No. 125 Brgy.

San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

AT.06.06 – Transaction Cycles

1. Statement 1: An understanding of the design and implementation of internal

controls under the transaction cycle approach is required by ISA 315, unless a
more relevant and reliable approach can be provided by the auditor.
Statement 2: Internal control policies and procedures are dependent on the nature
of risks that an entity faces. This explains why controls that exist in one type of
company may or may not exist in another.
Statement 3: Internal control policies and procedures identified using the
transaction cycle approach are direct controls that affect the specific classes of
transactions, account balances, and presentation and disclosure affected by
transactions under the specific group.
a. All statements are correct.
b. Two of the statements are correct.
c. One of the statements are correct.
d. None of the statements are correct.

2. To achieve good internal control, which department should perform the activities
of matching shipping documents with sales orders and preparing daily summaries?
a. Billing department
b. Shipping department
c. Credit department
d. Sales department

3. Statement 1: The bill of lading or delivery receipt is a document describing the

goods to be shipped and serves as contract between the seller and carrier.
Statement 2: The primary recipient of the sales order form is the credit department,
originating from the sales department, with copies provided to the customer,
shipping department, and billing department.
a. True, True
b. True, False
c. False, True
d. False, False

4. Which of the following documents would support entries made into the sales
journal and updates made to the accounts receivable / customer master file?
a. Approved sales order
b. Bill of lading
c. Sales invoice
d. Credit memo

5. Which of the following documents would be the starting point for an auditor who
wants to test for the completeness of sales recorded in the sales journal and to
determine whether such sales were appropriately billed to customers and
ultimately recorded as sales?
a. Sales invoice
b. Sales order
c. Delivery notes
d. Credit memo

6. For effective internal control, employees maintaining the accounts receivable

subsidiary ledger should not also approve:
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JABELLAR/AIBAY/AJABINAL/RBERCASIO/JMAGLINAO/ASARMIENTO
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

a. employee overtime wages.

b. credit granted to customers.
c. write-offs of customer accounts.
d. cash disbursements.

7. For most audits, a proper cash receipts cutoff is less important than the sales cutoff
because the improper cutoff of cash:
a. affects the cash and accounts receivable balances on the balance sheet
and does not affect net income.
b. is detected and correct when cash is separately audited.
c. is unlikely to have a material impact on the balance sheet or the income
statement.
d. rarely occurs given the control consciousness of most entities.

8. Which of the following functions relating to the revenue and receipt cycle is least
likely performed by the credit department?
a. Reviewing sales orders from the sales department.
b. Conducting credit investigation.
c. Approving write-off of long overdue receivables.
d. Forwarding sales orders to inventory control department.

9. Which of the following personnel is most likely involved in the preparation of the
credit memo forwarded to the customer for returned merchandise?
a. Sales department
b. Accounts receivable department
c. Warehouse department
d. Receiving department

10. Which of the following supporting documents supports the recording of sales
transactions into the client’s accounting information systems?
a. Sales order
b. Shipping documents
c. Sales invoice
d. Remittance advice

11. When considering inherent risks and control risks for the auditor’s combined risk
assessment, the order to cash, or revenue cycle is usually given significant
attention because of the risk of
a. Misappropriation of assets
b. Improper revenue recognition
c. Cut-off errors
d. Related party transactions

12. When preparing sales orders, the accounting system of the audit client permits
inputs only to the item code, description and quantity fields only. The selling price
is auto-populated based on the established price list by management. What type
of control is demonstrated in this scenario?
a. Automated control
b. IT dependent manual control
c. Manual control
d. Detective control

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JABELLAR/AIBAY/AJABINAL/RBERCASIO/JMAGLINAO/ASARMIENTO
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

13. Which of the following is least likely an internal control consideration on accepting
and approving customer orders?
a. List of authorized customers
b. Recent orders/transactions with the customer
c. Credit limit checks
d. C-level endorsement

14. Which of the following document is least likely a critical document that an auditor
must examine when performing an order-to-cash process walkthrough?
a. Available revenue cycle process documentation
b. Daily sales summaries
c. Remittance advices
d. Packing lists

15. Almost all companies need physical controls over their assets to prevent loss.
Which of the following is not an example of such a control?
a. Perpetual inventory master files.
b. Segregated, limited-access storage areas.
c. Custody of assets assigned to specific responsible individuals.
d. Approved prenumbered documents for authorizing movement of inventory.

16. Regarding the physical count of inventory, necessary control procedures include
the following, except:
a. proper instructions for the physical count.
b. independent third-party verification of the counts.
c. third-party reconciliations of the physical counts with perpetual inventory
master files.
d. counting the inventory only on the year-end date.

17. Automated ordering based on system-established order points will most likely be
implemented by an audit client using
a. Just in time process
b. Kaizen manufacturing practice
c. Electronic data interchange (EDI)
d. Business process outsourcing

18. An example of a risk that exists in the inventory cycle is the fraudulent tagging of
inventory as obsolete items so inventory personnel may remove them from the
warehouse, or acquire it at a low price from the company. Which of the following
is an example of a detective control addressing this issue?
a. Inventory items tagged as obsolete is independently verified against
management approvals.
b. Obsolete inventory items are located in a separate area of the warehouse.
c. Obsolete inventory items are given a unique code in the warehouse
management system.
d. Cash receipts from obsolete inventory dispositions are recorded to a
separate account.

19. What form of analytical review might uncover the existence of obsolete
merchandise?
a. Inventory turnover rates.
b. Decrease in the ratio of gross profit to sales.
c. Ratio of inventory to accounts payable.

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JABELLAR/AIBAY/AJABINAL/RBERCASIO/JMAGLINAO/ASARMIENTO
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

d. Comparison of inventory values to purchase invoices.

20. Which of the following is not a procedure that must be performed by an audit client
prior to a physical inventory count?
a. Prepare sequentially numbered count and DNC (Do Not Count) tags.
b. Count all partial packages, seal them and mark the quantity on the tape.
c. Issue a list of count team members, with a notice regarding where and when
they should appear for the inventory count.
d. Call all outside storage warehouses and ask them to fax in their respective
inventory counts.

21. This document authorizes the start of production activities base on approved sales
forecast.
a. Packing list
b. Materials Requisition Form
c. Production Order
d. Move tickets

*End of Handout*

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