Question 1

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

Accepted Answer

Segregation of duties between receiving cash and posting the accounts receivable ledger would be most likely to deter the lapping of collections from customers. This is because lapping involves a delay in posting customer payments to cover up an earlier theft. If the employee receiving cash does not also have responsibility for posting to the accounts receivable ledger, it is harder to cover up the theft through lapping. The other options listed are all important internal controls, but are less likely to deter lapping specifically.

Question 2

While auditing the sales system of Candle Pty Ltd you have determined that there is a risk of sales being misstated, and that this potential misstatement is associated with the completeness assertion.Which of the following would be an appropriate audit response to this assessed risk?

Accepted Answer

Selecting a sample of shipping documents and testing them to the related sales invoices and sales journal would help to verify the completeness of sales transactions. This would ensure that all sales have been properly recorded in the sales journal and that there are no unrecorded sales. Option A does not directly address the completeness assertion, while option B tests the existence assertion. Option D addresses the authorization assertion but not completeness.

Question 3

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

Accepted Answer

The primary function of the purchasing department is to ensure the acquisition of goods of a specified quality. While reducing expenditures and verifying the propriety of goods is important, it is secondary to the main goal of procuring quality goods for the organization. Authorizing the acquisition of goods is also an important function, but it is typically carried out by higher-level executives or managers.

Question 4

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

Accepted Answer

Segregation of duties is a key internal control that helps prevent fraud and errors. In the revenue process, it is important to separate responsibilities to ensure that no single individual has control over all aspects of a transaction. Preparing shipping orders and bills of lading are both part of the shipping process, and having the same party perform these tasks does not violate the principle of segregation of duties. The other options (B, C, D) describe combinations of duties that should be segregated to prevent conflicts of interest and reduce the risk of errors or fraud.

Question 5

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

Accepted Answer

Selecting a sample of invoices received before the year-end and ensuring that they are appropriately recorded in the accounts payable master file will help ensure the completeness of purchases made during the year. This ensures that all purchases made during the year have been recorded properly in the accounts payable master file, which is a key component of the financial statements. The other options do not directly address the completeness of purchases made during the year.

Question 6

Beta Pty Ltd posts to its perpetual inventory records directly from its sales invoices Inadequate control procedures over the invoicing function allow goods to be shipped that are not invoiced.The inadequate control procedures could cause an:

Accepted Answer

Since goods are being shipped without being invoiced, the company is not recording the revenue and receivables that should result from those sales. This will result in an understatement of both revenues and receivables. Additionally, since the inventory records are being updated based on the unrecorded sales, the inventory balance will be overstated. Therefore, option C is the correct answer.

Question 7

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:

Accepted Answer

When control risk is assessed as low for the occurrence assertion concerning sales transactions, and evidence supporting cash receipts and accounts receivable has already been gathered, an auditor is more likely to limit substantive audit tests of sales transactions. This is because evidence on cash receipts and accounts receivable directly relates to the sales transactions' completeness and accuracy, providing assurance about the occurrence of recorded sales.

Question 8

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?

Accepted Answer

Vouching transactions from the voucher register to supporting documents is a test of the occurrence assertion. The auditor is checking that the recorded transactions actually occurred and have supporting documents to back them up. Completeness would be tested by tracing transactions from the supporting documents to the voucher register. Accuracy would be tested by checking that the amounts recorded in the voucher register match the amounts on the supporting documents. Classification would be tested by verifying that transactions are classified correctly in the voucher register.

Question 9

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

Accepted Answer

While proper segregation of duties is an important control, it is not specifically related to credit memos. The other choices all relate to controls over credit memos: ensuring approval by someone other than the initiator, requiring supporting documentation for returned goods, and implementing proper segregation of duties between accessing customer records and authorizing credit memos.

Question 10

While undertaking the audit of the payables and disbursements system at Broil Ltd, you find that the 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 would provide you with the greatest assurance that this control is operating effectively?

Accepted Answer

Option C directly tests the control by ensuring that the receiving reports, which must be approved before payment, are indeed dated no later than the date of payment. This confirms that payments are made only after the receipt of goods has been properly documented and approved, aligning with the control objective.

Question 11

Purchase cut-off procedures should be designed to test whether all inventory:

Accepted Answer

Purchase cut-off procedures are designed to ensure that all inventory that was purchased and received before the year-end was correctly recorded in the financial statements for that year. This helps to prevent inventory-related misstatements from occurring. Options A, C, and D are not relevant to the purpose of purchase cut-off procedures.

Question 12

Tracing bills of lading to sales invoices provides evidence that:

Accepted Answer

Tracing bills of lading to sales invoices ensures that shipments to customers were recorded as sales, confirming that all shipped goods are accounted for in sales records.

Question 13

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

Accepted Answer

Reconciling suppliers' monthly statements with subsidiary payable ledger accounts is the most effective control to detect duplicate recording of purchases. This process involves comparing the details of what the company has recorded as purchases with what the supplier has billed, which would highlight any discrepancies such as a purchase being recorded twice.

Question 14

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

Accepted Answer

Tracing shipping documents to sales invoices and the sales journal is a test of controls for the completeness assertion for revenue. This test ensures that all sales that have been shipped have been properly recorded and included in the sales journal. Option A is a test of controls for the accuracy assertion, option B is a test of controls for the authorisation assertion, and option D is a substantive test of transactions.

Question 15

Beta Pty Ltd posts to its perpetual inventory records directly from its sales invoices.Inadequate control procedures over the invoicing function allow goods to be invoiced that are not shipped.The inadequate control procedures could cause an:

Accepted Answer

If goods are invoiced but not shipped, revenues and receivables would be overstated because sales that haven't actually occurred are being recorded. Inventory would be understated because the system would record these goods as sold and thus no longer part of inventory, even though they physically remain in stock.

Question 16

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:

Accepted Answer

After a voucher is prepared and verified, it is entered into the voucher register to record the liability before proceeding to payment approval.

Question 17

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

Accepted Answer

The receiving clerk should match the goods with the supplier shipping document and the purchase order to ensure that what was ordered has indeed been delivered and corresponds with the details (quantity, type, etc.) specified in the purchase order. This process helps in verifying the accuracy of the delivery against the original request.

Question 18

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:

Accepted Answer

Clients are more likely to overstate revenues, so auditors are more concerned with controls associated with the occurrence assertion to ensure that revenue is only recorded when it has actually been earned. Controls associated with the completeness assertion are more focused on ensuring that all revenue transactions are recorded, which is less of a concern if the client is more likely to overstate revenues.

Question 19

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?

Accepted Answer

The auditor is checking to ensure that for every shipment, an invoice was prepared, which relates to the completeness assertion. This assertion concerns whether all transactions and accounts that should be included in the financial statements are indeed included.

Question 20

The cut-off assertion for accounts payable involves testing whether all accounts payable are:

Accepted Answer

The cut-off assertion for accounts payable involves ensuring that all accounts payable have been recorded in the proper period. This means that expenses or liabilities that belong to another period have not been included in the current period's financial report. The other choices are also important but do not specifically relate to the cut-off assertion for accounts payable.

Quiz 8: Tests of Controls