CHAPTER 7

Question 1

Which of the following is not a function within the inventory and warehousing cycle?
A. Process invoices for shipped goods.
B. Process the goods
C. Ship finished goods
D. Store raw materials

Answer 1

A. Process invoices for shipped goods.

Question 2

The inventory and warehousing cycle can be thought of as having two separate out closely related systems, one involving the actual physical flow of goods, and the other the
A. Related costs
B. Storage of the goods.
C. Internal control over those goods.
D. Prevention of waste, obsolescence, and theft.

Answer 2

A. Related costs

Question 3

In obtaining an understanding of a manufacturing entity’s internal control over inventory balances, an auditor most likely would
A. Analyze the liquidity and turnover ratios of the inventory. B. Perform analytical procedures designed to identify cost variances.
C. Perform test counts of inventory during the entity’s physical count.
D. Review the entity’s descriptions of inventory policies and procedures.

Answer 3

D. Review the entity’s descriptions of inventory policies and procedures.

Question 4

In most manufacturing companies, the inventory and warehousing cycle begins with the
A. Receipt of a customer’s order.
B. Completion of production of a customer’s order.
C. Initiation of production of a customer’s order.
D. Acquisition of raw materials for production of an order.

Answer 4

D. Acquisition of raw materials for production of an order.

Question 5

Which of the following controls would most likely minimize defects in finished goods because of poor quality raw materials?
A. Determination of spoilage at the end of the manufacturing process.
B. Proper handling of work-in-process inventory to prevent damage.
C. Implementation of specifications for purchases.
D. Timely follow-up on unfavorable usage variances.

Answer 5

C. Implementation of specifications for purchases.

Question 6

Receipt of ordered materials by the receiving department will generate the completion of a form called the
A. Bill of lading
B. Receiving report
C. Materials requisition
D. Inventory acquisition summary.

Answer 6

B Receiving report

Question 7

Which of the following controls would be appropriate regarding the release of materials from a stockroom?
7. A. production employees request materials be delivered to their work areas as they need them,
B. Stockroom employees deliver materials to work areas throughout the day to maintain acceptable levels of safety stock - no written records are maintained.
C. Production employees submit approved requisition forms to the stockroom for materials needed.
D. Production employer in need of materials should personally pick up needed materials from the stockroom.

Answer 7

C. Production employees submit approved requisition forms to the stockroom for materials needed.

Question 8

Appropriate control over obsolete materials requires that they be
A. Sorted, treated, and packaged before disposition takes place, in order to obtain the best-selling price.
B. Determined by an approved authority to be lacking in regular usability.
C. Retained within the regular storage area.
D. Carried at cost in the accounting records until the actual disposition takes place.

Answer 8

B. Determined by an approved authority to be lacking in regular usability.

Question 9

9.Which department within a manufacturing company is often responsible for the review of production and scrap reports?
A. Purchasing
B. Accounts payable
C. Accounting
D. Production

Answer 9

C. Accounting

Question 10

Which of the following is a significant audit concern related to the transfer of inventory from one location to another?
A. Recorded transfer occurred. B. Transfers were properly transported.
C. Transfers were properly planned.
D. Transfers represent efficient movement of assets.

Answer 10

A. Recorded transfer occurred.

Question 11

Which of the following is not a common activity within personnel and payroll?
A. Preparing and updating personnel records.
B. Preparing and recording payroll.
C. Distributing paychecks to employees.
D. Initiating termination.

Answer 11

D. Initiating termination.

Question 12

Which of the following best describes proper internal control over payroll?
A. The preparation of the payroll must be under the control of the personnel department.
B. The confidentiality of employee payroll date should be carefully protected to prevent fraud.
C. The duties of hiring, payroll computation, and payment to employees should be segregated.
D. The payment of cash to employees should be replaced with payment of checks

Answer 12

C. The duties of hiring, payroll computation, and payment to employees should be segregated.

Question 13

No individuals with access to timecards, to payroll records, or checks should also be permitted access
A. The computer
B. Job time tickets
C. Personnel records
D. The canceled check files

Answer 13

C. Personnel records

Question 14

The payroll and personnel cycle begins with which of the following events?
A. Interviewing job candidates.
B. Hiring a new employee.
C. Existing employees submitting requests for payment for work performed.
D. Issuance of checks.

Answer 14

B. Hiring a new employee.

Question 15

Which department should be authorized to add and delete employees from the payroll or change pay rates and deductions?
A. The supervising department
B .The accounting department
C. The HR department
D. The President’s office

Answer 15

C. The HR department

Question 16

Which of the following controls would be the most appropriate means to ensure that terminated employees had been removed from the payroll?
A. Reconciling payroll and time-keeping records.
B. Mailing checks to employees’ residences.
C. Establishing direct-deposit procedures with employees’ banks.
D, Establishing computerized limit checks on payroll rates.

Answer 16

A. Reconciling payroll and time-keeping records.

Question 17

Which of the following type of employee typically does not complete timecards?
A. Hourly employees.
B. Salaried employees.
C. All employees must be timecard.
D. Timecards are typically completed by salaried employees but may also be completed by hourly employees.

Answer 17

B. Salaried employees.

Question 18

Which of the following is an effective internal accounting control used to prove that production department employees are properly validating payroll timecards at a time-recording station?
A. Internal auditors should make observations of distribution of paychecks on a surprise basis
B. Timecards should be carefully inspected by those persons who distribute pay envelopes to the employees.
C. One person should be responsible for maintaining records of employee time for which salary payment is not to be made.
D. Daily reports showing time charged to jobs should be approved by the supervisor and compared to the total hours worked on the employee timecards

Answer 18

D. Daily reports showing time charged to jobs should be approved by the supervisor and compared to the total hours worked on the employee timecards

Question 19

It would be appropriate for the payroll department to be responsible for which of the following functions?
A. Approval of employee time records.
B. Maintain records of employment, firings, and raises.
C. Temporary retention of unclaimed employee paychecks.
D. Preparation of governmental reports as to employees’ earnings and withholding taxes.

Answer 19

D. Preparation of governmental reports as to employees’ earnings and withholding taxes.

Question 20

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

Answer 20

B. General accounting

Question 21

The capital acquisition and repayment cycle does not include:
A. Payment of interest
B. Payment of dividends
C. Payment of vendor invoices
D. Acquisition of capital through interest-bearing debt.

Answer 21

C. Payment of vendor invoices

Question 22

Which one of the following is not a characteristic of the capital acquisition and repayment cycle?
A. There is legal relationship between the client and the holder of the equity securities.
B. There is a direct relationship the interest and dividends accounts and debt and equity.
C. Relatively few transactions affect the account balances, but each transaction is often highly material in amount.
D. The exclusion of a few transactions is rarely material by itself.

Answer 22

D. The exclusion of a few transactions is rarely material by itself.

Question 23

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 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 of the transaction. requiring review of major
C. Written company policies funding/repayment proposals by the board of directors.
D. Use of an underwriter in all cases of new issue of debt or equity instruments.

Answer 23

C. Written company policies funding/repayment proposals by the board of directors.

Question 24

Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable?
A. Are assets that collateralize notes payable critically needed for the entity’s continued existence?
B. Are two or more authorized signatures required on checks that repay notes payable?
C. Are the proceeds from notes payable used for the purchase of noncurrent assets?
D. Are direct borrowings on notes payables authorized by the board of directors?

Answer 24

D. Are direct borrowings on notes payables authorized by the board of directors?

Question 25

To achieve effective internal accounting controls over fixed asset additions, a company should establish procedures that require A. Authorization and approval of major fixed asset additions. B. Capitalization of the cost of fixed asset additions in excess of a specific peso amount. C. Classification, as investments, of those fixed asset additions that are not used in the business. D. Performance of recurring fixed asset maintenance work solely by maintenance department employees.

Answer 25

A. Authorization and approval of major fixed asset additions.

Question 26

Which of the following is the most important internal control procedure over acquisitions of property, plant and equipment? A. Establishing a written company policy distinguishing between capital and revenue expenditure. B. Using a budget to forecast and control acquisitions and retirements. C. Analyzing monthly variances between authorized expenditures and actual costs. D. Requiring acquisitions to be made by user department.

Answer 26

B. Using a budget to forecast and control acquisitions and retirements.

Question 27

The auditor interviews the plant manager. The auditor is most likely to rely upon this interview as primary support for an audit conclusion A. The necessity to record a provision for deferred maintenance costs. B. The adequacy of the depreciation expense. C. Capitalization vs. expensing policy. D. AIlocation of fixed and variable cost.

Answer 27

A. The necessity to record a provision for deferred maintenance costs.

Question 28

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

Answer 28

B. Inspection Of equipment and reconciliation with accounting records

Question 29

A company has additional temporary funds to invest. The board of directors decided to purchase marketable securities and assigned the future purchase and sale decisions to a responsible financial executive. The best person(s) to make periodic reviews of the investment activity would be A. The treasurer. B. The investment committee of the board of directors. C. The corporate controller. D. The chief operating officer.

Answer 29

B. The investment committee of the board of directors.

Question 30

Which of the following is not a control designed to protect investment securities? A.Securities should be registered in the name of the owner. B.Securities should be properly controlled physically in order to prevent unauthorized usage. C. Custody over securities should be limited to individuals who have recordkeeping responsibility over the securities. D. Access to securities should be vested in more than one individual.

Answer 30

C. Custody over securities should be limited to individuals who have recordkeeping responsibility over the securities.