AUDITING- INTERNAL CONTROL 2 Flashcards
1
Q
- 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 confi rmation 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.
A
- (a) The requirement is to identify the accounts
receivable auditing procedure that an auditor would most
likely perform to obtain support for an assessed level of
control risk below the maximum. Since an auditor uses the
results of tests of controls to support an assessed level of
control risk below the maximum, we are attempting to identify
a test of a control. Answer (a) is correct because observing an
entity’s employee prepare the schedule of past due accounts
receivable is a test of a control to evaluate the effectiveness
the process of preparing an accurate schedule of past due
accounts; if the process is found to be effective it may lead to
a reduction in the assessed level of control risk. Answer (b) is
incorrect because the confi rmation of accounts receivable is a
substantive test, not a test of a control. Answer (c) is incorrect
because the inspection of accounts receivable for unusual
balances and comparing uncollectible accounts expense to
actual accounts expense is ordinarily an analytical procedure
performed as a substantive test. Answer (d) is incorrect
because comparing uncollectible accounts expense to actual
uncollectible accounts is ordinarily a substantive test
2
Q
- 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 confi rmation request.
A
- (a) The requirement is to identify the procedure an
auditor most likely would perform to test controls relating
to management’s assertion about the completeness of cash
receipts for cash sales at a retail outlet. Answer (a) is correct
because the use of cash registers and tapes helps assure that
all such sales are recorded. Answer (b) is incorrect because
the cash has already been recorded. Answer (c) is incorrect
because the procedure only deals with recorded deposits,
and therefore the completeness assertion is not addressed
as directly as in answer (a). Answer (d) is incorrect because
one would not expect the cash balance in the general
ledger to agree with the bank confi rmation request amount
due to items in transit and outstanding at the point of
reconciliation.
3
Q
- 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.
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
A
- (c) The requirement is to identify the proper procedure
to be performed immediately upon receipt of checks by
mail. Sound internal control requires the use of adequate
documentation to ensure that all transactions are properly
recorded. This helps the company attain the fi nancial statement
assertion of completeness. Answer (c) is correct because the
preparation of a duplicate listing of checks received provides
the company with a source document of all the checks
received that day. One list is then forwarded to the employee
responsible for depositing the checks at the end of the day and
the other list is sent to the accounting department so that they
can post the amount to the cash receipts journal. Answer (a)
is incorrect because the daily cash summary will ordinarily
be prepared at the end of the day when all checks have been
received. Answer (b) is incorrect because checks need not be
compared to a sales invoice. Answer (d) is incorrect because
the employee opening the mail should not also perform the
recordkeeping function of recording the checks in the cash
receipts journal
4
Q
- To obtain audit evidence about control risk, an auditor
selects tests from a variety of techniques including
a. Inquiry.
b. Analytical procedures.
c. Calculation.
d. Confi rmation.
A
- (a) The requirement is to identify an approach that
auditors use to obtain audit evidence about control risk.
Answer (a) is correct because auditors test controls to provide
evidence for their assessment of control risk through inquiries
of appropriate personnel, inspection of documents and records,
observation of the application of controls, and reperformance
of the application of the policy or procedure. Answers (b),
(c), and (d) are incorrect because analytical procedures,
calculation, and confi rmation relate more directly to
substantive testing and are not primary methods to test controls
for purposes of assessing control risk.
5
Q
- Which of the following is least likely to be evidence the
auditor examines to determine whether controls are operating
effectively?
a. Records documenting usage of computer programs.
b. Canceled supporting documents.
c. Confi rmations of accounts receivable.
d. Signatures on authorization forms.
A
- (c) The requirement is to identify the least likely type
of evidence the auditor will examine to determine whether
controls are operating effectively. Answer (c) is correct
because confi rmation of accounts receivable is a substantive
test, not a test of a control. Answer (a) is incorrect because
records documenting the usage of computer programs may be
tested to determine whether access is appropriately controlled.
Answer (b) is incorrect because examining canceled
supporting documents may help the auditor to determine
that the structure will not allow duplicate billing to result in
multiple payments. Answer (d) is incorrect because proper
signatures will help the auditor to determine whether the
authorization controls are functioning adequately.
6
Q
- 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.
A
- (b) The requirement is to determine the type of
evidence obtained when tracing shipping documents to
prenumbered sales invoices. Answer (b) is correct because
the shipping documents relate to shipments to customers,
and tracing them to sales invoices will provide evidence on
whether sales invoices were prepared. Answer (a) is incorrect because duplicate shipments or billings will not in general
be detected by tracing individual shipping documents to
prenumbered sales invoices. Answer (c) is incorrect because an
auditor will trace from customer orders to shipping documents
to determine whether all goods ordered were shipped.
Answer (d) is incorrect because an auditor will account for
the sequence of sales invoices to determine whether all sale
invoices were accounted for
7
Q
- 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.
A
- (a) The requirement is to identify the control most
likely to reduce the risk of diversion of customer receipts
by an entity’s employees. Answer (a) is correct because a
bank lockbox system eliminates employee contact with cash
receipts, and thereby greatly reduces the risk of diversion by
employees. Answer (b) is incorrect because remittance advices
are ordinarily prenumbered using the numbering schemes
of the various customers and not of the client; also, even if
a prenumbering system is instituted, diffi culties remain in
assuring that all receipts are recorded. Answer (c) is incorrect
because a monthly bank reconciliation is only likely to be
effective when receipts are deposited and then abstracted.
Answer (d) is incorrect because while the daily deposit of cash
receipts may reduce the risk of employee diversion of receipts,
the procedure is not as effective as the bank lockbox system,
which eliminates employee contact with the receipts.
8
Q
- 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 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.
A
- (a) The requirement is to identify the best listed
procedure for detecting the lapping of cash receipts by the
client’s cashier through use of customer checks received in
the mail. Answer (a) is correct because lapping will result
in a delay in the recording of specifi c remittance credits on
the fi nancial records, but the checks will be deposited in the
bank as they are received. Answer (b) is incorrect because the
daily cash summaries will include the same sums as the cash
receipts journal entries. Answer (c) is incorrect because the
bank deposit slips will be identical to any details included in
the monthly bank statements. Answer (d) is incorrect because
while the write-off of a receivable may help the individual
involved in the lapping to avoid repayment, no lag is to be
expected between authorization of the write-off and the date it
is actually recorded.
9
Q
- 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.
A
- (a) The requirement is to identify the control that most
likely would assure that all billed sales are correctly posted to
the accounts receivable ledger. Answer (a) is correct because
the daily sales summary will include all “billed” sales for
a particular day. Comparing this summary to the postings
to the accounts receivable ledger will provide evidence
on whether billed sales are correctly posted. Answer (b)
is incorrect because comparing sales invoices to shipping
documents provides evidence on whether invoiced sales have
been shipped. Answer (c) is incorrect because reconciling
the accounts receivable ledger to the control account will
not provide assurance that all billed sales were posted in that
both the receivable ledger and the control account may have
omitted the sales. Answer (d) is incorrect because comparing
shipments with sales invoices provides evidence on whether all
shipments have been invoiced, not on whether all billed sales
are correctly posted.
10
Q
- An auditor tests an entity’s policy of obtaining credit
approval before shipping goods to customers in support of
management’s fi nancial statement assertion of
a. Valuation or allocation.
b. Completeness.
c. Existence or occurrence.
d. Rights and obligations.
A
- (a) The requirement is to determine the fi nancial
statement assertion being most directly tested when an auditor
tests an entity’s policy of obtaining credit approval before
shipping goods to customers. Answer (a) is correct because
testing credit approval helps assure that goods are shipped
to customers who are likely to be able to pay; accordingly
the valuation assertion for receivables is being directly
tested. Answer (b) is incorrect because completeness deals
with whether all transactions and accounts are recorded.
Answer (c) is incorrect because existence deals with whether
assets exist at a given date and whether recorded transactions
have occurred during a given period. Answer (d) is incorrect
because rights and obligations deal with whether assets are
the rights of the entity and liabilities are the obligations of the
entity at a given date.
11
Q
- 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.
A
- (d) The requirement is to identify the control that most
likely would help ensure that all credit sales transactions
are recorded. Answer (d) is correct because the matching
of shipping documents with entries in the sales journal
will provide assurance that all shipped items (sales) have
been completely recorded. Answer (a) is incorrect because
comparison of approved sales orders to authorized credit
limits and balances will help ensure that customer credit
limits are not exceeded, rather than the complete recording
of credit sales. Answer (b) is incorrect because reconciliation of the accounts receivable subsidiary ledger to the accounts
receivable control account will provide only a limited amount
of control over the complete recording of sales. The control
is incomplete since, for example, a sale that has not been
recorded in either the subsidiary or control accounts will
not be detected. Answer (c) is incorrect because monthly
statements generally will not be sent to customers to whom no
sales have been recorded.
12
Q
- 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.
A
- (c) The requirement is to identify the control that will
be most effective in offsetting the tendency of sales personnel
to maximize sales volume at the expense of high bad debt
write-offs. Answer (c) is correct because segregation of the
authorization of credit from the sales function will allow an
independent review of the creditworthiness of customers.
Answer (a) is incorrect because while denying access to cash
by employees responsible for sales and bad debt write-offs
may deter embezzlements, the problem of high bad debt
write-offs is likely to remain. Answer (b) is incorrect because
while so segregating the matching of shipping documents and
sales invoices may help assure that items are shipped properly
and subsequently recorded, it will not signifi cantly affect bad
debts. Answer (d) is incorrect because while independent
reconciliation of control and subsidiary accounts receivable
records may defer embezzlements, bad debt write-offs will not
be affected.
13
Q
- 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
A
- (b) The requirement is to identify the function that is
consistent with matching vendors’ invoices with receiving
reports. Answer (b) is correct because while matching
invoices and receiving reports, the employee might effectively
recompute the calculations on the vendors’ invoices to
determine that the amounts are proper. Answers (a) and (c)
are incorrect. The individual who matches the invoices and
receiving reports will often also approve them for payment.
Therefore, this individual should not also post accounts
payable records or reconcile the accounts payable ledger.
Answer (d) is incorrect because the individual who controls
the signing of the checks should cancel the invoices after
payment.
14
Q
- 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.
A
- (b) The requirement is to identify the population
from which items should be selected to determine whether
checks are being issued for unauthorized expenditures.
Answer (b) is correct because a sample of canceled checks
should be selected and compared with the approved
vouchers, a prenumbered purchase order and prenumbered
receiving reports. A canceled check that does not have
such support may have been unauthorized. Answers (a),
(c), and (d) are all incorrect because selecting items from
purchase orders, receiving reports, or approved vouchers
will not reveal circumstances in which a check was issued
without that supporting document. For example, when
selecting a sample from purchase orders, one would not
discover a situation in which a check had been issued
without a purchase order.
15
Q
- Which of the following questions would most likely be
included in an internal control questionnaire concerning the
completeness assertion for purchases?
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 fi le 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?
A
- (d) The requirement is to determine which question
would most likely be included in an internal control
questionnaire concerning the completeness assertion for
purchases. Answer (d) is correct because prenumbering
and accounting for purchase orders, receiving reports, and
vouchers will allow a company to determine that purchases are
completely recorded. For example, in examining a receiving
report the client might discover that the purchase was not
recorded. Answer (a) is incorrect because requiring a purchase
order before a shipment is accepted will address whether or not
the shipment has been ordered. Answer (b) is incorrect because
matching purchase requisitions with vendor invoices does not
directly address whether the purchase is recorded. Answer (c)
is incorrect because the unpaid voucher fi le represents items that have already been recorded, and thus will not directly
address the completeness of the recording of purchases.
