Baliuag University

CBAA 141-0111

Quality Controls (Related PSA : PSA 220)

1)Which of the following best describes what is meant by GAAS?

1. 1. Acts to be performed by the auditor.
   2. Measures of the quality of the auditor's performance.
   3. Procedures to be used to gather evidence to support financial statements.
   4. Audit objectives generally determined on audit engagements.

2. The least important evidence of a CPA firm's evaluation of its system of quality controls would concern the CPA firm's policies and procedures with respect to
   1. Employment (hiring).
   2. Confidentiality of audit engagements.
   3. Assigning personnel to audit engagements.
   4. Determination of audit fees.

3. The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to
   1. Enable the CPA firm to attest to the reliability of the client.
   2. Satisfy the CPA firm’s duty to the public concerning the acceptance of clients.
   3. Minimize the likelihood of association with clients whose management lacks integrity.
   4. Anticipate before performing any fieldwork whether an unqualified opinion can be expressed.

4. A CPA firm's quality control procedures pertaining to the acceptance of a prospective audit client would most likely include
   1. Inquiry of management as to whether disagreements between the predecessor auditor and the prospective client were resolved satisfactorily.
   2. Consideration of whether sufficient competent evidential matter may be obtained to afford a reasonable basis for an opinion.
   3. Inquiry of third parties, such as the prospective client's bankers and attorneys, about information regarding the prospective client and its management.
   4. Consideration of whether the internal control structure is sufficiently effective to permit a reduction in the extent of required substantive tests.

5. In pursuing a CPA firm’s quality control objectives, a CPA firm may maintain records indicating which partners or employees of the CPA firm were previously employed by the CPA firm’s clients. Which quality control objective would this be most likely to satisfy?
   1. Professional relationship.                                         c. Independence.
   2. Supervision.                                                                   d. Advancement.

6. The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the
   1. Auditor’s system of quality control has been maintained at a high level.
   2. Results are consistent with the conclusions to be presented in the auditor’s report.
   3. Audit procedures performed are approved in the professional standards.
   4. Audit has been performed by persons having adequate technical training and proficiency as auditors.

7. Which of the following is the best criterion for evaluating a staff auditor’s work performance?
   1. Quantity of deficiency findings.
   2. Ability to get along with clients.
   3. Working papers appearance.
   4. Fulfillment of requirements set forth in the audit programs.

8. The auditor with final responsibility for an engagement and one of the assistants have a difference of opinion about the results of an auditing procedure. If the assistant believes it is necessary to be disassociated from the matter’s resolution, the CPA firm’s procedures should enable the assistant to
   1. Refer the disagreement to the PICPA’s Quality Review Committee.
   2. Document the details of the disagreement with the conclusion reached.
   3. Discuss the disagreement with the entity’s management or its audit committee.
   4. Report on the disagreement to an impartial peer monitoring team. AICPA 11/93

Pre-engagement (Related PSAs: PSA 210)

9. Which of the following factors most likely would cause an auditor not to accept a new audit engagement?
   1. An inadequate understanding of the entity’s internal control.
   2. The close proximity to the end of the entity’s fiscal year.
   3. Concluding that the entity’s management probably lacks integrity.
   4. An inability to perform preliminary analytical procedures before assessing control risk.

10. Before accepting an audit engagement, you as the successor auditor would least likely make specific inquiries of the previous auditor regarding
    1. Facts that might bear on the integrity of management.
    2. The degree of cooperation the previous auditor received from the client’s lawyer.
    3. An inquiry regarding disagreements with management as to auditing procedures.
    4. The predecessor auditor’s understanding as to the reasons for the change of auditors.

11. Which of the following factors most likely would influence an auditor’s determination of the auditability of an entity’s financial statements?
    1. The complexity of the accounting system.
    2. The existence of related-party transactions.
    3. The adequacy of the accounting records.
    4. The operating effectiveness of control procedures.
12. In making a decision to accept or continue with a client, the auditor should consider:

13. Which of the following is least likely a source of information about a potential new audit client?
    1. The predecessor auditor.
    2. Management.
    3. Industry journal.
    4. The new auditor’s permanent file.

14. Preliminary arrangements agreed to by the auditor and the client should be reduced to writing by the auditor. The best place to set forth these arrangements is in
    1. A memorandum to be placed in the permanent section of the auditing working papers.
    2. An engagement letter.
    3. A client representation letter.
    4. A confirmation letter attached to the constructive services letter.

15. When an auditor believes that an understanding with the client has not been established, he or she should ordinarily
    1. Perform the audit with increased professional skepticism.
    2. Decline to accept or perform the audit.
    3. Assess control risk at the maximum level and perform a primarily substantive audit.
    4. Modify the scope of the audit to reflect an increased risk of material misstatements due to fraud.

16. Assuming a recurring audit, in which of the following situations would the auditor be unlikely to send a new engagement letter to the client?
    1. A recent change in partner and/or staff involved in the audit engagement.
    2. A change in the terms of engagement.
    3. A recent change of client management.
    4. A significant change in the nature or size of the client's business.

Audit planning (Related PSAs: PSA 300, 310, 320, 520 and 570)

17. Adequate audit planning helps ensure that appropriate attention is devoted:

18. In planning an examination, the auditor would consider all of the following matters, except
    1. Anticipated reliance on internal controls.
    2. Preliminary judgment about materiality levels for audit purposes.
    3. Financial statement items likely to require adjustment.
    4. The kind of opinion (unqualified, qualified, disclaimer, or adverse), likely to be given.

19. Which of the following situations would most likely require special audit planning by the auditor?
    1. Some items of factory and office equipment do not bear identification numbers.
    2. Depreciation methods used on the client’s tax return differ from those used on the books.
    3. Assets costing less than P5,000 are expensed even though the expected life exceeds one year.
    4. Inventory is comprised of precious stones.

20. This includes distributing assignments among staff assistants and reviewing the progress of such assignments on a periodic basis.
    1. Supervision                                    b. Staff training                              c. CPE                                 d. Planning.

21. The senior auditor responsible for coordinating the fieldwork usually schedules a pre- audit conference with the audit team primarily to
    1. Give guidance to the staff regarding both technical and personnel aspects of the audit.
    2. Discuss staff suggestions concerning the establishment and maintenance of time budgets.
    3. Establish the need for using the work of specialists and internal auditors.
    4. Provide an opportunity to document staff disagreements regarding technical issues.

22. An auditor obtains knowledge about a new client’s business and its industry to
    1. Make constructive suggestions concerning improvements to the client’s internal control.
    2. Develop an attitude of professional skepticism concerning management’s financial statement assertions.
    3. Evaluate whether the aggregation of known misstatements causes the financial statements takes as a whole to be materially misstated.
    4. Understand the events and transactions that may have an effect on the client’s financial statements.

23. A CPA may reduce the audit work on a first-time audit by reviewing the working papers of the predecessor auditor. The predecessor should permit the successor to review working papers relating to matters of continuing accounting significance such as those that relate to
    1. Extent of reliance on the work of specialists.
    2. Fee arrangements and summaries of payments.
    3. Analysis of contingencies.
    4. Staff hours to complete the engagement.

24. Which of the following procedures would an auditor most likely perform in planning a financial statement audit?
    1. Reviewing investment transactions of he audit period to determine whether related parties were credited.
    2. Performing analytical procedures to identify areas that may represent specific risks.

1. 3. Reading the minutes of stockholder and director meetings to discover whether any unusual transactions have occurred.
   4. Obtaining        a     written      representation        letter      from      the     client       to     emphasize management’s responsibilities.

25. Which of the following procedures would an auditor least likely perform in planning a financial statement audit?
    1. Coordinating the assistance of entity personnel in data preparation.
    2. Discussing matters that may affect the audit with firm personnel responsible for non-audit services to the entity.
    3. Selecting a sample of vendor’s invoices for comparison to receiving reports.
    4. Reading the current year’s interim financial statements.

26. In developing the overall audit plan for a new client, factor not to be considered is
    1. The terms of the engagement and any statutory responsibilities.
    2. The client's business, including the structure of the organization and accounting system used.
    3. The amount of estimated audit fee.
    4. The audit risk and procedures to be performed to achieve audit objectives.

27. The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the (E)
    1. Evidence to be gathered to provide a sufficient basis for the auditor’s opinion.
    2. Procedures to be undertaken to discover litigation, claims and assessments.
    3. Pending legal matters to be included in the inquiry of the client’s attorney.
    4. Timing of inventory observation procedures to be performed.

28. A basic tool used by the auditor to control the audit work and review the progress of the audit.
    1. Audit program                                                               c. Engagement letter.
    2. Progress flowchart                                                      d. Time and Expense Summary

29. Those procedures specifically outlined in an audit program are primarily designed to
    1. Gather evidence.
    2. Detect errors or irregularities.
    3. Test internal systems.
    4. Protect the auditor in the event of litigation.

30. An audit program provides proof that
    1. Sufficient competent evidential matter was obtained.
    2. The work was adequately planned.
    3. There was compliance with GAAS of reporting.
    4. There was a proper study and evaluation of internal control.

31. Audit programs should be designed so that
    1. Most of the required procedures can be performed as interim work.
    2. Inherent risk is assessed at a sufficiently low level.
    3. The auditor can make constructive suggestions to management.
    4. The audit evidence gathered supports the auditor’s conclusions.

32. The audit program usually cannot be finalized until the
    1. Consideration of the entity’s internal control has been completed.
    2. Engagement letter has been signed by the auditor and the client.
    3. Reportable conditions have been communicated to the audit committee of the board of directors.
    4. Search for unrecorded liabilities has been performed and documented.

33. In designing written audit programs, an auditor should establish specific audit objectives that related primarily to the
    1. Timing of audit procedures.                                    c. Selected audit techniques.
    2. Cost-benefit of gathering evidence.                    d. Financial statement assertions.

34. Which item would not be contained in an audit program?
    1. Staff assigned to the audit.
    2. List of specific tasks to be performed.
    3. Documentation of system being reviewed.
    4. Estimated time required to perform each task.

35. When planning an examination, an auditor should
    1. Consider whether the extent of substantive tests may be reduced based on the results of the internal control questionnaire.
    2. Make preliminary judgments about materiality levels for audit purposes.
    3. Conclude whether changes in compliance with prescribed control procedures justifies reliance on them
    4. Prepare a preliminary draft of the management representation letter.

36. The concept of materiality will be least important to the CPA in determining the
    1. Scope of his audit of specific accounts.
    2. Specific transactions that should be reviewed.
    3. Effects of audit exceptions upon his opinion.
    4. Effects of his direct financial interest in a client upon his independence.

37. In considering materiality for planning purposes, an auditor believes that misstatements aggregating P100,000 would have a material effect on an entity’s income statement, but the misstatements would have to aggregate P200,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate

a. P100,000                           b. P200,000                      c. P150,000                       d. P300,000

38. The concepts of audit risk and materiality are interrelated and must be considered together by the auditor. Which of the following is true?
    1. Audit risk is the risk that the auditor may unknowingly express a modified opinion when in fact the financial statements are fairly stated.
    2. The phrase in the auditor's standard report "present fairly, in all material respects, in conformity with generally accepted accounting principles" indicates the auditor's belief that the financial statements taken as a whole are not materially misstated.
    3. If misstatements are not important individually but are important in the aggregate, the concept of materiality does not apply.
    4. Material fraud but not material errors cause financial statements to be materially misstated.

39. Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit?
    1. Obtaining a written representation letter from the client’s management.
    2. Examining documents to detect illegal acts having a material effect on the financial statements.
    3. Consider whether the client’s accounting estimates are reasonable in the circumstances.
    4. Determining the extent of involvement of the client’s internal auditors.

40. If the independent auditors decide that the work performed by the internal auditor may have a bearing on their own procedures, they should consider the internal auditor’s
    1. Competence and objectivity.                                  c. Independence and review skills.
    2. Efficiency and experience.                                       d. Training and supervisory skills.

41. When assessing an internal auditor’s objectivity, an independent auditor should
    1. Evaluate the adequacy of the internal auditor’s audit programs.
    2. Inquire about the internal auditor’s educational background and professional certification.
    3. Consider the organizational level to which the internal auditor reports.
    4. Review the internal auditor’s working papers.

42. For which of the following judgments may an independent auditor share responsibility with an entity’s internal auditor who is assessed to be both competent and objective?

43. Which of the following is not a specialist upon whose work an auditor may rely?
    1. Lawyer.            b. Internal auditor.                        c. Actuary.                         d. Appraiser.

44. Which of the following statements is correct concerning an auditor’s use of the work of a specialist?
    1. The auditor need not obtain an understanding of the methods and assumptions used by the specialist.
    2. The auditor may not use the work of a specialist in matters material to the fair presentation of the financial statements.
    3. The reasonableness of the specialist’s assumptions and their applications are strictly the auditor’s responsibility.
    4. The work of a specialist who has a contractual relationship with the client may be acceptable under certain circumstances.

45. When using the work of another auditor, the principal auditor should ordinarily perform the following procedure
    1. Obtain information regarding the professional competence of the other auditor in the context of the specific assignment undertaken by the other auditor.
    2. Advise the other auditor of the applicable independence requirements as regards both the entity and the component and obtain representation as to his compliance with them.
    3. Advise the other auditor of the applicable accounting, auditing and reporting requirements and obtain representation as to compliance with them.
    4. All of the above.

Risk Assessment and Response to Assessed Risks (Related PSAs: PSA 400, 315 and 330)

46. The audit risk against which the auditor and those who rely on his/her opinion require reasonable protection is a combination of three separate risks at the account-balance or class-of-transactions level. The first risk is inherent risk. The second risk is that material misstatements will not be prevented or detected by internal control. The third risk is that
    1. The auditor will reject a correct account balance as incorrect.
    2. Material misstatements that occur will not be detected by the audit.
    3. The auditor will apply an inappropriate audit procedure.
    4. The auditor will apply an inappropriate measure of audit materiality.

47. Audit risk consists of inherent risk, control risk, and detection risk. Which of the following statements is true?
    1. Cash is more susceptible to theft than an inventory of coal because it has a greater inherent risk.
    2. The risk that material misstatement will not be prevented or detected on a timely basis by internal control can be reduced to zero by effective controls.
    3. Detection risk is a function of the efficiency of an auditing procedure.
    4. The existing levels of inherent risk, control risk, and detection risk can be changed at the discretion of the auditor.

48. Control risk should be assessed in terms of
    1. Specific controls.                                                          c. Financial statement assertions.
    2. Types of potential fraud.                                          d. Control environment factors.

49. After obtaining a sufficient understanding of internal control, the auditor assesses
    1. The need to apply GAAS.
    2. Detection risk to determine the acceptable level of inherent risk.
    3. Detection risk and inherent risk to determine the acceptable level of control risk.
    4. Control risk to determine the acceptable level of detection risk.

50. An auditor may decide to assess control risk at the maximum level for certain assertions because the auditor believes
    1. Control policies and procedures are unlikely to pertain to the assertions.
    2. The entity’s control environment, accounting system, and control procedures are interrelated.
    3. Sufficient evidential matter to support the assertions is likely to be available.
    4. More emphasis on tests of controls than substantive tests is warranted.

51. When control risk is assessed at the maximum level for all financial statement assertions, an auditor should document the auditor’s

52. When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the
    1. Extent of tests of controls.                                      c. Extent of tests of details.
    2. Level of detection risk.                                              d. Level of inherent risk.

53. The auditor faces a risk that the examination will not detect material errors which occur in the accounting process. In regard to minimizing this risk, the auditor primarily relies on
    1. Substantive tests.                                                        c. Internal control.
    2. Compliance tests.                                                        d. Statistical analysis.

54. The auditor uses the assessed level of control risk (together with the assessed level of inherent risk) to determine the acceptable level of detection risk for financial statement assertions.   As the acceptable level of detection risk decreases, the auditor may do one or more of the following except change the
    1. Nature of substantive tests to more effective procedures.
    2. Timing of substantive tests, such as performing them at year-end rather than at an interim date.
    3. Extent of substantive tests, such as using larger sample sizes.
    4. Assurances provided by substantive tests to a lower level.

55. While performing an audit, Sebastian decides to restrict the risk of misstatement to 3%. What must the acceptable level of detection risk be if inherent risk is 25% and control risk is 40%?

a.   0.3%                                  b. 30%                                c. 12%                                 d. 33.3%

Internal Control (Related PSAs/PAPSs: PSA 400, 402 and 315)

56. An auditor uses the knowledge provided by the understanding of internal control and the assessed level of control risk primarily to
    1. Determine whether procedures and records concerning the safeguarding of assets are reliable.
    2. Ascertain whether the opportunities to allow any person to both perpetrate and conceal fraud are minimized.
    3. Modify the initial assessments of inherent risk and preliminary judgments about materiality levels.
    4. Determine the nature, timing and extent of substantive tests for financial statement assertions.

57. Which of the following is not a component of internal control?
    1. Control risk.                                                                    c. Information and communication.
    2. Monitoring.                                                                    d. The control environment.

58. Which of the following factors are included in an entity’s control environment?

59. Basic to a proper control environment are the quality and integrity of personnel who must perform the prescribed procedures. Which is not a factor in providing for competent personnel?
    1. Segregation of duties.                                               c. Training programs.
    2. Hiring practices.                                                            d. Performance evaluations.

60. Control activities constitute one of the five components of internal control. Control activities do not encompass
    1. Performance reviews.                                               c. Physical controls.
    2. Information processing.                                           d. An internal audit function.

61. Proper segregation of duties reduces the opportunities to allow persons to be in positions to both
    1. Journalize entries and prepare financial statements.
    2. Record cash receipts and cash disbursements.
    3. Establish internal controls and authorize transactions.
    4. Perpetuate and conceal errors and irregularities.

62. Which of the following are compatible functions in a well-designed internal control structure.
    1. Preparing receiving reports, and also approving purchase orders.
    2. Approving vouchers for payment, and also have access to unused purchased orders.
    3. Mailing signed checks, and also preparing bank reconciliations.
    4. Mailing signed checks, and also canceling supporting documents.

63. Internal control should follow certain basic principles to achieve its objectives. One of these principles is the segregation of functions. Which one of the following examples does not violate the principle of segregation of functions?
    1. The treasurer has the authority to sign checks but gives the signature block to the assistant treasurer to run the check-signing machine.
    2. The warehouse clerk, who has the custodial responsibility over inventory in the warehouse, may authorize disposal of damaged goods.
    3. The sales manager has the responsibility to approve credit and the authority to write off accounts.
    4. The department time clerk is given the undistributed payroll checks to mail to absent employees.

64. If internal control is well designed, two tasks that should be performed by different persons are
    1. Approval of bad debt write-offs, and reconciliation of the accounts payable subsidiary ledger and controlling account.
    2. Distribution of payroll checks and approval of sales returns for credit.
    3. Posting of amounts from both the cash receipts journal and cash payments journal to the general ledger.
    4. Recording of cash receipts and preparation of bank reconciliations.

65. A small entity may use less formal means to ensure that internal control objectives are achieved. For example, extensive accounting procedures, sophisticated accounting records, or formal controls are least likely to be needed if
    1. Management is closely involved in operations.
    2. The entity is involved in complex transactions.
    3. The entity is subject to legal or regulatory requirements also found in larger entities.
    4. Financial reporting objectives have been established.

66. Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity’s internal control?
    1. Incompatible duties.                                                  c. Mistakes in judgment.
    2. Management override.                                            d. Collusion among employees.

67. The internal auditor recognizes that certain limitations are inherent in any internal control system. Which one of the following scenarios is the result of an inherent limitation of internal control?

1. 1. The comptroller both makes and records cash deposits.
   2. A security guard allows one of the warehouse employees to remove company assets from the premises without authorization.
   3. The firm sells to customers on account, without credit approval.
   4. An employee, who is unable to read, is assigned custody of the firm's computer tape library and run manuals that are used during the third shift.

68. When considering the internal control structure, an auditor should be aware of the concept of reasonable assurance, which recognizes that
    1. Procedures requiring segregation of duties may be circumvented by employee collusion and management override.
    2. Establishing and maintaining the internal control structure is an important responsibility of management.
    3. The cost of an entity’s internal control structure should not exceed the benefits expected to be derived.
    4. Adequate safeguards over access to assets and records should permit an entity to maintain proper accountability.

69. It is important for the CPA to consider the competence of the audit client’s employees because their competence bears directly and importantly upon the
    1. Cost/benefit relationship of the system of internal control.
    2. Achievement of the objectives of the system of internal control.
    3. Comparison of recorded accountability with assets.
    4. Timing of the tests to be performed.

70. When an organization has strong internal control, management can expect various benefits.

The benefit least likely to occur is

1. 1. Reduced cost of an external audit.
   2. Elimination of employee fraud.
   3. Improvement in the reliability and integrity of information for decision-making purposes.
   4. Some assurance of compliance with governmental regulations.

71. Of the following statements about an internal control system, which one is not valid?
    1. No one person should be responsible for the custodial responsibility and the recording responsibility for an asset.
    2. Transactions must be properly authorized before such transactions are processed.
    3. Because of the cost/benefit relationship, a client may apply control procedures on a test basis.
    4. Control procedures reasonably insure that collusion among employees can not occur.

72. The requirement that purchases be made from suppliers on an approved vendor list is an example of a
    1. Preventive control.                                                     c. Corrective control.
    2. Detective control.                                                        d. Monitoring control.

73. Internal controls may be preventive, detective, or corrective.           Which of the following is preventive?
    1. Requiring two persons to open mail.
    2. Reconciling the accounts receivable subsidiary file with the control account.
    3. Using batch totals.
    4. Preparing bank reconciliations.

74. A good system of internal control provides reasonable assurance that errors and irregularities will be detected or prevented. Identify the detective control for the procurement function.
    1. Goods received are counted and compared to quantities on purchase order and receiving reports.
    2. The procurement function is organizationally separate from receiving, disbursing, and accounting.
    3. Review and approval of each procurement action is required prior to the final issuance of a purchase order.
    4. Prenumbered standard purchase order forms include all relevant terms required to be used in all applicable instances.

75. Audit committees have been identified as a major factor in promoting both the internal and external auditor's independence.   Which of the following is the most important limitation on the effectiveness of audit committees?
    1. Audit committees may be composed of independent directors. However, those directors may have close personal and professional friendships with management.
    2. Audit committee members are compensated by the organization and thus favor a shareholder's view.
    3. Audit committees devote most of their efforts to external audit concerns and do not pay much attention to internal auditing and the overall control environment.
    4. Audit committee members do not normally have degrees in the accounting or auditing fields.

76. CPAs may send a formal “management letter” to clients in order that such a letter may provide
    1. A summary of the CPA’s observations arising out of his study of the client’s internal control system.
    2. A written record of discussion between the auditor and the client concerning the former’s observations and suggestions for improvements in financial management.
    3. A permanent record of the review of the internal control work accomplished by the auditor during the course of his engagement.
    4. Evidence as to the adequacy or inadequacy of the operating internal control system.

77. A conceptually logical approach to the auditor's evaluation of internal accounting control consists of the following four steps:

1. Determine whether the necessary procedures are prescribed and are being followed satisfactorily.
2. Consider the types of errors and irregularities that could occur.
3. Determine the internal accounting control procedures that should prevent or detect errors and irregularities.
4. Evaluate any weakness to determine its effect on the nature, timing, or extent of auditing procedures to be applied and suggestions to be made to the client.

What should be the order in which these four steps are performed?

1. 1. III, IV, I, II                          b. II, III, I, IV                      c. III, I, II, IV                      d. II, I, III, IV

78. Tests of controls are least likely to be omitted with regard to
    1. Accounts believed to be subject to ineffective controls.
    2. Accounts representing few transactions.
    3. Accounts representing many transactions.
    4. Subsequent events.

79. To obtain evidential matter about control risk, an auditor selects tests from a variety of techniques including
    1. Inquiry.            b. Calculations.               c. Analytical procedures.            d. Confirmations.

80. A procedure that would most likely be used by an auditor in performing tests of control procedures that involve segregation of functions and that leave no transaction trail is
    1. Inspection.                     b. Reperformance.        c. Observation.               d. Reconciliation.

81. Which of the following controls would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments?
    1. Senior management verifies that securities in the bank safe deposit box are registered in the entity’s name.
    2. The internal auditor compares the securities in the bank safe deposit box with recorded investments.
    3. The treasurer vouches the acquisition of securities by comparing brokers’ advices with canceled checks.
    4. The controller compares the current market prices of recorded investments with the brokers’ advices on file.

82. Which of the following internal control procedures is not usually performed in the treasurer’s department?
    1. Verifying the accuracy of checks and vouchers.
    2. Controlling the mailing of checks to vendors.

1. 3. Approving vendors’ invoices for payment.
   4. Canceling payment vouchers when paid.

83. Which of the following controls would an entity most likely use in safeguarding against the loss of marketable securities?
    1. An independent trust company that has no direct contact with the employees who have record-keeping responsibilities has possession of securities.
    2. The internal auditor verifies the marketable securities in the entity’s safe each year on the balance sheet date.
    3. The independent auditor traces all purchases and sales of marketable securities through the subsidiary ledgers to the general ledger.
    4. A designated member of the board of directors controls the securities in a bank safe deposit box.

84. The treasurer makes disbursements by check and reconciles the monthly bank statements to accounting records. Which of the following best describes the control impact of this arrangement?
    1. Internal control will be enhanced because these are duties that the treasurer should perform.
    2. The treasurer will be in a position to make and conceal unauthorized payments.
    3. The treasurer will be able to make unauthorized adjustments to the cash account.
    4. Controls will be enhanced because the treasurer will have two opportunities to discover inappropriate disbursements.

85. From the standpoint of good internal control, the billing department, for good internal control should be under directions of the
    1. Credit manager.                b. Controller.               c. Sales manager.                           d. Treasurer.

86. To achieve good internal accounting control which department should perform the activities of matching shipping documents with sales orders and preparing daily sales summaries?
    1. Billing.                                    b. Credit.                      c. Shipping.                                      d. Sales order.

87. The most likely result of ineffective internal control policies and procedures in the revenue cycle is that
    1. Irregularities in recording transactions in the subsidiary accounts could result in a delay in goods shipped.
    2. Omission of shipping documents could go undetected, causing an understatement of inventory.
    3. Final authorization of credit memos by personnel in the sales department could permit an employee defalcation scheme.
    4. Fictitious transactions could be recorded, causing an understatement of revenues and overstatement of receivables.

88. Smith Manufacturing Company’s accounts receivable clerk has a friend who is also Smith’s customer. The accounts-receivable clerk, on occasion, has issued fictitious credit memorandums to his friend for goods supposedly returned. The most effective procedure for preventing this type of activity is to
    1. Prenumber and account for all credit memorandums.
    2. Require receiving reports to support all credit memorandums before they are approved.
    3. Have all the sales department independent of the accounts-receivable department.
    4. Mail monthly statements.

89. Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments?
    1. Accounts receivable.                                                  c. Accounts payable.
    2. Credit.                                                                              d. Treasurer.

90. Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs?
    1. Employees responsible for authorizing sales and bad debt write-offs denied access to cash.

1. 2. Shipping documents and sales invoices are matched by an employee who does not have authority to write off bad debts.
   3. Employees involved in the credit-granting function are separated from the sales function.
   4. Subsidiary accounts receivable records are reconciled to the control account by an employee independent of the authorization of credit.

91. At which point in an ordinary sales transaction of a wholesaling business would a lack of specific authorization least concern the auditor conducting an audit?
    1. Determining discounts.                                              c. Granting credit.
    2. Selling goods for cash.                             d. Shipping goods.

92. An auditor observes the mailing of monthly statements to a client’s customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management’s financial statement assertion(s) of

93. An auditor tests an entity’s policy of obtaining credit approved before shipping goods to customers in support of management’s financial statement assertion of
    1. Valuation or allocation.                                              c. Existence or occurrence.
    2. Completeness.                                                             d. Rights and obligations.

94. Which of the following audit procedures would an auditor most likely perform to test controls relating to management’s assertion concerning the completeness of sales transactions?
    1. Verify that extensions and footings on the entity’s sales invoices and monthly customer statements have been recomputed.
    2. Inspect the entity’s reports of prenumbered shipping documents that have not been recorded in the sales journal.
    3. Compare the invoiced prices on prenumbred sales invoices to the entity’s authorized price list.
    4. Inquire about the entity’s credit granting policies and the consistent application of credit checks.

95. To determine whether the system of internal accounting control operated effectively to minimize errors of failure to invoice a shipment, the auditor would select a sample of transactions from the population represented by the
    1. Customer order file.                                c. Open invoice file.
    2. Bill of lading file.                                                             d. Sales invoice file.
96. Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate controls over the invoicing function allow goods to be shipped that are not invoiced. The inadequate controls could cause an
    1. Understatement of revenues, receivables, and inventory.
    2. Overstatement of revenues and receivables, and an understatement of inventory.
    3. Understatement of revenues and receivables, and an overstatement of inventory.
    4. Overstatement of revenues, receivables, and inventories.

97. Which of the following controls most likely addresses the completeness assertion for inventory?
    1. Work in process account is periodically reconciled with subsidiary records.
    2. Employees responsible for custody of finished goods do not perform the receiving function.
    3. Receiving reports are prenumbered and periodically reconciled.
    4. There is a separation of duties between payroll department and inventory accounting personnel.

98. Which of the following controls most likely would be used to maintain accurate inventory records?
    1. Perpetual inventory records are periodically compared with the current cost of individual inventory items.
    2. A just-in-time inventory ordering system keeps inventory levels to a desired minimum.