Deck 9: Tests of Controls

Question 1

Which of the following tests of control most likely would help assure an auditor that goods shipped are properly billed? Checking that the client has:

A) scanned the sales journal for sequential and unusual entries.
B) examined shipping documents for matching sales invoices.
C) compared the accounts receivable ledger to daily sales summaries.
D) inspected unused sales invoices for consecutive pre-numbering.

Answer 1

B

Question 2

An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control procedures leave no audit trail of documentary evidence, the auditor most likely will test the procedures by:

A) inquiry and analytical procedures.
B) confirmation and observation.
C) observation and inquiry.
D) analytical procedures and confirmation.

Answer 2

C

Question 3

Evidence about which aspect(s) of internal control is usually gained when the auditor is assessing control risk?

A) Existence.
B) Effectiveness.
C) Continuity.
D) All of the given answers.

Answer 3

A

Question 4

Which of the following procedures most likely would provide an auditor with evidence about whether an entity's internal control activities are suitably designed to prevent or detect material misstatements?

A) Performing analytical procedures using data aggregated at a high level.
B) Re-performing the controls for a sample of transactions.
C) Observing the entity's personnel applying the controls.
D) Vouching a sample of transactions directly related to the controls.

Question 5

Tracing bills of lading to sales invoices provides evidence that:

A) invoiced sales were shipped.
B) recorded sales were shipped.
C) shipments to customers were recorded as sales.
D) shipments to customers were invoiced.

Question 6

In the examination of which of the following general ledger accounts will tests of controls be particularly appropriate?

A) Loans payable.
B) Equipment.
C) Sales.
D) Bank charges.

Question 7

Assessing control risk at a level below high most likely would involve:

A) identifying specific internal controls relevant to specific assertions.
B) changing the timing of substantive tests by omitting interim testing and performing the tests at year-end.
C) reducing inherent risk for most of the assertions relevant to significant account balances.
D) performing more extensive substantive tests with larger sample sizes than originally planned.

Question 8

Which of the following audit tests would be regarded as a test of controls?

A) Tests comparing inventory pricing to vendors' invoices.
B) Tests of the specific items making up the balance in a given general ledger account.
C) Tests of the additions to property, plant and equipment by physical inspections.
D) Tests of the signatures on purchase orders to a list of approved signatories.

Question 9

Tracing shipping documents to pre-numbered 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 pre-numbered sales invoices were accounted for.

Question 10

Based on a study and evaluation completed at an interim date, the auditor concludes that no significant internal accounting control weaknesses exist. The records and procedures would most likely be tested again at year-end if:

A) the internal accounting control system provides a basis for reliance in reducing the extent of substantive testing.
B) tests of controls were not performed by the internal auditor during the remaining period.
C) inquiries and observations lead the auditor to believe that conditions have changed.
D) the auditor used non-statistical sampling during interim compliance testing.

Question 11

After obtaining an understanding of an entity's internal control system, an auditor may assess control risk at the maximum level for some account balances because he or she:

A) identifies internal controls that are likely to prevent material misstatements.
B) performs tests of controls to reduce detection risk to an acceptable level.
C) determines that the pertinent internal control components are not well documented.
D) believes the internal controls are unlikely to be operating effectively.

Question 12

To determine whether internal control structure policies and procedures operated effectively to minimise errors of failure to invoice a shipment, the auditor would select a sample of transactions from the population represented by the:

A) bill of lading file.
B) customer order file.
C) sales invoice file.
D) subsidiary customer accounts ledger.

Question 13

A procedure that would most likely be used by an auditor in performing tests of controls that involve segregation of functions and that leave no transaction trail is:

A) observation.
B) inspection.
C) reconciliation.
D) re-performance.

Question 14

Test of controls must be performed:

A) to ensure that controls that are to be relied upon are operating effectively throughout the entire year.
B) when inherent risk is high.
C) in areas of business risk.
D) when control risk is high.

Question 15

When undertaking tests of controls which are related to controls built around a major transaction flow, which assertion would be of least interest to the auditor?

A) Accuracy.
B) Completeness.
C) Occurrence.
D) Rights and obligations.

Question 16

For effective internal control, the billing function should be performed by the:

A) accounting department.
B) sales department.
C) shipping department.
D) credit and collection department.

Question 17

Which of the following procedures most likely would be included as part of an auditor's tests of controls?

A) Reconciliation.
B) Inspection.
C) Analytical procedures.
D) Confirmation.

Question 18

When undertaking tests of controls which are related to controls built around a major transaction flow, which assertion would be of least interest to the auditor?

A) Occurrence.
B) Accuracy.
C) Cut-off.
D) Valuation or allocation.

Question 19

An auditor may decide to assess control risk at high for certain assertions because the auditor believes:

A) evaluating the effectiveness of control policies and procedures is inefficient.
B) sufficient evidential matter to support the assertions is likely to be available.
C) considering the relationship of assertions to specific account balances is more efficient.
D) more emphasis on tests of controls than substantive tests is warranted.

Question 20

Tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of:

A) Classification.
B) Cut-off.
C) Occurrence.
D) Accuracy.

Question 21

Tracing copies of sales invoices to shipping documents will provide evidence that all:

A) shipments to customers were billed.
B) debits to the accounts receivable master file are for sales shipped.
C) billed sales were shipped.
D) shipments to customers were recorded as receivables.

Question 22

An internal control questionnaire indicates that an approved receiving report is required to accompany every cheque request for payment of merchandise. Which of the following tests of control provides the greatest assurance that this control is operating effectively?

A) Select and examine receiving reports and ascertain that the related voucher documents are dated no later than the receiving reports.
B) Select and examine receiving reports and ascertain that the cancelled voucher documents are dated no earlier than the receiving reports.
C) Select and examine voucher documents and ascertain that the related receiving reports are dated no later than the date of payment.
D) Select and examine voucher documents and ascertain that the related receiving reports are dated no earlier than the date of payment.

Question 23

To check the accuracy of the accounting records with regards to the recorded hours worked, an auditor would ordinarily compare time clock cards with:

A) shop job time tickets.
B) personnel records.
C) time recorded in the payroll register.
D) labour variance reports.

Question 24

When goods are received, the receiving clerk should match the goods with:

A) the receiving report and the vendor shipping document.
B) the vendor shipping document and the purchase order.
C) the vendor invoice and the receiving report.
D) the purchase order and the requisition form.

Question 25

Which of the following is a test of controls for the control assertion of completeness for revenue?

A) Test a sample of sales invoices for authorised customer orders.
B) Review sales orders for proper credit approval.
C) Trace shipping documents to sales invoices and the sales journal.
D) Examine reconciliation of accounts receivable subsidiary ledger to general ledger control account.

Question 26

An audit client erroneously recorded a large purchase twice. Which of the following tests of control measures would be most likely to detect this error in a timely and efficient manner?

A) Reconciling vendors' monthly statements with subsidiary payable ledger accounts.
B) Footing the purchases journal.
C) Sending written quarterly confirmations to all vendors.
D) Tracing totals from the purchases journal to the ledger accounts.

Question 27

To ensure the completeness of purchases made during the year, the auditor should:

A) select a sample of transactions from the accounts payable master file and vouch to related invoices.
B) select a sample of invoices received before the year-end and ensure that they are appropriately recorded in the accounts payable master file.
C) perform a bank reconciliation.
D) select a sample of receiving reports before and after the year-end and ensure they have been appropriately recorded.

Question 28

Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate control procedures over the invoicing function allow goods to be shipped that are not invoiced. The inadequate control procedures could cause an:

A) understatement of revenues, receivables and inventory.
B) overstatement of revenues and receivables and an understatement of inventory.
C) understatement of revenues and receivables and an overstatement of inventory.
D) overstatement of revenues, receivables and inventory.

Question 29

Which of the following control activities is not usually performed in the vouchers payable department?

A) Controlling the mailing of the cheque and remittance advice.
B) Matching the receiving report with the purchase order.
C) Determining the mathematical accuracy of the vendor's invoice.
D) Having an authorised person approve the voucher.

Question 30

Which is not a key segregation of duties for the revenue process? Different parties should:

A) prepare shipping orders and prepare bills of landing.
B) perform the credit and billing functions.
C) perform the shipping and billing functions.
D) receive cash and adjust accounts receivable.

Question 31

Purchase cut-off procedures should be designed to test whether or not all inventory:

A) on the statement of financial position was carried at lower of cost or market.
B) purchased and received before the year-end was recorded at year-end.
C) owned by the company is in the possession of the company.
D) on the year-end statement of financial position was paid for by the company.

Question 32

All of the following are important controls over credit memos except:

A) proper segregation of duties to ensure that sales discounts taken were earned.
B) credit memos should be approved by someone other than whoever initiated it.
C) credit memos should be supported by a receiving document for returned goods.
D) proper segregation of duties between access to customer records and authorising credit memos.

Question 33

Which of the following is a primary function of the purchasing department?

A) Reducing expenditures for goods acquired.
B) Verifying the propriety of goods acquired.
C) Ensuring the acquisition of goods of a specified quality.
D) Authorising the acquisition of goods.

Question 34

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to assess which assertion for sales?

A) Accuracy.
B) Completeness.
C) Cut-off.
D) Occurrence.

Question 35

When undertaking tests of controls for revenues, auditors are more concerned with controls associated with the occurrence assertion than they are with the completeness assertion because:

A) clients are more likely to overstate than understate revenues.
B) clients are more likely to understate than overstate revenues.
C) it is difficult to determine when services have been performed.
D) the allowance for doubtful accounts is often understated.

Question 36

An auditor most likely would limit substantive audit tests of sales transactions when control risk is assessed as low for the occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting:

A) opening and closing inventory balances.
B) cash receipts and accounts receivable.
C) shipping and receiving activities.
D) cut-offs for sales and purchases.

Question 37

In a properly-designed accounts payable system, a voucher is prepared after the invoice, purchase order, requisition and receiving report are verified. The next step in the system is:

A) approval of the voucher for payment.
B) entering of the voucher into the voucher register.
C) entry of the cheque amount in the cheque register.
D) cancellation of the supporting documents.

Question 38

Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate control procedures over the invoicing function allow goods to be invoiced that are not shipped. The inadequate control procedures could cause an:

A) understatement of revenues, receivables and inventory.
B) overstatement of revenues and receivables, and an understatement of inventory.
C) understatement of revenues and receivables, and an overstatement of inventory.
D) overstatement of revenues, receivables and inventory.

Question 39

Which of the following internal controls would be most likely to deter the lapping of collections from customers?

A) Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries.
B) Segregation of duties between receiving cash and posting the accounts receivable ledger.
C) Authorisation of write-offs of uncollectible accounts by a supervisor independent of the credit approval function.
D) Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries.

Question 40

The cut-off assertion for accounts payable includes:

A) determining whether all accounts payable are recorded at their correct amount.
B) determining whether all accounts payable are actually liabilities.
C) determining whether all accounts payable are recorded in the proper period.
D) determining whether all accounts payable are properly classified in the financial statements.

Question 41

In auditing the purchases system, an auditor vouches a sample of entries in the voucher register (accounting records) to the supporting documents. Which assertion would this test of controls most likely support?

A) Completeness.
B) Occurrence.
C) Accuracy.
D) Classification

Question 42

Possible misstatements related to the occurrence assertion for payroll transactions include all of the following except:

A) payments to fictitious employees.
B) payments to terminated employees.
C) payments to valid employees who have not worked.
D) payments to valid employees at a rate in excess of the authorised amount.

Question 43

In a properly-designed purchasing process, the same employee most likely would match vendors' invoices with receiving reports and also:

A) cancels vendors' invoices after payment.
B) reconciles the accounts payroll ledger.
C) recomputes the calculations on vendors' invoices.
D) posts the detailed accounts payable records.

Question 44

Which of the following is not among the errors that an auditor might include in the test data when auditing a client's IT system?

A) Authorisation code.
B) Numeric characters in alphanumeric fields.
C) Illogical entries in fields whose logic is tested by programmed consistency checks.
D) Differences in description of units of measure.

Question 45

Selected employee time cards that have been approved by supervisory personnel during the year are compared to the payroll register to ensure that they have been recorded. Which of the following assertions for payroll expense does this test?

A) Occurrence.
B) Completeness.
C) Accuracy.
D) Cut-off.

Question 46

Smith Ltd has numerous customers. Each customer file contains name, address, credit limit and account balance. The auditor wishes to undertake a test of the programmed control that does not allow account balance to exceed credit limit. The best procedure for the auditor to follow would be to:

A) develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit.
B) develop test data that would cause some account balances to exceed the credit limit and determine if the system properly detects such situations.
C) request a printout of a sample of account balances so they can be individually checked against the credit limits.
D) request a printout of all account balances so they can be manually checked against the credit limits.

Question 47

An auditor will use test data in order to gain certain assurances with respect to the:

A) degree of keying accuracy.
B) controls contained within the program.
C) machine capacity.
D) input data.

Question 48

Selected items from the payroll register are compared to employee time cards that have been approved by supervisory personnel.Which of the following assertions for payroll expense does this test?

A) Occurrence.
B) Completeness.
C) Accuracy.
D) Cut-off.

Question 49

An auditor decides that it is important and necessary to observe a client's distribution of payroll cheques on a particular audit. The client organisation is so large that the auditor cannot conveniently observe the distribution of the entire payroll. In these circumstances, which of the following is most acceptable to the auditor?

A) Observation should be made for all departments regardless of the inconvenience.
B) Observation should be limited to one or more selected departments.
C) Observation should be limited to those departments where employees are readily available.
D) Observation should be eliminated and other alternative auditing procedures should be utilised to obtain satisfaction.

Question 50

An auditor who is testing IT controls in a payroll system would most likely use test data that contain conditions such as:

A) payroll cheques with unauthorised signatures.
B) time cards with invalid job numbers.
C) overtime not approved by supervisors.
D) deductions not authorised by employees.

Question 51

Tests of controls for the occurrence assertion for purchases include all of the following except:

A) evaluating proper segregation of duties.
B) testing a sample of vouchers to an authorised purchase order.
C) testing a sample of vouchers to receiving reports.
D) tracing a sample of vouchers to the purchases journal.

Question 52

In a daily computer run to update cheque account balances and to print out basic details on any customer's account that was overdrawn, the overdrawn account of the computer programmer was never printed. Which of the following control procedures would have been most effective in detecting this irregularity?

A) A manual test check of the information in the master file against the information on the printout.
B) Use of the test data approach by the auditor in testing the client's program and verifying the subsidiary file.
C) Periodic recompiling of programs from approved and documented source code, and comparison with programs currently in use.
D) A program check for valid customer code.

Question 53

Which of the following is the most effective test of control to detect vouchers prepared for the payment of goods that were not received?

A) Counting of goods upon receipt in the storeroom.
B) Matching of purchase order, receiving report and vendor invoice for each voucher in the accounts payable department.
C) Comparison of goods received with goods requisitioned in the receiving department.
D) Verification of vouchers for accuracy and approval in the internal audit department.

Question 54

Which of the following procedures would be most likely to be considered a weakness in an entity's internal controls over payroll?

A) The personnel department sends employees' termination notices to the payroll department.
B) The employee who distributes payroll cheques is responsible for later distributing unclaimed payroll cheques to the employees absent at time of payroll distribution.
C) Payroll cheques are prepared by the payroll department and signed by the treasurer.
D) A voucher for the amount of the payroll is prepared in the general accounting department based on the payroll department's payroll summary.

Question 55

Which of the following internal control activities is not usually performed in the accounts payable department?

A) Indicating the asset and expense accounts to be debited.
B) Accounting for unused pre-numbered purchase orders and receiving reports.
C) Matching the vendor's invoice with the related receiving report.
D) Approving vouchers for payment by having an authorised employee sign the vouchers.

Question 56

When testing a computerised accounting system, which of the following is not true of the test data approach?

A) The test data must consist of all possible valid and invalid conditions.
B) Test data are processed by the client's computer programs under the auditor's control.
C) Only one transaction of each type need be tested.
D) The test data need consist of only those valid and invalid conditions in which the auditor is interested.

Question 57

An approach to testing real-time processing of a computer-based information system is known as the integrated test facility (ITF) technique. This approach involves:

A) testing the computer hardware at the same time as test transactions enter the real-time system.
B) validating as well as editing all input transactions entering the real-time system.
C) running monthly activities simultaneously with current transactions so that the two are integrated in the result of the test.
D) setting up a small set of records for a fictitious entity in the master files and then processing dummy transactions against the fictitious entity.

Question 58

Tests of controls of an advanced IT system:

A) can be performed using actual transactions or simulated transactions.
B) can be performed using only actual transactions since testing of simulated transactions is of no consequence.
C) is inadvisable because it may distort the evidence in master files.
D) is impractical since many procedures within the CIS activity leave no visible evidence of having been performed.

Question 59

Auditing by testing the input and output of an IT system instead of the computer program itself will:

A) detect all program errors, regardless of the nature of the output.
B) not detect program errors which do not show up in the output sampled.
C) not provide the auditor with confidence in the results of the auditing procedures.
D) provide the auditor with the same type of evidence.