Auditing (Theoretical Concepts): TRANSACTION CYCLES

PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION

TRANSACTION CYCLES

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. 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.

3. 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.

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.

5. An auditor most likely would review a client’s periodic accounting for the numerical sequence of shipping
documents and sales invoices to support management’s financial statement assertion of
A. Existence
B. Rights and obligations
C. Completeness
D. Valuation and allocation

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

7. Which of the following control activities in an entity’s revenue/receipt cycle would provide reasonable assurance
that all billed sales are correctly posted to the accounts receivable ledger?
A. Each shipment of goods on credit is supported by a prenumbered sales invoice.
B. The accounts receivable subsidiary ledger is reconciled daily to the accounts receivable control account in the
general ledger.
C. Daily sales summaries are compared to daily postings to the accounts receivable ledger.
D. Each sales invoice is supported by a prenumbered shipping document.

8. Defective merchandise returned by customers should be presented to

A. Inventory control personnel.
B. Sales personnel.
C. Purchasing personnel.
D. Receiving personnel.

9. 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.

10. Which of the following would best protect a company that wishes to prevent lapping?
A. Segregate duties so that accounting has no access to incoming mail.
B. Segregate duties so that no employee has access both to checks from customers and to currency from daily
cash receipts.
C. Have customers send payments directly to the company's bank.
D. Request that customers checks be made payable to the company and be addressed to the treasurer.

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Auditing (Theoretical Concepts): TRANSACTION CYCLES
11. A client's expenditure/disbursement cycle begins with requisitions from user departments and ends with the
receipt of materials and the recognition of a liability. An auditor's primary objective in reviewing this cycle is to
A. Evaluate the reliability of information generated by the cycle.
B. Investigate the physical handling and recording of unusual acquisitions of materials.
C. Consider the need to be on hand for the annual physical inventory count if this system is not functioning
properly.
D. Ascertain that materials said to be ordered, received, and paid for are on hand.

12. An auditor is planning the consideration of internal control over the expenditure/disbursement cycle. The auditor
will be least influenced by
A. The availability of a company procedures manual describing purchasing and cash disbursement procedures.
B. The scope and results of work performed by the company's internal auditors.
C. The existence within the purchasing department of control procedures that offset deficiencies.
D. The strength or deficiency of control procedures in other areas, e.g., sales and accounts receivable.

13. The accounts payable department receives the purchase order form to accomplish all of the following except to
A. Compare invoice price to purchase order price
B. Ensure that the purchase had been properly authorized
C. Ensure that the goods had been received by the party requesting the goods
D. Compare quantity ordered to quantity purchased

14. An auditor performs a test to determine whether all merchandise for which the client was billed was received. The
population for this test consists of all:
A. merchandise received.
B. vendors' invoices.
C. canceled checks.
D. receiving reports.

15. Which of the following controls is not usually performed in the accounts payable department?
A. Indicating on the voucher the affected asset and expense accounts to be debited.
B. Approving vouchers for payment by having an authorized employee sign the vouchers.
C. Accounting for unused prenumbered purchase orders and receiving reports.
D. Matching the vendor’s invoice with the related purchase requisition, purchase order, and receiving report.

16. 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.

17. 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.

18. 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.

19. 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.

20. As an in-charge auditor, you are reviewing a write-up of internal control in cash receipt and disbursement
procedures. Which of the following deficiencies alone should cause you the least concern?
A. Checks are signed by only one person.
B. Signed checks are distributed by the controller to approved payees.
C. The treasurer fails to establish bona fide names and addresses of check payees.
D. Cash disbursements are made directly out of cash receipts.

21. What control objective is served by management's establishing and documenting account distribution procedures?
A. Amounts due to employees should be recorded at the proper amounts, be recorded in the proper period, and
be properly classified.
B. All payroll cash disbursements should be based upon a recognized liability.
C. Payroll and personnel procedures should be established in accordance with management's authorization.
D. Employees should be hired according to criteria authorized by management.

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

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Auditing (Theoretical Concepts): TRANSACTION CYCLES

23. A large retail enterprise has established a policy that requires that the paymaster deliver all unclaimed payroll
checks to the internal auditing department at the end of each payroll distribution day. This policy was most likely
adopted in order to
A. Assure that employees who were absent on a payroll distribution day are not paid for that day.
B. Prevent the paymaster from cashing checks that are unclaimed for several weeks.
C. Prevent a bona fide employee's check from being claimed by another employee.
D. Detect any fictitious employee who may have been placed on the payroll.

24. Of the financial statement accounts listed below, which is not likely affected by the accuracy of payroll and
account distribution?
A. Cost of sales.
B. Accrued taxes.
C. Cash.
D. Finished goods inventory.

25. In the weekly computer run to prepare payroll checks, a check was printed for an employee who had been
terminated the previous week. Which of the following control procedures, if properly utilized, would have been
most effective in preventing the error or assuring prompt detection?
A. A control total for hours worked, prepared from time cards collected by the timekeeping department.
B. Requiring the treasurer's office to account for the numbers of the prenumbered checks issued to the computer
department for the processing of the payroll.
C. Use of a check digit for employee numbers.
D. Use of a header label for the payroll input sheet.

26. Which of the following policies is an internal control weakness related to the acquisition of factory equipment?
A. Advance executive approvals are required for equipment acquisitions.
B. Variances between authorized equipment expenditures and actual costs are to be immediately reported to
management.
C. Depreciation policies are reviewed only once a year.
D. Acquisitions are to be made through and approved by the department in need of the equipment.

27. AAA Manufacturing Corporation mass produces eight different products. The controller who is interested in
strengthening control procedures over the accounting for materials used in production would be most likely to
implement
A. A perpetual inventory system
B. A job order cost accounting system
C. An economic order quantity (EOQ) system
D. A separation of duties among production personnel

28. 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 discounts allowed
C. Sales returns received
D. Cash purchases

29. A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and
submission of coupons for periodic interest collections probably should be delegated to the
A. Chief Accountant
B. Internal Auditor
C. Cashier
D. Treasurer

30. When no independent stock transfer agents are employed and the corporation issues its own stocks and maintains
stock records, canceled stock certificates should
A. Not be defaced but segregated from other stock certificates and retained in a canceled certificates file.
B. Be destroyed to prevent fraudulent reissuance.
C. Be defaced and sent to the secretary of state.
D. Be defaced to prevent reissuance and attached to their corresponding stubs.

SELF-TEST QUIZZERS
1. In considering internal control within the revenue/receipt cycle, what is the purpose of a transaction walk-
through?
A. To assure that employees are performing assigned functions accurately.
B. To confirm the auditor's understanding of the internal control structure.
C. To select documents for detailed tests of controls.
D. To verify the results of the auditor's sampling plan.

2. To gather audit evidence about the proper credit approval of sales, the auditor would select a sample of
documents from the population represented by the
A. Customer order file.
B. Bill of lading file.
C. Subsidiary customers' accounts ledger.
D. Sales invoice file.

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Auditing (Theoretical Concepts): TRANSACTION CYCLES
3. 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.

4. To achieve control when there is no Billing Department, the billing function should be performed by the
A. Accounting Department.
B. Sales Department.
C. Shipping Department.
D. Credit and Collection Department.

5. Which of the following control procedures will likely prevent the concealment of a cash shortage that was
perpetrated by improperly writing off a trade account receivable?
A. Write-offs must be approved by a responsible officer after reviewing Credit Department recommendations and
supporting evidence.
B. Write-offs must be supported by an aging schedule showing that only receivables months overdue have been
written off.
C. Write-offs must be approved by the cashier.
D. Write-offs must be authorized by field sales representatives.

6. 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.

7. To avoid potential errors and irregularities, well-designed controls in the accounts payable area should include a
separation of which of the following functions?
A. Cash disbursements and vendor invoice verification.
B. Vendor invoice verification and merchandise ordering.
C. Physical handling of merchandise received and preparation of receiving reports.
D. Check signing and cancellation of payment documentation.

8. Which of the following is not a common activity of the expenditure/disbursement cycle?

A. Purchasing.
B. Fixed asset additions.
C. Receiving.
D. Recording.

9. Which of the following functions is not appropriate for the accounts payable department?
A. Compare purchase requisitions, purchase orders, receiving reports, and vendors' invoices.
B. Prepare purchase orders.
C. Prepare voucher and daily summary.
D. File voucher package by due date.

10. 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.

11. Based on observations made during an audit, an independent auditor should discuss with management the
effectiveness of procedures that control against the purchase of
A. Supplies purchased from a vendor who offers no trade or cash discounts.
B. Inventory acquired just-in-time.
C. Equipment that is needed but does not qualify for investment tax credit.
D. Supplies ordered without considering potential volume discounts.

12. Internal control is improved 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.

13. An auditor will ordinarily determine whether payroll checks are properly endorsed during the testing of
A. Time cards.
B. The voucher system.
C. Cash in bank.
D. Accrued payroll.

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Auditing (Theoretical Concepts): TRANSACTION CYCLES
14. RIAN, Inc., has changed from a conventional to a computerized payroll clock card system. Factory employees
now record time in and out with magnetic cards, and the computer system automatically updates all payroll
records. Because of this change,
A. The auditor must audit through the computer.
B. Internal control has improved.
C. Part of the audit trail has been lost.
D. The potential for payroll-related fraud has been diminished.

15. Which of the following procedures is most effective in providing reasonable assurance that payroll checks are
distributed only to bona fide employees?
A. An employee independent of payroll preparation compares endorsements on canceled payroll checks with
employee signatures in personnel records.
B. All changes in pay rates and deductions are reviewed and approved by a responsible official independent of
payroll preparation and distribution.
C. All unclaimed paychecks are returned to an employee independent of payroll preparation and distribution.
D. All personnel and payroll records and documents are prenumbered and physically protected from unauthorized
access.

16. Which of the following activities is not a common to the conversion cycle?
A. Maintaining perpetual inventory records.
B. Accounting for fixed asset disposals and retirements.
C. Recording depreciation allocations.
D. Implementing a just-in-time order entry system.

17. When there are numerous property and equipment transactions during the year, an auditor who plans to assess
control risk at a low level usually performs
A. Tests of controls and extensive tests of property and equipment balances at the end of the year.
B. Analytical procedures for current year property and equipment transactions.
C. Tests of controls and limited tests of current year property and equipment transactions.
D. Analytical procedures for property and equipment balances at the end of the year.

18. An auditor has accounted for a sequence of inventory tags and is now going to trace information on a
representative number of tags to the physical inventory sheets. The purpose of this procedure is to obtain
assurance that
A. The final inventory is valued at cost
B. All inventory represented by an inventory tag is listed on the inventory sheets
C. All inventory represented by an inventory tag is bona fide
D. Inventory sheets do not include untagged inventory items

19. Which of the following questions would an auditor most likely include on an internal control questionnaire for notes
payable?
A. Are assets that collateralize note 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 payable authorized by the board of directors?

20. In reviewing and evaluating internal control over marketable securities, the auditor would be specially concerned
about:
A. Recording of stock investments by the controller.
B. Approval of stock investment purchases by the Board of Directors.
C. Access to stock certificates by the corporate treasurer.
D. Access to stock certificates by the controller.

ANSWERS TO SELF-TEST QUIZZERS (BAAAA CABBD DBCCA DCBDD)

"There is no path to happiness: happiness is the path." — Gautama Buddha

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