MULTIPLE CHOICE

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.
(AICPA ADAPTED)

2. To determine whether internal control effectively minimized errors of failure to bill a customer
for a shipment, the auditor would select a sample of transactions from the population represented
by the
a. Customer order file.
b. Shipping records file.
c. Subsidiary customer accounts ledger.
d. Sales invoice.
(AICPA ADAPTED)

3. Which of the following would the auditor consider to be an incompatible operation if the cashier
receives remittances from the mailroom?
a. The cashier posts the receipts to the accounts receivable subsidiary ledger.
b. The cashier makes the daily deposit at a local bank.
c. The cashier prepares the daily deposit.
d. The cashier endorses the checks.
(AICPA ADAPTED)

4.
a.
b.
c.
d.

The least crucial element of control over cash is

Separation of cash record keeping from custody of cash.
Preparation of the monthly bank reconciliation.
Batch processing of checks.
Separation of cash receipts from cash disbursements.

5.
a.
b.
c.
d.

Which of the following is not a universal rule for achieving control over cash?
Separate the cash-handling and record-keeping functions.
Decentralize the receiving of cash as much as possible.
Deposit each day's cash receipts by the end of the day.
Have bank reconciliations performed by employees who do not handle cash.
(AICPA ADAPTED)

6. 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.
(AICPA ADAPTED)

(AICPA ADAPTED)

7. To verify that all sales transactions have been recorded, a test of transactions should be completed
on a representative sample drawn from
a. Entries in the sales journal.
b. The billing clerk's file of sales orders.
c. A file of duplicate copies of sales invoices for which all prenumbered forms in the series have
been accounted.
d. The shipping clerk's file of duplicate copies of shipping documents.
(AICPA ADAPTED)

8.
a.
b.
c.

9.
a.
b.
c.
d.

Which of the following is not a primary objective of the auditor in tests of accounts receivable?
Determine the approximate realizable value.
Determine the adequacy of internal controls.
Establish the validity of the receivables.
Determine the approximate time of collectibility of the receivables.
(AICPA ADAPTED)

10.
a.
b.
c.
d.

Tracing copies of sales invoices to shipping documents will provide evidence that all
Shipments to customers were recorded as receivables.
Billed sales were shipped.
Debits to the subsidiary accounts receivable ledger are for sales shipped.
Shipments to customers were billed.
(AICPA ADAPTED)

11. 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.
(AICPA ADAPTED)

12.
a.
b.
c.
d.

Which of the following functions is common to the revenue/receipt cycle?

Resources are acquired from vendors and employees in exchange for obligations to pay.
Resources are sold to customers in exchange for promises for future payments.
Resources are acquired from employees in exchange for obligations to pay.
Capital funds are received from investors and creditors.

13.
a.
b.
c.
d.

Which of the following is not a common activity of the revenue/receipt cycle?

Order entry.
Inventory control.
Receiving.
Cash collection.

The negative form of accounts receivable confirmation request is particularly useful except when
Control procedures surrounding accounts receivable are considered to be effective.
A large number of small balances are involved.
The auditor has reason to believe the persons receiving the requests are likely to give them
consideration.
d. Individual account balances are relatively large.
(AICPA ADAPTED)

a
b.

14. To achieve control when there is no Billing Department, the billing function should be performed
by the
a. Accounting Department.
Sales Department.
c. Shipping Department.
d. Credit and Collection Department.
(AICPA ADAPTED)
b

a.
b.
c.
d.

15. The person who opens the mail commonly prepares a remittance advice when a customer fails to
return one with a payment. Consequently, mail should be opened by the:
Credit manager.
Receptionist.
Sales manager.
Accounts receivable clerk.
(AICPA ADAPTED)
a

16. 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.
(AICPA ADAPTED)

17. 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.
(AICPA
ADAPTED)

a.
b.
c.
d.

a.
b.
c.

a.
b.
c.

18. During the review of a small owner-managed company's internal controls, the auditor discovers
that the accounts receivable clerk approves credit memos and has access to cash. Which of the
following controls would offset this deficiency?
The owner reviews errors in billings to customers and postings to subsidiary records.
The controller receives the monthly bank statement directly and reconciles the checking accounts.
The owner reviews credit memos after they are recorded.
The controller reconciles the detailed receivables records to the general ledger.
(AICPA ADAPTED)
d 19. Defective merchandise returned by customers should be presented to
Inventory control personnel.
Sales personnel.
Purchasing personnel.
d.
Receiving personnel.
c 20. A sales cutoff test complements tests of
Sales returns.
Cash.
Accounts receivable.

d.

Sales allowances.
b

a.
b.
c.
d.

(AICPA ADAPTED)

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

22.
A.
B.
C.
D.

Following are four steps an auditor undertakes in assessing control risk:

Determine what control procedures are used by the entity.
Identify the system's control objectives.
Design tests of controls.
Consider the potential errors or irregularities that could result.

a.
b.
c.
d.

In what order would an auditor perform these steps?

DBAC.
BCDA.
BDAC.
DCAB.

23.
a.
b.
c.
d.

The purpose of tests of controls over shipping is to

Determine whether billed goods have been shipped.
Determine whether shipments are billed.
Determine whether shipping department personnel are competent.
Determine whether credit is approved before goods are shipped.

24.
a.
b.
c.
d.

The purpose of tests of controls over billing is to

Determine whether billed goods have been shipped.
Determine whether shipments are billed.
Determine whether billing department personnel are competent.
Determine whether credit is approved before goods are billed.