FURTHER AUDIT PROCEDURES

TRANSACTION CYCLES/SPECIFIC TESTS OF CONTROLS

Revenue and Receipt Cycle
1. Which of the following is not a universal rule for achieving control over cash?
a. Separate the cash-handling and record-keeping functions.
b. Deposit each days cash receipts by the end of the day.
c. Have bank reconciliations performed by employees who do not handle cash.
d. Decentralize the receiving of cash as much as possible.
2. An auditor is reviewing internal control for accounts receivable:
I. The billing function should not be assigned to the person who is responsible for maintaining accounts receivable records.
II. Responsibility for approval of the write-off of accounts receivable that are uncollectible should not be assigned to the cashier.
a. Only I is true
c. Both I and II are true
b. Only II is true
d. Neither I nor II is true
3. Which of the following is an effective internal control over accounts receivable?
a. Only persons who handle cash receipts should be responsible for the preparation of documents that reduce accounts receivable
balances.
b. Responsibility for approval of the write-off of uncollectible accounts receivable should be assigned to the cashier.
c. Balances in the subsidiary accounts receivable ledger should be reconciled to the general ledger control account once a year,
preferably at year-end.
d. The billing function should be assigned to persons other than those responsible for maintaining accounts receivable subsidiary
records.
4. To achieve control when there is no billing department, the billing function should be performed by the
a. Accounting department
c. Shipping department
b. Sales department
d. Credit and collection department
5. 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
a. Credit manager.
c. Sales manager.
b. Receptionist.
d. Accounts receivable clerk.
6. Which of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mail
room?
a. The cashier makes the daily deposit at a local bank.
b. The cashier prepares the daily deposit.
c. The cashier endorses the checks.
d. The cashier posts the receipts to the accounts receivable subsidiary ledger.
7. Which of the following would best protect a company that wishes to prevent lapping?
a. Segregating duties so that accounting has no access to an incoming mail
b. Segregating duties so that no employee has access both to checks from customers and to currency from daily cash receipts
c. Having customers send payments directly to the companys bank
d. Requesting that customers checks be made payable to the company and be addressed to the treasurer
8. Defective merchandise returned by customers should be presented to
a. Inventory control personnel.
c. Purchasing personnel
b. Sales personnel.
d. Receiving personnel
9. To determine whether internal control operates effectively to minimize 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. Shipping records file
c. Sales invoice
b. Customer order file
d. Subsidiary customer accounts ledger
10. The purpose of tests of controls over shipping is to determine whether
a. Billed goods have been shipped.
c. Shipping department personnel are competent.
b. Shipments are billed.
d. Credit is approved before goods are shipped.
11. The purpose of tests of controls over billing is to determine whether
a. Billed goods have been shipped.
c. Billing department personnel are competent.
b. Shipments are billed.
d. Credit is approved before goods are billed.

12. Which of the following control procedures could prevent or detect errors or frauds arising from shipments made to unauthorized
parties?

a. Document policies and procedures for scheduling shipments.

b. Establish procedures for reviewing and approving prices and sales terms before sale.
c. Prenumber bills of lading and assure that related billings are made on a periodic basis.
d. Prepare and periodically update lists of authorized customers.
13. Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments?
a. Accounts receivable.
c. Accounts payable.
b. Credit
d. Treasurer.
Expenditure and Disbursement Cycle
1. Matching the suppliers invoice, the purchase order, and the receiving report normally should be the responsibility of the
a. Receiving department
c. Accounting function
b. Purchasing department
d. Treasury function
2. 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 departments copy of the purchase order
d. Agree the vendors invoice with the receiving report and purchase order
3. 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
c. Purchasing agent
b. Receiving department
d. Accounts payable department
4. When goods are received, the receiving clerk should match the goods with the
a. Purchase order and requisition.
c. Vendors shipping document and the purchase order.
b. Vendors invoice and the receiving report.
d. Receiving report and the vendors shipping documents.
5. The accounts payable department should compare the information on each vendors invoice with the
a. Receiving report and the purchase order.
c. Vendors packing slip and the purchase order.
b. Receiving report and the vendor.
d. Vendors packing slip and the voucher.
6. The mailing of disbursement checks and remittance advices should be controlled by the employee who
a. Signed the checks last
c. Matched the receiving reports, purchase orders, and vendor invoices
b. Approved the vouchers for payment
d. Verified the mathematical accuracy of the vouchers and remittance advices
7. How can an auditor test to determine whether Receiving Department procedures are applied properly?
a. Test a sample of receiving documents.
c. Review procedures manuals.
b. Observe receiving procedures on a surprise basis.
d. Interview receiving personnel.
8. Which of the following control procedures could prevent or detect payment of goods not received?
a. Counting goods when received.
b. Matching the purchase order, receiving report, and vendors invoice.
c. Comparing goods received with goods requisitioned.
d. Verifying vouchers for accuracy and approval.
9. Which of the following would prevent a paid disbursement from being paid a second time?
a. Individuals responsible for signing checks should prepare vouchers.
b. Disbursements should be approved by at least two responsible officials.
c. The disbursement date should be within a few days of the date the voucher is presented for payment.
d. The official signing the check should cancel the supporting documents.
SUBSTANTIVE TESTS
1. In the context of an audit of financial statements, substantive tests are audit procedures that
a. May be eliminated under certain conditions
b. Are designed to discover significant subsequent events
c. May be either tests of transactions, direct test of balances, or analytical tests
d. Will increase proportionately with the auditors reliance on internal control
Audit of Cash
2. The primary evidence regarding year-end bank balances is documented in the
a. Standard bank confirmations
c. Interbank transfer schedule
b. Bank reconciliations
d. Bank deposit lead schedule

3. Cash receipts should be deposited on the day of receipt or the following business day. Select the most appropriate audit procedure
to determine that cash is promptly deposited.

a. Review the functions of cash receiving and disbursing for proper separation of duties.
b. Review cash register tapes prepared for each sale.
c. Review the functions of cash handling and maintaining accounting records for proper segregation of duties.
d. Compare the daily cash receipts totals with the bank deposits
4. Which of the following sets of information does an auditor usually confirm in one form?
a. Cash in bank and collateral for loans
c. Accounts receivable and accrued interest receivable
b. Accounts payable and purchase commitments
d. Accounts receivable and accrued interest receivable
5. To gather evidence regarding the balance per books in a bank reconciliation, an auditor would most likely examine
a. Cut-off bank statements
c. Bank confirmation
b. Year-end bank statement
d. General ledger
6. The auditor gathers evidence regarding the validity of deposits in transit by examining the
a. bank confirmation
c. year-end bank statement
b. cut off bank statement
d. bank reconciliation
7. An auditor ordinarily should send a standard confirmation request to all banks with which the client has done business during the
year under audit, regardless of the year-end balance because this procedure
a. Provides for confirmation regarding compensating arrangements
b. Detect kiting activities that may otherwise not be discovered
c. Seek information about indebtedness to the bank
d. Verifies securities held by the bank in safekeeping
Audit of Receivables
1. Which of the following statements is correct concerning the use of negative confirmation requests?
a. Unreturned negative confirmation requests rarely provide significant explicit evidence.
b. Negative confirmation requests are effective when detection risk is low.
c. Unreturned negative confirmation requests indicate that alternative procedures are necessary.
d. Negative confirmation requests are effective when understatements of account balances are suspected.
2. Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because
a. A majority of recipients usually lack the willingness to respond objectively.
b. Some recipients may report incorrect balances that require extensive follow-up.
c. The auditor cannot infer that all nonrespondents have verified their account information
d. Negative confirmation do not produce evidential matter that is statistically quantifiable
3. When there is a large number of relatively small account balances, negative confirmation of accounts receivable is feasible if
internal accounting control is
a. Strong, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration.
b. Weak, and the individuals receiving the confirmation requests are likely to give them adequate consideration.
c. Strong, and the individuals receiving the confirmation requests are likely to give them adequate consideration.
d. Weak, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration.
4. In which of the following circumstances would the use of negative form of accounts receivable confirmation most likely be
justified?
a. A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers.
b. A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with
small balances
c. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers.
d. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small
balances.
5. It is sometimes impracticable or impossible for an auditor to use normal accounts receivable confirmation procedures. In such
situations, the best alternative procedure the auditor might resort to would be
a. Examining subsequent receipts of year-end accounts receivable.
b. Reviewing accounts receivable aging schedules prepared at the balance sheet date and at a subsequent date.
c. Requesting that management increase the allowance for uncollectible accounts by an amount equal to some percentage of the
balance in those accounts that cannot be confirmed.
d. Performing an overall analytic review of accounts receivable and sales on a year-to-year basis.

6. Returns of positive confirmation requests for accounts receivable were very poor. As an alternative procedure, the auditor decided
to check subsequent collections. The auditor had satisfied himself that the client satisfactorily listed the customer name next to each
check listed on the deposit slip; hence, he decided that for each customer for which a confirmation was not received that he would add

all amounts shown for that customer on each validated deposit slip for the two months following the balance-sheet date. The major
fallacy in the auditors procedures is that
a. Checking of subsequent collections is not an accepted alternative auditing procedure for confirmation of accounts receivable.
b. By looking only at the deposit slip the auditor would not know if the payment was for the receivable at the balance sheet date or a
subsequent transaction.
c. The deposit slip would not be received directly by the auditor as a confirmation would be.
d. A customer may not have made a payment during the two-month period.
7. An aged trial balance of accounts receivable is usually used by the auditor to
a. Verify the validity of recorded receivables
c. Evaluate the results of compliance tests
b. Ensure that all accounts are promptly credited
d. Evaluate the provision for bad debts expense
8. One of the major audit procedures for determining whether the allowance for doubtful receivables is adequate is
a. The preparation of a list of aged accounts receivable.
b. Confirming any accounts receivable written off in prior periods.
c. Vouching the collection on any accounts receivable written off in prior periods.
d. Confirming any accounts receivable with a credit balance.
Audit of Inventory
1. When auditing inventories, an auditor would least verify that
a. The financial statement presentation of inventories is appropriate
b. Damaged goods and obsolete items have been properly accounted for
c. All inventory owned by the client is on hand at the time of the count
d. The client has used proper inventory pricing
2. While observing a clients annual physical inventory, an auditor recorded test counts for several items and noticed that certain test
counts were higher than the recorded quantities in the clients perpetual records. This situation could be the result of the clients
failure to record
a. Purchase discounts
c. Sales
b. Purchase returns
d. Sales returns
3. The audit of year-end physical inventories should include steps to verify that the clients purchases and sales cut-offs were adequate.
The audit steps should be designed to detect whether merchandise included in the physical count at year-end was not recorded as a
a. Sale in the subsequent period
c. Sale in the current period
b. Purchase in the current period
d. Purchase return in the subsequent period
4. When auditing merchandise inventory at year-end, the auditor performs a purchase cut-off test to obtain evidence that
a. All goods purchased before year-end are received before the physical inventory count.
b. No goods held on consignment for customers are included in the inventory balance.
c. No goods observed during the physical count are pledged or sold.
d. All goods owned at year-end are included in the inventory balance.
5. After accounting for a sequence of inventory tags, an auditor traces a sample tags to the physical inventory listing to obtain evidence
that all items
a. Included in the listing have been counted.
b. Represented by inventory tags are included in the listing.
c. Included in the listing are represented by inventory tags.
d. Represented by inventory tags are bona fide.
6. Which of the following might be detected by an auditors review of the clients sales cut-off?
a. Excessive goods returned for credit
c. Lapping of year-end accounts receivable
b. Unrecorded sales discounts
d. Inflated sales for the year
7. Purchase cut-off procedures should be designed to test whether or not all inventory
a. Purchased and received before the end of the year was paid.
b. Ordered before the end of the year was received.
c. Purchased and received before the end of the year was recorded.
d. Owned by the company is in the possession of the company at the end of the year.

Audit of Investments
1. To establish the existence and ownership of a long-term investment in the common stock of a publicly-traded company, an auditor
ordinarily performs a security count or
a. Relies on the clients internal accounting controls, if the auditors procedures are being applied as prescribed.

b. Confirms the number of shares owned that are held by an independent custodian.
c. Determine the market price per share at the balance sheet date from published quotation.
d. Confirms the number of shares owned with the issuing company.
2. An auditor would most likely verify the interest earned on bond investments by
a. Vouching the receipt and deposit of interest checks.
b. Confirming the bond interest rate with the issuer of the bonds
c. Recomputing the interest earned on the basis of face amount, interest rate and period held.
d. Testing the internal controls over cash receipts.
3. When an auditor is unable to inspect and count a clients investment securities until after the balance sheet date, the bank where the
securities are held in a safe deposit box should be asked to
a. Verify any differences between the contents of the box and the balances in the clients subsidiary ledger.
b. Provide a list of securities added and removed from the box between the balance sheet and the security-count date.
c. Confirm that there has been no access to the box between the balance sheet date and the security-count date.
d. Count the securities in the box so that the auditor have an independent direct verification.
4. Which of the following is the most effective audit procedure for verification of dividends earned on investments in marketable
securities?
a. Tracing deposit of dividend checks to cash receipts book.
b. Reconciling the amounts received with published dividend records.
c. Comparing the amounts received with preceding year dividends received.
d. Recomputing selected transactions extensions and footings of dividend schedules and comparing totals to the general ledger.
Audit of PPE
1. Which of the following combinations of procedures would an auditor most likely perform to obtain evidence about fixed asset
additions?
a. Inspecting documents and physically examining assets
b. Recomputing calculations and obtaining written management representations
c. Observing operating activities and comparing balances to prior period balances
d. Confirming ownership and corroborating transactions through inquiries of client personnel
2. In testing plant and equipment balances, an auditor examines new additions listed on an analysis of plant and equipment. This
procedure most likely obtains evidence concerning managements assertion of
a. Completeness
c. Presentation and disclosure
b. Existence or occurrence
d. Valuation or allocation
3. When there are few property and equipment transactions during the year, the continuing auditor makes a
a. Complete review of the related internal accounting controls and performs compliance test of controls being relied upon.
b. Complete review of the related internal accounting controls and performs analytical review tests to verify the current year additions
to property and equipment.
c. Preliminary review of the related internal accounting controls and performs a thorough examination of the balance at the beginning
of the year.
d. Preliminary review of the related internal accounting controls and performs extensive tests of current year property and equipment
transactions.
Audit of Liabilities
1. Which of the following is a substantive test that an auditor most likely would perform to verify the existence and valuation of
recorded accounts payable?
a. Investigating the open purchase order file to ascertain that prenumbered purchase orders are used and accounted for.
b. Receiving the clients mail, unopened period of time after the year-end to search for unrecorded vendors invoices.
c. Vouching selected entries in the accounts payable subsidiary ledgers to purchase orders and receiving reports.
d. Confirming accounts payable balances with known suppliers who have zero balances.
2. Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?
a. Reconcile receiving reports with related cash payments made just prior to year-end.
b. Contrast the ratio of accounts payable to purchases with the prior years ratio.
c. Vouch a sample of creditor balances to supporting invoices, receiving reports, and purchase orders.
d. Compare the cash payments occurring after the balance sheet date with the accounts payable trial balance.

3. Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because
a. This is a duplication of cut-off tests.
b. Accounts payable balances at the balance sheet date may not be paid before the audit is completed.
c. Correspondence with the audit clients attorney will reveal all legal action by vendors for nonpayment.
d. There is likely to be other reliable external evidence to support the balances.

4. Which of the following is the best procedure for determining the existence of unrecorded liabilities at year-end?
a. Examine a sample of invoices dated a few days prior to and subsequent to year-end to ascertain whether they have been properly
recorded.
b. Examine a sample of cash disbursements in the period subsequent to year-end.
c. Examine confirmation requests returned by creditors whose accounts appear on a subsidiary trial balance of accounts payable.
d. Examine unusual relationships between monthly accounts payable balances and recorded purchases.
Audit of SHE
1. When a clients company does not maintain its own stock records, the auditor should obtain written confirmation from the transfer
agent and the registrar concerning:
a. Restrictions on the payment of dividends
c. Guarantees of preferred stock liquidation value
b. The number of shares issued and outstanding
d. The number of shares subject to agreements to repurchase