AT03-06 – Transaction Cycles

1. Statement 1: PSA 315, Identifying and assessing the risks of material misstatement through understanding
the entity and its environment requires that the auditor documents his/her understanding of the entity’s
internal control activities on a per-transaction-cycle basis.
Statement 2: The use of transaction cycles in documenting the understanding of internal controls is a
matter of practicality, as these involves aggregating transactions into a relatively small number of groups
(transaction cycles), instead of on a per-FSLI (Financial Statement Line Item) basis.
a. True, True
b. True, False
c. False, True
d. False, False

Revenue/Receipt Cycle
2. Which of the following is the last step in the revenue/receipt cycle?
a. Customer requests for goods.
b. Recording of the sale transaction in the accounting systems.
c. Receipt of cash and depositing the same to the company’s bank account.
d. Delivery of finished goods to customers.

3. Which of the following is incorrect regarding the difference of customer orders and sales orders?
a. Customer order form is a document indicating a request for merchandise from a customer.
b. Sales order is an internal document communicating the description, quantity, and other related information
for goods ordered by a customer.
c. The credit department documents the approval for customer credit on the customer order form.
d. A sales order form duly approved by the company’s credit department is a document required before goods
are issued from the warehouse to the shipping department.

4. Sending accounts receivable confirmation letters to the client’s customers is consistent with the
auditor’s objective of validating client’s receivable assertion on:
a. Existence and rights
b. Completeness and valuation
c. Completeness and rights
d. Existence and valuation

5. 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

6. 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

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Purchasing/Disbursement Cycle
7. To properly control purchasing, expenditures and accounts payable, an information system must include
certain source documents. For a manufacturing organization, these documents should include:
a. Purchase orders, receiving reports, and vendor invoices.
b. Supplier price lists, benchmarking and results of bidding.
c. Purchase requisitions, purchase orders, receiving reports and vendor invoices.
d. Bill of materials, materials requisition, production orders, materials and finished goods stockcards.

8. Which of the following would an auditor most likely do to perform search for unrecorded liabilities and which
financial statement assertion is most likely validated by this procedure?
a. Vouch a sample of transactions from the company’s purchases journal just before year-end and then trace
these back to the receiving logs to determine whether there were goods actually received, and therefore

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 validating the existence assertion for liabilities.
b. Trace a sample of invoices paid just before year-end and then identify whether these items were received
and properly recorded as liabilities as of year-end, and therefore validating the completeness assertion for
liabilities.
c. Trace a sample of invoices paid just after year-end and then identify whether these items were received
and properly recorded as liabilities as of year-end, and therefore validating the completeness assertion for
liabilities.
d. Vouch a sample of transactions from the company’s purchases journal just before year-end and then trace
these back to the receiving logs to determine whether there were goods actually received, and therefore
validating the completeness assertions for liabilities.

9. Why does the auditor use the population of vendors with whom the entity has previously done business
with, rather than the amounts recorded in the accounts payable subsidiary ledger when using confirmations
for accounts payable balances?
a. The auditor is more interested in validating the completeness of reported liabilities rather than their
existence.
b. The auditor is more interested in validating the existence of reported liabilities rather than their
completeness.
c. It is possible that some of the liabilities reported in the subsidiary ledger have already been paid as of
year-end.
d. The vendor list provides a more reliable evidence about the obligation assertion.

10. Which of the following is the most likely reason why the auditor’s cut-off testing for purchases include entries
for both before and after period-end?
a. The auditor wants to vouch the entries before year-end to their supporting documents to validate the
existence assertion, and the entries after year- end to their supporting documents to validate the
completeness assertion.
b. The auditor wants to vouch the entries before year-end to their supporting documents to validate the
completeness assertion, and the entries after year-end to their supporting documents to validate the
existence assertion.
c. The auditor wants to trace the supporting documents to entries made before year-end to validate the
existence assertion, and the supporting documents to entries made after year-end to validate the
completeness assertion.
d. The auditor wants to trace the supporting documents to entries made before year-end to validate the
existence assertion, and the supporting documents to entries made after year-end to validate the valuation
assertion.

11. For good internal control, the purchasing department should not be responsible for:
a. Finding the lowest cost vendor.

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b. Reviewing the vendor’s catalog descriptions and prices for standardized items.
c. Designing the purchase order form.
d. Recording the purchase transactions and maintaining the accounts payable master file.

Personnel/Payroll Cycle
12. An auditor vouched data for a sample of employees in a payroll register to approved clock card
data to provide assurance that
a. Payments to employees are computed at authorized rates.
b. Employees work the number of hours for which they are paid.
c. Segregation of duties exist between the preparation and distribution of the payroll.
d. Controls relating to unclaimed payroll checks are operating effectively.

13. Considering the proper segregation of duties, which of the following is most likely the most appropriate
person to distribute payroll checks?
a. The payroll accountant.
b. The general accountant.
c. The HR personnel.
d. The accounts payable analyst.

14. Which of the following procedures would most likely assist the auditor in validating whether the HR
department authorizes all hires?
a. Examine employee time cards for proper authorization.
b. Compare payroll budgets to the preceding period budget.
c. Select a sample of employees on the payroll and determine that each has a properly approved hiring
authorization form in his or her personnel file.

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d. Select a sample of employee names from the payroll register and briefly interview each on a surprise
basis.

Inventory/Production Cycle
15. Which of the following control procedures would most likely be used to maintain accurate perpetual
inventory records?
a. Independent storeroom count of goods received.
b. Periodic independent reconciliation of control and subsidiary records.
c. Periodic independent comparison of records with actual goods on hand.
d. Independent matching of purchase orders, receiving reports, and vendor’s invoices.

16. 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.
d. Comparison of inventory values to purchase invoices.

17. When auditing inventories of raw materials, purchased parts, and/or merchandise inventory, the auditor’s
most effective means for evaluating the valuation assertion is to:
a. Examine recent invoices from vendors, along with freight bills and compare with client’s unit costs, as
adjusted for freight and discount.
b. Compare purchases with prior year and with industry averages and account for significant fluctuations.
c. Trace quantities from tags or count sheets to final inventory listings.
d. Scan inventory listings for large extended amounts, and trace related quantities to auditor’s copy of
the inventory tag or listing.

Investing Cycle: Property

18. An auditor is verifying a company’s ownership of equipment. What is the best evidence of ownership?

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a. The current year’s depreciation expense journal entry.
b. A cancelled check written to acquire the equipment.
c. An interview with the equipment custodian verifying company ownership.
d. The presence of the equipment on the company’s balance sheet.

19. The auditor may conclude that depreciation charges may be insufficient if he or
she notes:
a. Large amounts of fully depreciated assets still in use.
b. Continuous trade-ins of relatively new assets.
c. Insured values greatly in excess of book values.
d. Excessive recurring losses on retired assets.

20. Which of the following procedures would most likely be used by an auditor
when testing for the completeness and accuracy of the depreciation charge for the year?
a. Analytical procedures
b. Physical inspection
c. Documentary inspection
d. Reperformance

Investing Cycle: Securities

21. Which of the following would provide the best form of evidence on the valuation
assertion of a long-term investment of a client owning a 35% voting interest over the investee?
a. Audited financial statements of the investee.
b. Market quotations of the investee company’s shares.
c. Broker statement on the purchase transaction.
d. Broker’s confirmation reply on the transactions and shares held.

22. In auditing investments for proper valuation, the auditor should do all of
the following procedures except:
a. Confirm securities held in safekeeping off the client’s premises.
b. Vouch purchases and sales of securities by tracing to broker’s advices and cancelled
checks.
c. Compare cost and market values by reference to year-end valuation for selected securities.
d. Recalculate gains and/or losses on disposals.

23. Which of the following controls would an entity most likely use in safeguarding
against the loss of investment securities?
a. A designated member of the board of directors controls the securities in a bank safe deposit
box.
b. An independent trust company that has no direct contact with the employees who have
record-keeping responsibilities has possession of securities.
c. The internal auditor verifies the investment securities in the entity’s safe each year on the
balance sheet date.
d. The independent auditor traces all purchases and sales of investment securities through the
subsidiary ledgers to the general ledger.

Financing Cycle
24. One control objective of the financing/treasury cycle is the proper authorization
of company transactions dealing with debt and equity instruments. Which of the following
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 controls would best meet this objective?
a. The company serves as its own registrar and transfer agent.
b. Separation of responsibility for custody of funds from recording the transaction.
c. Written company policies requiring review of major funding/repayment proposals by the board
of directors.
d. Use of an underwriter in all cases of new issue of debt or equity instruments.

25. All corporate capital stock transactions should ultimately be traced to the

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Sales, Receivables, and Cash Receipts

1. Which of the following procedures concerning accounts receivable would an auditor most
likely perform to obtain evidence in support of an assessed level of control risk below the
maximum?
A. Observing an entity’s employee prepare the schedule of past due accounts receivable.
B. Sending confirmation requests to an entity’s principal customers to verify the existence of
accounts receivable.
C. Inspecting an entity’s analysis of accounts receivable for unusual balances.
D. Comparing an entity’s uncollectible accounts expense to actual uncollectible accounts
receivable.

Auditor uses results of tests of controls to support assessing level of control risk below maximum;
observing an entity's employee is a test of control to evaluate the effectiveness the process of
preparing an accurate schedule of past due accounts

2. Which of the following procedures would an auditor most likely perform to test controls relating
to management’s assertion about the completeness of cash receipts for cash sales at a retail
outlet?
A. Observe the consistency of the employees’ use of cash registers and tapes.
B. Inquire about employees’ access to
recorded but undeposited cash.
C. Trace deposits in the cash receipts journal to the cash balance in the general ledger.
D. Compare the cash balance in the general ledger with the bank confirmation request.

Use of cash registers and tapes helps assure that all such sales are recorded

3. Sound internal control dictates that immediately upon receiving checks from customers by
mail, a responsible employee should
A. Add the checks to the daily cash summary.

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B. Verify that each check is supported by a prenumbered sales invoice.
C. Prepare a duplicate listing of checks received.
D. Record the checks in the cash receipts journal.

For adequate documentation the preparation of the listing of checks received is used as a source
document. The listing of checks received are the sent to employee responsible for depositing
the checks at the end of the day and the other list is sent to the accounting department so
they can post to the cash receipts journal

4. Tracing shipping documents to prenumbered sales invoices provides evidence that

A. No duplicate shipments or billings occurred.
B. Shipments to customers were properly invoiced.
C. All goods ordered by customers were shipped.
D. All prenumbered sales invoices were accounted for.

Shipping documents relate to shipments to customers, tracing them to sales invoices will provide
evidence on whether sales invoices were prepared

5. Which of the following controls most likely would reduce the risk of diversion of customer
receipts by an entity’s employees?
A. A bank lockbox system.
B. Prenumbered remittance advices.
C. Monthly bank reconciliations.
D. Daily deposit of cash receipts.

Bank lockbox system eliminates employee contact with cash receipts. D incorrect; may reduce
the risk of diversion but is not as effective as a bank lockbox system

6. An auditor suspects that a client’s cashier is misappropriating cash receipts for personal use
by lapping customer checks received in the mail. In attempting to

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uncover this embezzlement scheme, the auditor most likely would compare the
A. Dates checks are deposited per bank statements with the dates remittance credits are
recorded.
B. Daily cash summaries with the sums of the cash receipts journal entries.
C. Individual bank deposit slips with the details of the monthly bank statements.
D. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are
actually recorded.

Lapping will result in a delay in the recording of specific remittance credits on the financial
records, but the checks will be deposited in the bank as they are received Lapping: clerk steals
money from one check and covers it up by stealing from the new customer, etc.

7. Upon receipt of customers’ checks in the mailroom, a responsible employee should prepare
a remittance listing that is forwarded to the cashier. A copy of the listing should be sent to the
A. Internal auditor to investigate the listing for unusual transactions.
B. Treasurer to compare the listing with the monthly bank statement.
C. Accounts receivable bookkeeper to update the subsidiary accounts receivable records.
D. Entity’s bank to compare the listing with the cashier’s deposit slip.

Accounts receivable bookkeeper will use the listing to update the subsidiary accounts receivable
records

8. Which of the following procedures most likely would not be a control designed to reduce the
risk of misstatements in the billing process?
A. Comparing control totals for shipping documents with corresponding totals for sales invoices.
B. Using computer programmed controls on the pricing and mathematical accuracy of sales
invoices.

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C. Matching shipping documents with approved sales orders before invoice preparation.
D. Reconciling the control totals for sales invoices with the accounts receivable
subsidiary ledger.

The reconciliation of the control totals for sales invoices with the accounts receivable subsidiary
ledger will follow billing; thus billing errors have already occurred

9. Which of the following audit procedures would an auditor most likely perform to test controls
relating to management’s assertion concerning the completeness of sales transactions?
A. Verify that extensions and footings on the entity’s sales invoices and monthly customer
statements have been recomputed.
B. Inspect the entity’s reports of prenumbered shipping documents that have not been
recorded in the sales journal.
C. Compare the invoiced prices on prenumbered sales invoices to the entity’s authorized price
list.
D. Inquire about the entity’s credit granting policies and the consistent application of credit
checks.

Inspection of shipping documents that have not been recorded in the sales journal will possibly
reveal items that have been sold but not recorded as sales

10. Which of the following controls most likely would assure that all billed sales are
correctly posted to the accounts receivable ledger?
A. Daily sales summaries are compared to daily postings to the accounts receivable
ledger.
B. Each sales invoice is supported by a prenumbered shipping document.
C. The accounts receivable ledger is reconciled daily to the control account in the general ledger.
D. Each shipment on credit is supported by a prenumbered sales invoice.

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Daily sales summary will include all billed sales, comparing this to the accounts receivable ledger
will provide the evidence on whether billed sales are correctly posted

11. An auditor tests an entity’s policy of obtaining credit approval before shipping
goods to customers in support of management’s financial statement assertion of
A. Valuation or allocation.
B. Completeness.
C. Existence or occurrence.
D. Rights and obligations.

Testing credit approval helps assure that goods are shipped to customers who are likely to be
able to pay; the valuation assertion for receivables is being directly tested

12. Which of the following controls most likely would help ensure that all credit sales
transactions of an entity are recorded?
A. 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.
B. The accounting department supervisor independently reconciles the accounts receivable
subsidiary ledger to the accounts receivable control account monthly.
C. The accounting department supervisor controls the mailing of monthly statements to
customers and investigates any differences reported by customers.
D. The billing department supervisor matches prenumbered shipping documents with
entries in the sales journal.

Matching of shipping documents with entries in the sales journal will provide assurance that all
shipped items have been completely recorded

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13. Which of the following controls most likely would be effective in offsetting the
tendency of sales personnel to maximize sales volume at the expense of high bad debt write-
offs?
A. Employees responsible for authorizing sales and bad debt write-offs are denied access to
cash.
B. Shipping documents and sales invoices are matched by an employee who does not have
authority to write off bad debts.
C. Employees involved in the credit- granting function are separated from the sales
function.
D. Subsidiary accounts receivable records are reconciled to the control account by an employee
independent of the authorization of credit.

Segregation of the authorization of credit from the sales function will allow an independent
review of the creditworthiness of customers. Will not be
allowed to make sales to those who have bad credit.

14. Proper authorization of write-offs of uncollectible accounts should be approved in

which of the following departments?
A. Accounts receivable.
B. Credit.
C. Accounts payable.
D. Treasurer.

Treasurer is independent of the various functions, the treasurer's department is likely to have
knowledge to help make proper decisions of this nature

15. Employers bond employees who handle cash receipts because fidelity bonds
reduce the possibility of employing dishonest individuals and
A. Protect employees who make unintentional misstatements from possible monetary damages
resulting from their misstatements.
B. Deter dishonesty by making employees aware that insurance companies may
investigate and prosecute dishonest acts.

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C. Facilitate an independent monitoring of the receiving and depositing of cash receipts.
D. Force employees in positions of trust to take periodic vacations and rotate their assigned
duties.

16. During the consideration of a small business client’s internal control, 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 ledger.
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 detail accounts receivable accounts to the amount
shown in the ledger.

Owner's review could help establish that fraudulent memos had not been issued for receivables
which had in actuality been collected by the clerk. When reviewing credit memos, there should
be a receiving report for sales returns for which credit memos have been generated.

17. When a customer fails to include a remittance advice with a payment, it is common
practice for the person opening the mail to prepare one. Consequently, mail should be opened
by which of the following four company employees?
A. Credit manager.
B. Receptionist.
C. Sales manager.
D. Accounts receivable clerk.

Receptionist is independent of the sales function

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Purchases, Payables, and Cash Disbursements
18. To provide assurance that each voucher is submitted and paid only once, an
auditor most likely would examine a sample of paid vouchers and determine whether each
voucher is
A. Supported by a vendor’s invoice.
B. Stamped “paid” by the check
signer.
C. Prenumbered and accounted for.
D. Approved for authorized purchases.

19. In testing controls over cash disbursements, an auditor most likely would
determine that the person who signs checks also
A. Reviews the monthly bank reconciliation.
B. Returns the checks to accounts payable.
C. Is denied access to the supporting documents.
D. Is responsible for mailing the checks.

Takes out the element that another employee could cash their check for themselves

20. In assessing control risk for purchases, an auditor vouches a sample of entries in
the voucher register to the supporting documents. Which assertion would this test of controls
most likely support?
A. Completeness.
B. Existence or occurrence.
C. Valuation or allocation.
D. Rights and obligations.

Existence or occurrence assertion addresses whether recorded entries are valid and the direction
of this test is from the recorded entry in the voucher register to the supporting documents

21. Which of the following controls is not usually performed in the vouchers payable
department?
A. Matching the vendor’s invoice with the
related receiving report.

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B. Approving vouchers for payment by having an authorized employee sign the vouchers.
C. Indicating the asset and expense accounts to be debited.
D. Accounting for unused prenumbered purchase orders and receiving
reports.

Vouchers payable department will not have access to unused prenumbered purchased orders
and receiving reports.

22. With properly designed internal control, the same employee most likely would
match vendors’ invoices with receiving reports and also
A. Post the detailed accounts payable records.
B. Recompute the calculations on
vendors’ invoices.
C. Reconcile the accounts payable ledger.
D. Cancel vendors’ invoices after
payment.

Should ensure that amounts are correct

23. An entity’s internal control requires for every check request that there be an
approved voucher, supported by a prenumbered purchase order and a prenumbered receiving
report. To determine whether checks are being issued for unauthorized expenditures, an
auditor most likely would select items for testing from the population of all
A. Purchase orders.
B. Canceled checks.
C. Receiving reports.
D. Approved vouchers.

Sample of canceled checks should be compared with the rest of these documents. If a check
does not have the support, it may be unauthorized

24. Which of the following questions would most likely be included in an internal control
questionnaire concerning the completeness assertion for purchases?

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A. Is an authorized purchase order required before the receiving department can accept a
shipment or the vouchers payable department can record a voucher?
B. Are purchase requisitions prenumbered and independently matched with vendor
invoices?
C. Is the unpaid voucher file periodically reconciled with inventory records by an employee who
does not have access to purchase requisitions?
D. Are purchase orders, receiving reports, and vouchers prenumbered and
periodically accounted for?

Prenumbering and accounting for these documents will allow a company to determine that
purchases are completely recorded

25. For effective internal control, the accounts payable department generally should
A. Stamp, perforate, or otherwise cancel supporting documentation after payment is mailed.
B. Ascertain that each requisition is approved as to price, quantity, and quality by an authorized
employee.
C. Obliterate the quantity ordered on the receiving department copy of the purchase order.
D. Establish the agreement of the vendor’s invoice with the receiving report and purchase
order.

AP department should establish the agreement in order to provide assurance that the item was
both ordered and received

26. Internal control is strengthened when the quantity of merchandise ordered is

omitted from the copy of the purchase order sent to the
A. Department that initiated the requisition.
B. Receiving department.
C. Purchasing agent.
D. Accounts payable department.

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If receiving department is unaware of the correct quantity, the can provide an independent count
of the quantities received

27. A client erroneously recorded a large purchase twice. Which of the following
internal control measures would be most likely to detect this error in a timely and efficient
manner?
A. Footing the purchases journal.
B. Reconciling vendors’ monthly statements with subsidiary payable ledger accounts.
C. Tracing totals from the purchases journal to the ledger accounts.
D. Sending written quarterly confirmations to all vendors.

This will disclose the error because the vendors' monthly statements are an outside source,
where in (c) they are both internally produced documents

28. With well-designed internal control, employees in the same department most likely
would approve purchase orders, and also
A. Reconcile the open invoice file.
B. Inspect goods upon receipt.
C. Authorize requisitions of goods.
D. Negotiate terms with vendors.

Purchases department will normally approve purchase orders and negotiate terms of purchase
with vendors

Personnel and Payroll

29. An auditor vouched data for a sample of employees in a payroll register to
approved clock card data to provide assurance that
A. Payments to employees are computed at authorized rates.
B. Employees work the number of hours for which they are paid.
C. Segregation of duties exist between the preparation and distribution of the payroll.
D. Controls relating to unclaimed payroll checks are operating effectively.

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30. Which of the following is a control that most likely could help prevent employee
payroll fraud?
A. The personnel department promptly sends employee termination notices to the payroll
supervisor.
B. Employees who distribute payroll checks forward unclaimed payroll checks to the absent
employees’ supervisors.
C. Salary rates resulting from new hires are approved by the payroll supervisor.
D. Total hours used for determination of gross pay are calculated by the payroll supervisor.

Prompt notification of the payroll supervisor concerning terminations will lead to timely removal
of terminated employees from the payroll

31. In determining the effectiveness of an entity’s controls relating to the existence or

occurrence assertion for payroll transactions, an auditor most likely would inquire about and
A. Observe the segregation of duties concerning personnel responsibilities and
payroll disbursement.
B. Inspect evidence of accounting for prenumbered payroll checks.
C. Recompute the payroll deductions for employee fringe benefits.
D. Verify the preparation of the monthly payroll account bank reconciliation.

Proper segregation of duties between personnel and payroll disbursement eliminates many
frauds in which fake employees are being paid

32. An auditor most likely would assess control risk at a high level if the payroll
department supervisor is responsible for
A. Examining authorization forms for new employees.
B. Comparing payroll registers with original batch transmittal data.

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C. Authorizing payroll rate changes for all employees.
D. Hiring all subordinate payroll department employees.

Payroll is a recordkeeping function, should not authorize payroll change rates. Recordkeeping,
authorization and custody are major segregation of duties.

33. Which of the following controls most likely would prevent direct labor hours from
being charged to manufacturing overhead?
A. Periodic independent counts of work in process for comparison to recorded amounts.
B. Comparison of daily journal entries with approved production orders.
C. Use of time tickets to record actual labor worked on production orders.
D. Reconciliation of work-in-process inventory with periodic cost budgets.

Time tickets are coded to the specific project direct labor should be charged to

34. In meeting the control objective of safeguarding of assets, which department

should be responsible for
A. Distribution of paychecks: Treasurer; Custody of unclaimed paychecks: Treasurer
B. Distribution of paychecks: Payroll; Custody of unclaimed paychecks: Treasurer
C. Distribution of paychecks: Treasurer; Custody of unclaimed paychecks: Payroll
D. Distribution of paychecks: Payroll; Custody of unclaimed paychecks: Payroll

Custody function should not be performed by the payroll department (recordkeeping)

35. Proper internal control over the cash payroll function would mandate which of the
following?
A. The payroll clerk should fill the envelopes with cash and a computation of the net wages.

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B. Unclaimed pay envelopes should be retained by the paymaster.
C. Each employee should be asked to sign a receipt.
D. A separate checking account for payroll be maintained.

Sign receipt to provide assurance correct amounts were disbursed

36. 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 recordkeeping responsibility.
C. Human resources function from the controllership function.
D. Administrative controls from the internal accounting controls.

Hiring: authorization function, distribution; custody function; these two functions must be done by
two different people or departments

37. 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

Get unclaimed cash out of the fir'ms physical control

38. The auditor may observe the distribution of paychecks to ascertain whether
A. Pay rate authorization is properly separated from the operating function.
B. Deductions from gross pay are calculated correctly and are properly authorized.
C. Employees of record actually exist and are employed by the client.
D. Paychecks agree with the payroll register and the time cards.

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39. Which of the following departments most likely would approve changes in pay rates and
deductions from employee salaries?
A. Personnel.
B. Treasurer.
C. Controller.
D. Payroll.

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a. Minutes of the meetings of the Board of Directors
b. Cash receipts journal
c. Cash disbursements journal
d. Numbered stock certificates

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