seeks information about indebtedness to the bank.
b. This procedure will detect kiting activities, which would otherwise not be detected.
c. The mailing of confirmation forms to all such banks is required by PSAs.
d. This procedure relieves the auditor of any responsibility with respect to non-detection of forged
checks.

21. To gather evidence about the balance per bank in a bank reconciliation, an auditor would
examine all of the following except the
a. Cutoff bank statement.
b. Year-end bank statement.
c. Bank confirmation.
d. General ledger.

22. An auditor compares information on canceled checks with information contained in the cash
disbursement journal. The objective of this test is to determine that
a. Recorded cash disbursement transactions are properly authorized.
b. Proper cash purchase discounts have been recorded.
c. Cash disbursements are for goods and services actually received.
d. No discrepancies exist between the data on the checks and the data in the journal.

23. Which of the following audit procedures would be most appropriate to address the existence
assertion for sales?
a. Confirm receivables balances.
b. Perform analytical procedures.
c. Review collectability.
d. Confirm cash deposits in banks.

24. Which of the following financial statement assertions is not addressed by the confirmation of
accounts receivable?
a. Existence.
b. Presentation and disclosure.
c. Rights.
d. Valuation.

25. Audit working papers often include a client prepared, aged trial balance of accounts receivable
as of the balance sheet date. An aging is best used by the auditor to
a. Evaluate controls over credit sales.
b. Test the accuracy of recorded charge sales.
c. Estimate credit losses.
d. Verify the validity of the recorded receivables.

26. When auditing the allowance for uncollectible accounts, the least reliance should be placed on which
of the following?
a. The credit manager's opinion.
b. An aging of past due accounts.
c. Collection experience of the client's collection agency.
d. Ratios that show the past relationship of the allowance to net credit sales.

27. In determining the existence of accounts receivable, which of the following would the auditor
consider most reliable?
a. Documents that supports the accounts receivable balance.
b. Credits to accounts receivable from the cash receipts book after the close of business at year-
end.
c. Direct telephone communication between auditor and debtor.
d. Confirmation replies received directly from customers.

28. Customers with substantial due balances have failed to reply after second requests had been mailed
to them directly. Which of the following audit procedures is most appropriate?
a. Examine shipping documents.
b. Review cash collections during the year being audited.
c. Intensify the study of internal controls for receivables.
d. Increase the balance in the accounts receivable allowance account.

29. The negative form of accounts receivable confirmation is not useful when
a. Internal control is considered to be effective.
b. A large number of small balances are involved.
c. The auditor has reason to believe that persons receiving the requests are likely to consider
them.
d. Individual account balances are relatively large.

30. Negative confirmation of accounts receivable is less effective than positive confirmation of
accounts receivable because
a. A majority of recipients are usually unwilling to respond objectively.
b. Some recipients may report incorrect balances that require extensive follow up.
c. The auditor cannot infer that all nonrespondents have verified the account information.
d. Negative confirmations do not produce evidence that is statistically quantifiable.

31. The accounts payable department receives the purchase order form to accomplish all of the
following except
a. Compare invoice price to purchase order price.
b. Ensure that the purchase had been properly authorized.
c. Ensure that the party requesting the goods had received the goods.
d. Compare quantity ordered to quantity purchased.

32. Which of the following is a primary function of the purchasing department?

a. Authorizing the acquisition of goods.
b. Ensuring the acquisition of goods of a specified quality.
c. Verifying the propriety of goods of a specified quality.
d. Reducing expenditures for goods acquired.

33. Omitting quantities from copies of purchase orders sent to the receiving department is a control
procedure intended mainly to
a. Ensure that goods received are physically counted by receiving department personnel.
b. Identify and return damaged goods as soon as they are received.
c. Provide a crosscheck for verifying the accuracy of perpetual inventory records.
d. Prevent theft of goods by receiving department personnel.

34. Which of the following is not an appropriate activity for the treasurer's department?
a. Prepare checks.
b. Forward checks to vendors.
c. Cancel vouchers.
d. Prepare vouchers.

35. An effective internal control procedure that protects against the preparation of improper or
inaccurate disbursements is to require that all checks be
a. Signed by an official after necessary supporting evidence has been examined.
b. Reviewed by the treasurer before mailing.
c. Sequentially numbered and accounted for by internal auditors.
d. Perforated or otherwise effectively canceled when they are returned with the bank statement.

36. Matching the supplier's invoice, the purchase, and the receiving report normally should be the
responsibility of the
a. Receiving department.
b. Purchasing department.
c. Accounting function.
d. Treasury function.

37. Which of the following is a necessary control procedure for cash disbursements?
a. Checks should be signed by the controller and at least one other employee of the company.
b. Checks should be sequentially numbered, and the numerical sequence should be accounted for
by the person preparing the bank reconciliation.
c. Checks and supporting documents should be marked "Paid" immediately after the check is
returned with the bank statement.
d. Checks should be sent directly to the payee by the employee who prepares documents that
authorize check preparation.

38. The accounts payable department generally should

a. Cancel supporting documentation after a cash payment is mailed.
b. Approve the price and quantity of each purchase requisition.
c. Assure that the quantity ordered is omitted from the receiving department's copy of the
purchase order.
d. Agree the vendor's invoice with the receiving report and purchase order.

39. When goods are received, the receiving clerk should match the goods with the
a. Purchase order and requisition.
b. Vendor's invoice and the receiving report.
c. Vendor's shipping document and the purchase order.
d. Receiving report and the vendor's shipping document.

40. To assure that disbursements are neither improper nor inaccurate, an entity could require that
all checks be
a. Signed by an officer after supporting documentation has been examined.
b. Reviewed by the treasurer before mailing.
c. Numbered sequentially and accounted for by internal auditors.
d. Canceled when they are returned with the bank statement.

41. In order to establish accounts payable cutoff, an auditor will most likely
a. Coordinate cutoff tests with the physical inventory observation.
b. Compare cutoff reports with purchase orders.
c. Compare vendors' invoices with vendors' statements.
d. Coordinate the mailing of confirmations with cutoff tests.

42. When an auditor selects a sample of items from the vouchers payable register for the last
month of the period under audit and traces them to underlying documents, the auditor is gathering
evidence primarily to support the assertion that
a. Recorded obligations were paid.
b. Incurred obligations were recorded in the correct period.
c. Recorded obligations were valid.
d. Cash disbursements were recorded as incurred obligations.

43. Which of the following audit procedures is least likely to detect an unrecorded liability?
a. Analysis and recomputation of interest expense.
b. Analysis and recomputation of depreciation expense.
c. Mailing a standard bank confirmation form.
d. Reading the minutes of board of directors' meetings.

44. Unrecorded liabilities are most likely to be found during the review of which of the following
documents?
a. Unpaid bills.
b. Shipping records.
c. Bills of lading.
d. Unmatched sales invoices.

45. Confirmation of accounts payable balances

a. Is usually performed at interim dates rather than at year-end.
b. Is not effective in testing for unrecorded liabilities.
c. Is particularly useful when the auditor suspects liabilities may be materially understated.
d. Is required by generally accepted auditing standards.
 
46. Which of the following is not used to test overstatements and understatements of accounts
payable?
a. Cash receipts records.
b. Cash disbursement records.
c. Canceled voucher packages.
d. Unmatched receiving reports.

47. For appropriate segregation of duties, journalizing and posting summary payroll transactions
should be assigned to
a. The treasurer's department.
b. General accounting.
c. Payroll accounting.
d. The timekeeping department.

48. To minimize the opportunities for fraud, unclaimed cash payroll should be
a. Deposited in a safe deposit box.
b. Held by the payroll custodian.
c. Deposited in a special bank account.
d. Held by the controller.

49. Personnel department responsibilities should be separated from payroll preparation to

a. Separate the custody of assets from the recording function.
b. Establish clear lines of authority and accountability.
c. Separate the authorization of transactions from the recording function.
d. Separate the authorization of transactions from the execution of transactions.

50. Which of the following is not a common activity within personnel and payroll?
a. Initiate terminations.
b. Prepare and update personnel records.
c. Prepare and record payroll.
d. Distribute paychecks to employees.

51. To strengthen control procedures over the custody of heavy mobile equipment, the client would
most likely institute a policy requiring a periodic
a. Increase in insurance coverage.
b. Inspection of equipment and reconciliation with accounting records.
c. Verification of liens, pledges, and collateralizations.
d. Accounting for work orders.

52. From the auditor's point of view, inventory counts are more acceptable prior to the year-end,
when
a. Internal control is deficient.
b. Accurate perpetual inventory records are maintained.
c. Inventory is slow moving.
d. Significant amounts of inventory are held on consignment.

53. For several years, a client's physical inventory count has been lower than what was shown on
the books at the time of the count so that downward adjustments to the inventory account were
required. Contributing to the inventory problem could be deficiencies in internal control that led to the
failure to record some
a. Purchases returned to vendors.
b. Sales returns received.
 c. Sales discounts allowed.
d. Cash purchases.

54. Purchase cutoff procedures should be designed to test whether or not all inventory
a. Purchased and received before the year-end was recorded.
b. Was carried at the lower of cost or market on the year-end balance sheet.
c. Was paid for by the company on the year-end balance sheet.
d. Owned by the company is in the possession of the company.

55. A client's physical count of inventories was higher than the inventory quantities per the
perpetual records. This situation could be the result of the failure to record
a. Sales.
b. Sales discounts.
c. Purchases.
d. Purchase returns.