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b 1. A client erroneously recorded a large purchase twice. Which of the following control procedures
would be most likely to detect this error in a timely and efficient manner?
a. Footing the purchases journal.
b. Reconciling vendors monthly statements with subsidiary payable ledger accounts.
c. !racing totals from the purchases journal to the ledger accounts.
d. "ending written #uarterly confirmations to all vendors. $A%&'A A(A'!)(*
d +. An internal control #uestionnaire indicates that an approved receiving report must accompany
every check re#uest for payment of merchandise. Which of the following procedures provides
the greatest assurance that this control is operating effectively?
a. "elect and e,amine receiving reports and ascertain that the related canceled checks are dated no
earlier than the receiving reports.
b. "elect and e,amine receiving reports and ascertain that the related canceled checks are dated no
later than the receiving reports.
c. "elect and e,amine canceled checks and ascertain that the related receiving reports are dated no
earlier than the checks.
d. "elect and e,amine canceled checks and ascertain that the related receiving reports are dated no
later than the checks. $A%&'A A(A'!)(*
c -. !he accounts payable department receives the purchase order form to accomplish all of the
following e,cept
a. &ompare invoice price to purchase order price.
b. )nsure that the purchase had been properly authori.ed.
c. )nsure that the party re#uesting the goods had received the goods.
d. &ompare #uantity ordered to #uantity purchased. $A%&'A A(A'!)(*
b /. For effective internal control purposes0 which of the following individuals should be responsible
for mailing signed checks?
a. Receptionist.
b. !reasurer.
c. Accounts payable clerk.
d. 'ayroll clerk. $A%&'A A(A'!)(*
a 1. A clients e,penditure2disbursement cycle begins with re#uisitions from user departments and
ends with the receipt of materials and the recognition of a liability. An auditors primary objective
in reviewing this cycle is to
a. )valuate the reliability of information generated by the cycle.
b. %nvestigate the physical handling and recording of unusual ac#uisitions of materials.
c. &onsider the need to be on hand for the annual physical inventory count if this system is not
functioning properly.
d. Ascertain that materials said to be ordered0 received0 and paid for are on hand.
$A%&'A A(A'!)(*
b 4. Which of the following is a primary function of the purchasing department?
a. Authori.ing the ac#uisition of goods.
b. )nsuring the ac#uisition of goods of a specified #uality.
c. 5erifying the propriety of goods of a specified #uality.
d. Reducing e,penditures for goods ac#uired. $A%&'A A(A'!)(*
d 3. An auditor is planning the consideration of internal control over the e,penditure2disbursement
cycle. !he auditor will be least influenced by
!he availability of a company procedures manual describing purchasing and cash disbursement
!he scope and results of work performed by the companys internal auditors.
!he e,istence within the purchasing department of control procedures that offset deficiencies.
!he strength or deficiency of control procedures in other areas0 e.g.0 sales and accounts receivable.
$A%&'A A(A'!)(*
a 6. 7mitting #uantities from copies of purchase orders sent to the receiving department is a control
procedure intended mainly to
a. )nsure that goods received are physically counted by receiving department personnel.
b. %dentify and return damaged goods as soon as they are received.
c. 'rovide a crosscheck for verifying the accuracy of perpetual inventory records.
d. 'revent theft of goods by receiving department personnel.
d 8. Which of the following is not an appropriate activity for the treasurers department?
'repare checks.
Forward checks to vendors.
&ancel vouchers.
'repare vouchers.
a 19. An effective internal control procedure that protects against the preparation of improper or
inaccurate disbursements is to re#uire that all checks be
a. "igned by an official after necessary supporting evidence has been e,amined.
b. Reviewed by the treasurer before mailing.
c. "e#uentially numbered and accounted for by internal auditors.
d. 'erforated or otherwise effectively canceled when they are returned with the bank statement.
$A%&'A A(A'!)(*
a 11. As an in:charge auditor0 you are reviewing a write:up of internal control in cash receipt and
disbursement procedures. Which of the following deficiencies alone should cause you the least
a. &hecks are signed by only one person.
b. "igned checks are distributed by the controller to approved payees.
c. !he treasurer fails to establish bona fide names and addresses of check payees.
d. &ash disbursements are made directly out of cash receipts. $A%&'A A(A'!)(*
c 1+. ;atching the suppliers invoice0 the purchase0 and the receiving report normally should be the
responsibility of the
a. Receiving department.
b. 'urchasing department.
c. Accounting function.
d. !reasury function. $A%&'A A(A'!)(*
a 1-. !o avoid potential errors and irregularities0 well:designed controls in the accounts payable area
should include a separation of which of the following functions?
&ash disbursements and vendor invoice verification.
5endor invoice verification and merchandise ordering.
'hysical handling of merchandise received and preparation of receiving reports.
&heck signing and cancellation of payment documentation. $A%&'A A(A'!)(*
b 1/. Which of the following is a necessary control procedure for cash disbursements?
a. &hecks should be signed by the controller and at least one other employee of the company.
b. &hecks should be se#uentially numbered0 and the numerical se#uence should be accounted for by
the person preparing the bank reconciliation.
c. &hecks and supporting documents should be marked <'aid< immediately after the check is
returned with the bank statement.
d. &hecks should be sent directly to the payee by the employee who prepares documents that
authori.e check preparation. $A%&'A A(A'!)(*
b 11. Which of the following is not a common activity of the e,penditure2disbursement cycle?
a. 'urchasing.
b. Fi,ed asset additions.
c. Receiving.
d. Recording.
b 14. Which of the following functions is not appropriate for the accounts payable department?
a. &ompare purchase re#uisitions0 purchase orders0 receiving reports0 and vendors invoices.
b. 'repare purchase orders.
c. 'repare voucher and daily summary.
d. File voucher package by due date.
d 13. !he accounts payable department generally should
a. &ancel supporting documentation after a cash payment is mailed.
b. Approve the price and #uantity of each purchase re#uisition.
c. Assure that the #uantity ordered is omitted from the receiving departments copy of the purchase
d. Agree the vendors invoice with the receiving report and purchase order. $A%&'A A(A'!)(*
d 16. =ased on observations made during an audit0 an independent auditor should discuss with
management the effectiveness of procedures that control against the purchase of
a. "upplies purchased from a vendor who offers no trade or cash discounts.
b. %nventory ac#uired just:in:time.
c. )#uipment that is needed but does not #ualify for investment ta, credit.
d. "upplies ordered without considering potential volume discounts. $A%&'A A(A'!)(*
b 18. %nternal control is improved when the #uantity of merchandise ordered is omitted from the copy
of the purchase order sent to the
(epartment that initiated the re#uisition.
Receiving department.
'urchasing agent.
Accounts payable department. $A%&'A A(A'!)(*
c +9. When goods are received0 the receiving clerk should match the goods with the
a. 'urchase order and re#uisition.
b. 5endors invoice and the receiving report.
c. 5endors shipping document and the purchase order.
d. Receiving report and the vendors shipping document. $A%&'A A(A'!)(*
a +1. !he accounts payable department should compare the information on each vendors invoice with
a. Receiving report and the purchase order.
b. Receiving report and the voucher.
c. 5endors packing slip and the purchase order.
d. 5endors packing slip and the voucher. $A%&'A A(A'!)(*
c ++. )ffective internal control over the purchase of raw materials should usually include all of the
following procedures e,cept
a. Reporting product changes that will affect raw materials needs.
b. (etermining the need for raw materials prior to preparing a purchase order.
c. 7btaining third:party written #uality and #uantity reports prior to paying for the raw materials.
d. 7btaining approval prior to making a purchase commitment. $A%&'A A(A'!)(*
a +-. !o improve control over merchandise purchases0 a companys receiving department should
a. Accept merchandise only if an approved purchase order is on hand.
b. Accept and count all merchandise received from known vendors.
c. Rely on shipping documents to prepare receiving reports.
d. =e responsible for handling merchandise but not for preparing receiving reports.
$A%&'A A(A'!)(*
b +/. !o assure that disbursements are neither improper nor inaccurate0 an entity could re#uire that all
checks be
a. "igned by an officer after supporting documentation has been e,amined.
b. Reviewed by the treasurer before mailing.
c. >umbered se#uentially and accounted for by internal auditors.
d. &anceled when they are returned with the bank statement. $A%&'A A(A'!)(*
a +1. !he mailing of disbursement checks and remittance advices should be controlled by the employee
a. "igned the checks last.
b. Approved the vouchers for payment.
c. ;atched the receiving reports0 purchase orders0 and vendor invoices.
d. 5erified the mathematical accuracy of the vouchers and remittance advices.
$A%&'A A(A'!)(*
b +4. An auditor plans to e,amine a sample of +9 checks for countersignatures as prescribed by the
clients internal control procedures. 7ne of the checks in the sample cannot be found. !he auditor
a. )valuate the results as if sample si.e had been 18.
b. !reat the missing check as a deviation.
c. !reat the missing check in the same manner as the majority of the other 18 checks0 i.e.0
countersigned or not.
d. &hoose another check to replace the missing check in the sample. $A%&'A A(A'!)(*
c +3. Which of the following procedures relating to the audit of accounts payable could the auditor
delegate entirely to the clients employees?
a. !est footings in the accounts payable ledger.
b. Reconcile unpaid invoices to vendors statements.
c. 'repare a schedule of accounts payable.
d. ;ail confirmations for selected account balances. $A%&'A A(A'!)(*
a +6. %n order to establish accounts payable cutoff0 an auditor will most likely
a. &oordinate cutoff tests with the physical inventory observation.
b. &ompare cutoff reports with purchase orders.
c. &ompare vendors invoices with vendors statements.
d. &oordinate the mailing of confirmations with cutoff tests. $A%&'A A(A'!)(*
b +8. An audit of accounts payable is ordinarily not designed to
a. (etect substantially past due accounts.
b. 5erify that accounts payable were properly authori.ed.
c. (etermine the reasonableness of recorded liabilities.
d. (etermine that all e,isting liabilities at the balance sheet date have been recorded.
c -9. When an auditor selects a sample of items from the vouchers payable register for the last month
of the period under audit and traces them to underlying documents0 the auditor is gathering
evidence primarily to support the assertion that
a. Recorded obligations were paid.
b. %ncurred obligations were recorded in the correct period.
c. Recorded obligations were valid.
d. &ash disbursements were recorded as incurred obligations. $A%&'A A(A'!)(*
b -1. Which of the following audit procedures is the most efficient at detecting unrecorded liabilities at
the balance sheet date?
a. &onfirm large accounts payable balances at the balance sheet date.
b.&ompare cash disbursements in the subse#uent period with the accounts payable trial
balance at year:end.
c. ),amine purchase orders issued for several days prior to the close of the year.
d.7btain a letter from the clients attorney. $A%&'A A(A'!)(*
b -+. Which of the following audit procedures is least likely to detect an unrecorded liability?
a. Analysis and recomputation of interest e,pense.
b. Analysis and recomputation of depreciation e,pense.
c. ;ailing a standard bank confirmation form.
d. Reading the minutes of board of directors meetings. $A%&'A A(A'!)(*
c --. A company sells a product only in the last month of its fiscal year. !he company uses commission
agents and pays them 4 percent of their net sales -9 days after the sales are made. !he agents
sales were ?1909990999. ),perience indicates that 19 percent of the sales are usually not collected
and + percent are returned in the first month of the new year. !he auditor would e,pect the
year:end balance in the accrued commissions account to be
a. ?1+60999.
b. ?1/90999.
c. ?1660999.
d. ?4990999. $A%&'A A(A'!)(*
1. 7utline how an auditor obtains an understanding of internal control.
i. 'erforming a preliminary review
ii. =y documenting the system
iii. =y performing a transaction walk:through
iv. (etermining whether e,isting control procedures are potentially reliable in assessing
control risk below the ma,imum.
+. >ame the two major business functions associated with the e,penditure2disbursement cycle.
Resources $goods and services* are ac#uired from vendors and employees in
e,change for obligations to pay.
7bligations to vendors and employees are paid.
-. %n the recording process of the e,penditure2disbursement cycle0 how can management protect
against inaccurate account balances and misstated financial statements?
!o protect against inaccurate account balances and therefore against misstated financial
statements0 management should institute policies to assure that all purchases and cash
disbursements are recorded properly and in the proper period. ;anagement could control the
recording function by preparing input totals0 by reconciling journals and subsidiary ledgers0 and
by establishing procedures for processing and recording.
Following system documentation and assuming that controls are potentially reliable in assessing control
risk below that ma,imum0 what are the ne,t steps the auditor would take in the identification of control
!he auditor would@
%dentify the systemAs control objectives.
&onsider the potential errors or frauds that might result if specific control objectives
are not met.
(etermine what control procedures management uses to prevent or detect potentially
material errors or frauds.
(esign tests of controls.
%n what ways can management safeguard cash or other company assets?
;anagement could safeguard cash and other company assets by@
Restrict access to purchasing and cash disbursement records and forms.
'renumber and control forms and documentsB maintaining lists and samples of
authori.ed signatures.
"egregating responsibility for authori.ing0 e,ecuting0 and recording.
1. !here are several forms of documentation affecting the e,penditure2disbursement cycle and are
also used as audit evidence. >ame and describe five forms of documentation.
5oucher 'ackage !he purchase re#uisition0 purchase order0
receiving report0 and invoice. 7ften includes
a summari.ing document0 the voucher.
5endorAs %nvoice %dentifies goods purchased and represents
formal notice about the amount and terms of
payment C often called the bill.
Receiving Report %dentifies information about goods received
from a vendor.
'urchase 7rder A re#uest issued by the purchasing
department to a vendor to purchase goods
'urchase Re#uisition A re#uest from an employee or department
supervisor that goods be purchased.
+. "ummari.e the purchasing and cash disbursements activities0 narrating the flow through the
'urchasing0 Receiving0 Accounts 'ayable0 and &ash (isbursements process.
Purchasin !e"ar#$en#
'urchase re#uisitions are accepted and approved.
'repares purchase orders0 distributes copies0 and retains the file copy.
Recei%in !e"ar#$en#
Files purchase orders until goods are received.
When goods are received0 counts #uantities and compares the results with the
purchase orders.
'repares a receiving report.
Forwards goods to %nventory &ontrol.
Forwards copies of receiving report to Accounts 'ayable and to 'urchasingB
Receiving also retains a file copy of receiving report0 purchase order0 and
updated receiving log.
Acc&un#s Pa'a()e !e"ar#$en#
&ompares purchase re#uisition0 purchase order0 receiving report0 and
vendorAs invoice.
'repares voucher and daily summary and then assembles voucher package.
Files voucher package by due dateB forwards to cash disbursements on date
Forwards daily summary to Deneral Accounting for recordingB Accounts
'ayable retains the file copy.
Cash !is(urse$en#s
Reviews voucher packages received from Accounts 'ayable on due date.
'repares checks and daily summary.
Eas checks signed by authori.ed signatories.
Forwards checks to vendors.
Forwards summary to Deneral Accounting and Accounts 'ayable for
recordingB &ash (isbursements retains a file copy of summary.
&ancels and files voucher packages.