Q&A Hero

Q: Tamra is performing a test of control consisting of looking at the numerical sequence of credit memos issued by the company. Tamra is performing a block test by looking for any missing number in the sequence. This test will provide evidence of A) completeness. B) occurrence, completeness. C) occurrence and accuracy. D) accuracy and completeness.

Q: To test for recorded sales for which there were no actual shipments, the auditor traces from the A) bill of lading to the sales journal. B) sales journal to the shipping documents. C) sales journal to the accounts receivable subsidiary ledger. D) bill of lading to the supporting customer order and sales order.

Q: One of the key internal controls to prevent transactions in the sales and collection cycle to fictitious customers is to A) have the bank reconciliation done by someone who is independent of the treasury function. B) account for the integrity of the numerical sequence of sales orders. C) compare customer numbers entered to the customer master file. D) include the sales price list of all products in the computer files.

Q: When there are problems with program change procedures or with access controls the auditor may choose to A) rely less upon manual controls since control risk has been increased. B) not rely on programmed or interdependent application controls. C) reduce control risk, which reduces the level of substantive testing. D) use an information technology audit specialist to assess programmed application controls.

Q: When a company uses purchased software packages for its accounting software, such packages normally do not permit the company to change the software package's functionality. This means that the auditor will consider A) access controls as being poor. B) program change controls as poor. C) program change controls as excellent. D) access controls as being excellent.

Q: One of the reasons that the auditor considers the type of information systems and its functions is to A) assess whether hardware functioning affects applications. B) evaluate design effectiveness of internal controls. C) complete risk assessment by audit assertion for cycles. D) assess whether programmed controls can be relied upon.

Q: The information systems audit specialist on your audit team has indicated that the general controls over program changes are inadequate for all application cycles. What impact does this have upon your audit of sales invoice processing? A) The auditor could potentially rely upon only manual controls. B) Only interdependent controls should be considered for control testing. C) It is likely that calculations, such as extensions, are performed consistently and accurately throughout the year. D) Unauthorized access to information recorded in the master files is likely.

Q: The information systems audit specialist on your audit team has indicated that the general controls over program changes are excellent for all application cycles. What impact does this have upon your audit of sales invoice processing? A) Generalized audit software should be used to select a sample of sales transactions for control testing. B) Tests of controls should be omitted; only substantive tests may be conducted. C) There could be problems with the accuracy of calculations for sales taxes and goods and excise taxes. D) The auditor can place reliance upon the programs performing sales calculations.

Q: As the quality of the enterprise risk management process declines, and the quality of internal controls over all declines A) risk of fraud decreases. B) risk of fraud increases. C) the extent of control testing increases. D) the extent of substantive testing decreases.

Q: You have just been assigned to manage the audit for a new large client of your firm, Cheap Music Downloads Inc. (CMD). CMD is a subsidiary of a client of your firm that manufactures audio and video equipment for international distribution. CMD has been in operation for two years, when its custom information systems were established. CMD runs a web site that allows customers to order songs using their credit card only. There are tens of thousands of small transactions daily. Once the credit card has been authorized by the credit card processing intermediary, CMD's web sales system generates a 16 digit sequential code that the customer uses to access the song via the web site. CMD will then record both the sale and the royalty for the song. Quarterly, CMD remits royalties to artists based upon the number of copies of the song that has sold, if the accumulated royalty exceeds $25.00 for that artist. Artist royalties that do not exceed $25.00 will be paid every two years if there has not been a payment during that time. All contracted royalty rates, artist names and song titles are recorded in CMD's database tables. Required: Describe three internal controls that should exist over sales or royalty transactions or over the database tables. For each control: (i) State the control (ii) Describe (not just state) the audit assertion associated with the control (or state the purpose of the control) (iii) Provide an audit test that you could use to test the control

Q: Gonzo is an on-line dating agency. Gonzo has been in business for 5 years and has been able to reach revenues of $1 million last year. Given its recent expansion, Gonzo's shareholders have required that the company's financial statements be audited for the first time this year. You have been assigned to the audit team for this mandate. The senior manager asked you to review the process description for the sales of Gonzo. The manager asked you to identify the controls in place that could be tested and used for the audit and also, any controls that might be missing. Briefly explain the impact on the audit. Gonzo's CEO provided you with the following description of their processes and activities for the past year: Sales Gonzo's web-site is operational 24 hours per day. All of the sales for Gonzo are done on-line when the customer opens a profile. A customer will pay $50 to open a profile and will then pay $10 per month to keep his profile active. Most customers pay on-line with their credit cards and the sale is automatically recorded in the sales ledger of Gonzo at the time of payment. Gonzo also had a promotion for the last 3 months of the year. If the customer wanted to subscribe for one year, they could pay $100 upfront to keep their profile active for the full year instead of paying $10 each month for 12 months. This proved to be a popular sales tactic as customers enjoyed the $20 savings. Web-Site Security In the past year, one hacker managed to intrude the web-site and steal the credit card information of 25 Gonzo customers. To ensure quality of customer service, Gonzo reimbursed a total of $10,000 to the customers to compensate them for the amounts that were stolen as a result of the intrusion on their web-site. Since then, Gonzo hired a third party, Mindster Box, to update the security features of their web-site. Mindster Box performs monthly updates to the security features and monitors any intrusion attempt. Gonzo did not have a problem since. Collection and Reconciliation As most of the sales are done by credit card, Gonzo receives the money from large credit card companies on a by-weekly basis. When the money is received from the credit card company, Jo-Ann, the accounting manager of Gonzo, reconciles the detail of the payments received by the credit card company to the sales ledger of Gonzo. Jo-Ann has often complained that this is nearly impossible to do since the accounting system of Gonzo keeps track of the payment by the on-line user name which is often very different from the actual name of the person as stated on the detailed report provided by the credit card company. Jo-Ann therefore mostly relies on the statement of the credit card company to record and adjust revenues reported by Gonzo.

Q: During your lunch, your audit team went to a local mall, in the food court, since they needed to be quick today. You dropped off a photofinishing film at a film developer, saying that you would pick it up after work that day. After telling you that she preferred using her digital camera to using regular film, your supervisor said, "Next week, you are going to be working at a client that just happens to be a group of photography stores. Tell me, what controls do you think should be programmed into the cash register to help ensure that sales transactions are accurate and complete?" Required: Answer your supervisor's question.

Q: A) Describe the four business functions that result in sales transactions in a typical sales and collection cycle and, for each function, state the key documents and records involved. B) State the five classes of transactions that comprise the sales and collection cycle. C) The sales and collections cycle is comprised of nine business functions. The first four functions result in sales transactions. Discuss each of the remaining five business functions that occur after sales transactions, and identify the key documents and records involved in each of those five functions.

Q: Proper accounting requires that an account receivable must be written off by the client when A) the client company concludes that an amount is no longer collectible. B) the customer files for bankruptcy. C) a collection agency cannot inspire the customer to pay the debt. D) the account is at least six months old.

Q: Zhang Corporation returned $6,000 of defective goods to Meli Inc. Meli has a strict policy of no cash refund. Meli should A) write off the account receivable. B) issue a credit memo to Zhang. C) wait until Zhang places its next order to record the return. D) not adjust their accounting records since $6,000 is not material for Meli.

Q: The document that is used to prepare and reconcile the deposit of cash and improve the control over the custody of assets (cash) is the A) sales invoice. B) credit memo. C) remittance advice. D) cash receipts journal.

Q: Some companies use a lockbox system, whereby customers mail payments to a post office box address. The lockbox contents could be handled by a bank, another external organization, or the owner of the company. One of the advantages of using a lockbox is that A) improves segregation of duties. B) results in more accurate bank deposits. C) results in more accurate accounts receivables. D) provides more detailed bank deposit information.

Q: Most companies recognize sales when A) a customer order is received. B) the merchandise is shipped. C) the merchandise is received by the customer. D) cash is received on account.

Q: A document prepared for shipment of the goods sold using a trucking company is called the A) sales order. B) bill of lading. C) sales invoice. D) customer order.

Q: Which of the following control weaknesses could result in problems with collectability of accounts receivable? A) Unauthorized individuals can establish or change credit limits. B) Matching shipping documents to sales records is done weekly. C) When there is one error in a batch of transactions, the whole batch is rejected. D) Cash receipts are matched to the customer accounts rather than against specific invoices.

Q: Poor controls over credit limit approval or in changing the credit limit in the master file may result in A) confused and frustrated customers. B) incomplete sales records. C) financial statement errors for sales and AR accounts. D) excessive bad debts and uncollectible account receivables.

Q: A document that is used to describe and authorize additions, changes or deletion of sales prices or customer data is called a(n) A) uncollectible account authorization form. B) journal entry authorization form. C) master file change form. D) transaction file change form.

Q: A document that describes which accounts receivable accounts are to be written off and why is called a(n) A) uncollectible account authorization form. B) journal entry authorization form. C) master file change form. D) sales returns and allowances journal.

Q: A document sent to each customer showing his or her beginning accounts receivable balance and the amount and date of each sale, cash payment received, credit memo issued, and the ending balance is the A) accounts receivable subsidiary ledger. B) monthly statement. C) remittance advice. D) sales invoice.

Q: Which of the following documents and records is used to record the packages, weights and sizes shipped using an external trucking company? A) remittance advice B) shipping advice containing shipment tracking number C) returns receiving report D) bill of lading

Q: Before goods are shipped on account to a new customer, a properly authorized person must A) prepare the sales invoice. B) approve the journal entry. C) approve credit. D) verify that the unit price is accurate.

Q: Which of the following is an example of a data entry input edit that could be used to improve the accuracy of online data entry of sales orders? A) matching of customer number to master file B) automatic posting of sales to the general ledger account C) reconciliation of the customer master file to accounts receivable D) daily point-of-sales control totals matched to cash receipts

Q: Which of the following data elements would be included in the customer master file as semi-permanent information? A) transaction date B) credit limit C) transaction amount D) amount paid

Q: What information would be considered semi-permanent as well as transaction information? A) Customer number or code B) Customer credit limit C) Transaction amount D) Current balance outstanding

Q: What is the primary focus with respect to error detection and correction for the online processing of sales transactions? A) reject groups of transactions when one transaction is in error B) trace daily sales totals from the journals to the general ledger C) account for numeric sequencing of input documents D) prevent the entering of incorrect transactions using data entry edits

Q: Which of the following controls pertains to audit trails in the batch processing of sales transactions? A) groups of documents are totalled B) audit trail is available in electronic form C) the focus is on preventing incorrect transactions D) remittance advice information is matched to sales invoice numbers

Q: There are three main types of revenue manipulations. Which of the following revenue manipulations affects the valuation objective? A) recording subsequent period sales as current period sales B) the use of "bill and holds" (goods are invoiced but not shipped) C) understatement of bad debts D) creation of fictitious sales that are misclassified as revenue

Q: There are three main types of revenue manipulations. Which of the following revenue manipulations affects the cutoff objective? A) avoiding recording of returns and allowances for the year B) recording subsequent period sales as current period sales C) understatement of bad debts D) creation of fictitious sales that are misclassified as revenue

Q: There are three main types of revenue manipulations. Which of the following revenue manipulations affects the occurrence objective? A) recording subsequent period sales as current period sales B) the use of "bill and holds" (goods are invoiced but not shipped) C) understatement of bad debts D) creation of fictitious sales that are misclassified as revenue

Q: Which of the following actions is more likely to be a result of error rather than fraud? A) consignment sales are knowingly recorded as revenue B) orders are shipped to a customer with a bad credit rating C) fictitious revenue transactions are recorded and reported D) subsequent period revenue is deliberately recorded in the current period

Q: The overall objective in the audit of the sales and collection cycle is to evaluate whether A) the sales account and the accounts receivable account are free of errors. B) the sales account and the accounts receivable account are free of material errors. C) the sales account and the accounts receivable account are presented fairly in accordance with an applicable financial reporting framework. D) the account balances affected by the cycle are fairly presented in accordance with an applicable financial reporting framework.

Q: 12.1 Identify and describe typical records and transactions in the sales cycle

Q: Illustrate the risk assessment and audit of sales and cash receipts using Hillsburg Hardware Limited to describe the typical audit process through tests of controls 1)A)B)C)D)

Q: A) State the five specific transaction-related audit objectives for cash receipts and describe one common test of controls for each objective. B) Discuss what is meant by proof of cash receipts and explain its purpose.

Q: Which of the following internal control procedures will most likely prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable? Write-offs must be A) approved by a responsible officer after review of credit department recommendations and supporting evidence. B) supported by an aging schedule showing that only receivables overdue several months have been written off. C) approved by the cashier who is in a position to know if the accounts receivable have, in fact, been collected. D) authorized by company field sales employees who are in a position to determine the financial standing of the customers.

Q: An audit procedure which compares the name, amount, and dates shown on remittance advices with cash receipts journal entries and with related duplicate deposit slips would be effective in detecting A) kiting. B) lapping. C) illicit write-offs of customers as uncollectible accounts. D) sales without proper credit authorization.

Q: The defalcation process, which postpones entries for the collection of accounts receivable to conceal an existing cash shortage, is referred to as A) kiting. B) lapping. C) computer fraud. D) financial statement fraud.

Q: Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor? A) postponing recording of cash receipt entries B) overstating the accounts receivable control account C) overstating the accounts receivable subsidiary ledger D) recording cash receipt entries early

Q: The appropriate test of controls for separation of duties is A) documentation. B) confirmation. C) examination. D) observation.

Q: Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom? The cashier A) prepares the daily deposit. B) makes the daily deposit at a local bank. C) records the receipts to the customer files. D) endorses the cheques with the company endorsement stamp.

Q: The most difficult type of cash defalcation for the auditor to detect is that which occurs A) before the cash is recorded. B) after cash is recorded but before it goes to the bank. C) out of the balance kept in a cash register. D) in amounts under $100.

Q: The emphasis for the audit of sales return and allowances is often placed on testing the existence of recorded transactions. However, the most important objective to consider is A) cut-off. B) valuation. C) accuracy. D) completeness.

Q: Chong Manufacturing Limited (CML) is a small manufacturer that supplies parts to the automotive industry. CML deals primarily with second tier companies, and does not deal with the car manufacturers directly. Last year, CML was required to implement EDI (electronic data interchange), otherwise two of its major customers would have taken their business elsewhere. The installation was provided by Simon's Computer Company, a local computer store with expertise in EDI. One of CML's customers, Delta Parts Limited, also sent a purchasing agent to CML to help train staff at CML in the use of EDI and to walk through the first few transactions with CML accounting personnel to ensure that they could use the system effectively. A typical EDI sale is processed as follows: Delta sends a purchase order to CML, which is received via the internet into an EDI in-basket. CML empties the EDI in-basket using its EDI software every hour, and the EDI software edits the purchase order for completeness and obvious errors. If there are no problems, then the purchase order is printed out and used by CML to process the order. Once the order has been processed, CML prepares its shipping documentation and invoice using its normal packaged accounting software. The shipping document and the electronic invoice are transferred to the EDI software and placed in an EDI out-basket. Accounting staff transmit the contents of the EDI out-basket to their customer (e.g. Delta). Once Delta receives the electronic shipping documents and electronic invoices, it will transfer the funds electronically to CML's bank account to pay for the goods delivered. This means that CML receives payment much faster than when invoices were mailed to customers. Required: A) What is the impact of the new EDI system on the audit engagement? B) List some controls that should be included in the new EDI system.

Q: Office Design Inc. (ODI) has been your audit client for five years. ODI designs and sells office furniture, such as desks, cabinets, and couches used in reception areas. ODI has sales in Canada and the U.S., with five distribution locations, where furniture is available to prospective purchasers to try out before purchasing. These locations are in Toronto, Montreal, Halifax, New York and Chicago. The company uses custom designed software for its order processing and sales, kept current by one of the five information systems personnel. The Vice President Finance is new. Executive management is paid based upon a salary and a bonus based upon the annual net income of ODI. Unfortunately, the accounting staff at head office (Montreal) has been downsized from ten people to six due to a recent slowdown in sales. Your review of the aged accounts receivable trial balance revealed that one third of the accounts have been outstanding for more than one year. ODI's profits have declined substantially from last year. The line of credit and bank loans are at their maximum, and the company is considering selling its U.S. operations to provide cash flow. Prior year working papers revealed few errors and that you considered management integrity to be good. However, due to segregation issues, you did not rely on the internal controls in the prior year. Required: A) What issues in corporate governance and in the control environment affect your assessment of internal controls for revenue? How does this affect the decision to conduct substantive testing (i.e. exclusion of tests of controls)? B) What is the likely assessment of computer general controls? How does this affect the type of audit testing conducted at ODI?

Q: You are the audit senior responsible for a large photofinishing centre and camera store. The store uses automated cash registers tied to inventory (also known as point of sale devices). The point of sale devices take advantage of automated procedures and controls that can be programmed, to reduce errors and improve controls over completeness of transactions. Required: Provide examples of interdependent controls that should be used to complement the programmed controls.

Q: A) Describe each of the six key control activities for sales. B) When assessing planned control risk for sales, the auditor is concerned about proper authorization at three key points. Discuss each of these three points. C) When testing the existence objective for sales, the auditor is concerned with the possibility of three types of misstatements. One type is sales being including in the journal for which no shipment was made. Discuss the other two types of misstatements.

Q: A) State the five specific transaction-related audit objectives for sales and describe one common test of controls for each objective. B) Describe three tests of controls commonly used to test the accuracy objective for sales.

Q: Outline the key areas that the auditor would review as part of general controls.

Q: Which of the following key controls helps ensure that sales transactions are classified to the correct account? A) Computer checks for gaps in shipping document numbers. B) Invoices are prepared using prices and terms from the customer master file. C) Management reviews sales reports regularly for reasonableness. D) Posting is done automatically to the sales account based upon periodic totals.

Q: What is one of the advantages of converting procedures from a design to a performance format? A) Obtain audit evidence of better quality B) Help the auditor select the procedures to be performed C) Eliminate duplicate procedures D) Ensure compliance with Canadian Auditing Standards

Q: It is common to test sales for proper classification as part of testing for A) cutoff. B) accuracy. C) valuation. D) completeness.

Q: It is important that sales be billed and recorded in the journal as soon as possible after A) the order is received. B) the order is received and credit is approved. C) credit is approved and it is verified that there is enough inventory to fill the order. D) shipment takes place.

Q: The auditor traces items from the journals back to the source documents in order to satisfy the A) occurrence objective. B) completeness objective. C) ownership objective. D) valuation objective.

Q: An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to satisfy the audit objective of A) accuracy. B) completeness. C) control. D) existence.

Q: The auditor traces items from the source documents to the journals in order to satisfy the A) existence objective. B) completeness objective. C) accuracy objective. D) classification objective.

Q: Which one of the following audit procedures is a dual-purpose test? A) Conduct analytical review to determine the reasonableness of the bad debt allowance. B) Examine credit limit changes for authorization. C) Calculate the accuracy of the accounts receivable aging. D) Observe error message when incorrect customer number is entered.

Q: For each control on which the auditor plans to rely to reduce assessed control risk, he or she must A) design one or more tests of controls to verify its effectiveness. B) report all weaknesses in the management letter. C) quantitatively determine the effect on sampling error. D) ensure that the test applies to several different transaction audit objectives.

Q: Certain internal controls satisfy more than one objective. It is desirable to consider A) each objective separately. B) the objectives together. C) the objectives that can be tested. D) only the controls that satisfy the more than one objective.

Q: After the auditor has identified the key internal controls and weaknesses and assessed control risk, it is appropriate to decide whether A) substantive tests will be increased sufficiently to justify the cost of performing tests of controls. B) substantive tests will be reduced sufficiently to justify the cost of performing tests of controls. C) tests of controls will be increased sufficiently to justify the cost of performing substantive tests. D) tests of controls will be reduced sufficiently to justify the cost of performing substantive tests.

Q: Invoices are prepared using a date equal to the shipping date. This control pertains to which transaction-related audit objective? A) posting and summarization B) classification C) cutoff D) completeness

Q: Which of the following is an example of a key internal control for an online system that would help ensure that recorded sales are for the amount of goods shipped and are accurately billed and recorded? A) Shipping documents are matched to invoices. B) Shipping details are automatically used as the invoicing source. C) Shipping documents are prenumbered and accounted for. D) Transactions are summarized daily for posting to the general ledger.

Q: You are analyzing the exceptions that arose after your control testing of credit limit approvals. There were four exceptions where credit had not been approved. One was for a customer that was subsequently placed on C.O.D. (cash on delivery), and three occurred while the business was in the middle of its busy season, processing three times more transactions than most other times of the year. The company's busy season normally lasts about two months. Required: A) What is an anomaly? B) Are any of the exceptions that you found anomalous? Why or why not? C) Provide an example of a credit approval testing exception that would be anomalous.

Q: You have just been given the approval to conduct statistical sampling for the audit of capital assets acquisitions. Previously, this work was completed using a judgmental sample. Required: Explain the key areas where decisions need to be made when conducting audit work using a statistical sample.

Q: You are working on the testing of internal controls over price changes in the inventory system. You completed the controls testing to determine whether all price changes were approved by the senior accountant, by reference to master file change forms. In order to place reliance on this control, your audit supervisor has decided that the error rate in the population should be less than 1%. When you calculated your sample size, you used a confidence level of 90% and predicted an error rate in the population of less than one percent. Based on these decisions, you examined 150 inventory price master file change forms. In your testing, you uncovered two deviations. Based on these results, you calculate that the actual error rate in the population could be as high as 2.33 %. Required: A) What actions are available to you regarding your planned reliance on the master file change controls? B) What are the advantages and disadvantages of each action? C) How would you decide which action to take?

Q: There are 14 steps to audit sampling, divided into four sections: plan the sample, select the sample, perform the audit procedures, and evaluate the results. Discuss each of the steps that comprise the "plan the sample" section for attribute sampling.

Q: An auditor who uses statistical sampling for attributes in testing internal controls should increase the assessed level of control risk when the A) sample rate of exceptions is less than the expected rate of exception used in planning the sample. B) tolerable exception rate less the allowance for sampling risk exceeds the sample rate of deviation. C) sample rate of exceptions plus the allowance for sampling risk exceeds the tolerable exception rate. D) sample rate of exceptions plus the allowance for sampling risk equals the tolerable exception rate.

Q: An increase in the sample size has the effect of decreasing the sampling error if the A) actual sample exception rate increases. B) actual sample exception rate does not increase. C) number of exceptions in the sample does not increase. D) number of exceptions in the sample increases.

Q: The final step in the evaluation of the audit results is the decision to A) determine the acceptability of the population. B) determine sampling error and calculate the estimated total population error. C) analyze exceptions or misstatements. D) determine the error in each sample.

Q: Helen found that the expense reports were not properly approved while the senior accounts payable clerk was on vacation in July. Helen decided to perform a test of control on the authorization of expense reports for all the months except for July which she will test substantively. Helen is allowed to do this because A) the authorized expense reports for July are not material. B) it would not be cost beneficial to test the entire population substantively. C) the authorizations for the month of July are not representative of the population as a whole. D) compensating controls exist in the payroll reconciliation process.

Q: The sample exception rate equals the number of A) exceptions in the population divided by the sample size. B) items in the population multiplied by the number of exceptions in the sample. C) exceptions in the sample divided by the sample size. D) exceptions in the population divided by the population size.

Q: If all other factors specified in a sampling plan remain constant, changing the estimated population exception rate (EPER) from 2% to 4% would cause the required sample size to A) increase. B) remain the same. C) decrease. D) become indeterminate.

Q: In attribute sampling, an advance estimate of the expected population exception rate is necessary to plan the appropriate sample size. The relationship of expected population exception rate (EPER) to sample size is A) direct (small EPER = small sample). B) inverse (small EPER = large sample). C) a variable (sometimes small, sometimes large) dependent on other factors present. D) indeterminate.

Q: The acceptable risk of incorrect acceptance (ARIA) has a significant effect on sample size. The relationship of ARIA to sample size is A) direct (larger ARIA = larger sample). B) inverse (larger ARIA = smaller sample). C) variable (sometimes larger, sometimes smaller). D) not determinable.

Q: In statistical terms, acceptable risk of assessing control risk too low (ARACR) corresponds with A) sampling risk. B) inherent risk. C) control risk. D) nonsampling risk.

Q: The tolerable exception rate (TER) has a significant effect on sample size. The relationship of TER to sample size is A) direct (larger TER = larger sample). B) inverse (larger TER = smaller sample). C) variable (sometimes larger, sometimes smaller). D) not determinable.