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Auditing and Assurance Principle lecture notes for BS Accounting students.
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0% found this document useful (0 votes)
1K views32 pagesChapter 4
Auditing and Assurance Principle lecture notes for BS Accounting students.
Uploaded by
Aerin ParkCopyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF or read online on Scribd
/ 32
Chapter 4 ~ Tr
CHAPTER 4
TRANSACTION CYCLES
: —
TOPIC OVERVIEW: :
This chapter discusses the different transaction cycles and the ke:
for each transaction cycle.
LEARNING OBJECTIVES:
After studying this chapter, you should be able t.
1. Describe the different categories of transaction cycles.
2. Identify the forms or documents used in different departments,
3, Identify and describe the functions of departments in each transaction
cycle.
4._Identify possible controls in each transaction cycl
COele——aeaeee oO
TRANSACTION CYCLES
(Processed "transactionstofilrelated"attivities such as sale of goods to
customers, acquisition of merchandise and payment to vendors, production
of finished products for sale, and payment to employees for services they
had rendered.
A ERED is an to exchange goods or
‘S@rviées or is by an
organization,
The revenue and receipt, purchase to pay and production cycle discussed in
this chapter is primarily for a Wanufactiring entity. In addition, the discussion
under the financing cycle is primarily for However, the payroll
cycle and investing cycle may be Aire, Furthermore,
internal controls discussed is normally applicable in a manual process set-up
which may significantly vary in an automated process set-up.
Categories of Transaction Cycles
These cycles can be categorized into five interrelated major cycles: 5
Category Inclusion
Revenue and receipt * sale of goods or services to customers
* collection of cash
'Y Controls
Expenditure and * acquisition of goods and services :
disbursement * payment for the goods and services acquired_/
Human resources and * acquisition of services from employees
Payroll * payment for the services acquired
Production or conversion |» production of entity's product for sale .
Financing and investing © generation of capital funds from outs!
46 Chapter 4 ~ Transaction Cycles
investors.
profitable activities
* investment of capital funds to other
REVENUE AND RECEIPT CYCLE / ORDER TO CASH (OTC)
Business ‘Two major business functions are
functions .
= ‘oyeustomers in exchange for
fo
‘Accounts Accounts affected include the following:
affected * Sales and related sales returns, allowances and discount
. Receivable, allowance for bad debts and bad debts expense
* Cas
Departments | Significant departments affecting the cycle are
involved Revenue
* Sales or customer order , maricting
* Credit
* Inventory control or warehouse
+ Shipping
* Billing
* Accounting (inventory, receivable and general)
Receipt
* Mail room or receptionist
* Treasury
+ Accounting (receivable and general)
Forms or documents received, initiated and processed
Form Description Initiated by: | Distributed to:
Sales order Contains the Sales * Customers
(order slipor | of goods department * Credit
customer order) | (quantity, prices and © Shipping
payment terms) © Billing
Shippin, Describes the goods | Shipping © Carrier
semua (ill | tooNENSHIpped and | department * Customers
oflading or serves as * Billing
delivery receipt) | between the entity
an
i * Customers
Sales invoice Describes the Billing e
(billing isola, and | department * Accounting
stat
Remittance Customer thru | General
advice the mail room accounting
department « Receivable
department Chapter 4 - Transaction Cycles
Daily Receivable (for | «
summaries sales) coeal
‘Treasury (for es oo
collection) Receivablen™
departments Mail room (for .
mail received)
Important notes to forms or documents processed
1, The approves the form.
2. The department that ing is accountable forunlise
ePhlso, access to those forms erilibe Slimed tothe ress
department. id
3, The notificatiomofiforms dors shall b
forwarded. Notification can be done thru electronic mail. :
4, The sansineiinaeitiazds neces DrOeSSeMaat shall retain,
‘aicopy (hard or electronic copy) for filing.
Summary of Functions of Departments in the Revenue Cycle
‘A. Sales department
Primary objective:
‘To increase entity's sales
Possible controls
Activities
T Locates and encourages buyers
2. Negotiates terms with buyers
3. Accepts customer orders
i. Prepares sales order and distribute
copies to customers, credit, shipping
and billing
5, Retains copy in unfilled order file
& Monitors the status of the order
7 Updates customers as to the status of
the order
Common controls adopted by
different entities in this department
include:
« Sales department has an
customers |
« Entity maintains listvohauthorized!
minimize exposure 0
customiets to
B. Credit department
Primary objective: To
‘Activities
7. Receives and review ‘sales order from
sales department
2.Conducts credit investigation
3. by preparin,
red
mark in the sales order
4. Notifiés sales department as to the
approval/disapproval of the credit
request
5, Forwards the approved sales order to
* pricesioritsproduets
to
Possible controls
Common controls adopted ¥
different entities In this departme™
include:
it
* Entities establish —
department that is
a ee
48 ransaction Cycles
4
chapter Alrisevances OW
c, Inventory control department a
primary objet To control
storage areas, and r
damaged items.
Activities Possible controls
order |} Common controls adopted by
different entities in this department
include:
the availability of goods
Inventory control that provides:
3,authiories the WSSHancelOrgoodsito | ACCESS) to salesmidepartment to
the inventory levels
«forwards the approvedrsalesorderto | «
which, are
| "tstnyatgomswnenneds
a
{| ___—+
D. Shipping department AN istuany, are curnenzed
Primary objective: To provide réasonablelassurance thatvallishipments
i “ Possible controls
Activities
Common controls adopted by
different entities in this department
include:
« Shipping documents that areypre-
d
numbered and accounted for
7 + Ensure related billings are made on
: . igs | aipenionicnestss
SE cna. that goods
have been shipped
5. Forwards) the
and ‘der to
E. Billingdepartment * °’ & dnipped
Primary objective: To provide reasonable assurance that all Shipments
7 Activities Possible controls
= a Common controls adopted by
: from sales department _| different entities in this department
. r and(Shipping | include:
it from shipping | «
department . must be
ee
r (thru the carrier) | i 7
al
49 Chapter 4 - Transaction Cycles
Chapter 4 - Transaction Cycles
F. Accounting department :
© Inventory: Provides cost information on the goods sold to be
forwarded to general accounting and records transaction related t
the cost of goods sold. :
* General: Records the sale and forward sales invoice and relateq
documents to accounts receivable
+ Accounts: Receivable! Updates’ SUBSIALAFVNIEUGEr related toTeustomer,
account.
Summary of Functions of Departments in the Receipt Cycle
Collections
A. Mail room or Receptionist
© RECeives ices and clistomePehetks from customers
* Prepares
+ Endorses checks and listORFECeipts to the treasurydepartmient
+ Endorses remittancewadvices and@listlOfireceipts to the accounts
receivable department
B. Treasury department
* Updates cashnrecoras
* Prepares deposit’slips
* Prepares collectionisumimaties, sendsi¢opyitolaccountSireceivable and
genierallaccounting and
=D
kk
C. Accounting department
. compares remittancevadviee from mailroom and
from 1 di: ers, and
to be forwarded t .
Compares dallystninaes from tréasiiry and ‘@écounts
Other activities in the re
Uncollected accounts
1. Accounts receivable
* Review individual customer acco unts peri ly and comp:
i id 7
; ee periodically ai e
venue and receipt cycle Chapter 4 ~ Transaction Cycles
© If judged to be Uncollectible, written authorization to write-off should
be sent to accounts receivable and general accounting
Sales returns and allowances
1. Salesiepatnten t
2
* Receives returned goods
# Prepare receiving report
3, WOERBiycostem
* Compares goods receive
i ‘d through the receiving department and
credit memo
* Unventory: updates inventory records based on receiving report and
Prepare daily summaries to be forwarded to general accounting
update records based on the credit memo
received and prepares daily summaries to be forwarded to general
accounting.
. compares daily summaries from inventory and accounts
receivable, then, updates general ledgers,
PURCHASE TO PAY (P2P)
Business Two major business functions are
functions * RESOURES ae) sequ from ends n exenngey
+ Entity pays ash to vendors and employees
Accounts Accounts affected include the following:
affected © Purchases (e.g. inventory and supplies)
« Purchase returns, allowances and discount
© Payables
* Cash
Departments _| Significant departments affecting the cycle are:
involved Expenditure
* User (any department within the entity)
* Purchasing or procurement
* Receiving
* Accounting (accounts or vouchers payable)
* Accounting (inventory and general)
Disbursement
© Treasury (outflows) - Diseurnd Offa
* Accounting (receivable and general)
51 Distributed >)
to:
Purchasing
fequisition
slip
Vendor
« User
Receiving
Accounts
ayable
|__| Receiving ‘ Purchasing
[recetving | Describs the quantity, | department Accounts
report , a ition) yayable
description and condi coe tr | pa aaa
Sripping | Deseribes the as | the carrier) department
document
Accounts
Vendors Describes the Vendor . ;
[Remittance | A document sent by the Treasury Vendor
advice entity to the _ seller,
informing the seller that
their invoice has been |
aid.
Daily (mansactions | Accounts * General
summaries | recorded payable (for | accounting
by the, ifferent | purchases)
department
Treasury (for
| payment)
Summary of Functions of Departments in P2P Process Cycle
A. User department
apc: aisle to be forwarded toNpurchasing and accounts
authonze acqu
any E vote or procurement department
ey ele the specific needs of the user department
Activities
Possible controls
L
from the user department
rand
Common controls ‘adopted bY
different entities in this department
includ
Purchasi
52° Bidding
» canvass atteact 3
department _has_2 ral
chapter 4 - Transaction Cycles
and
3.
jstributes copies to vendor, user,
receiving and accounts payable
as to the(statusior
——
* Entity maintains listiofvauthorized
* a amma: «0
¢. Receiving department
's until goods are
received
2.Upon receipt, c the
goodsifor appropriate quantity and
condition
a and compares (puretasé
and shipping document from
4.Prepares: to be
forwarded to purchasing and
accounts payable accompanied by
purchase order from purchasing and
shipping document from the carrier
‘asta Primary objective: To provide that received goods
ongaen_are. y
Activities Possible controls
Common controls adopted — by
different entities in this department
include
*To ensure that the Feéeiving)
‘ill
ise
az
5
‘aang
only be made to shipments received
D. Accounts or vouchers payable department
Primary objective: To provide reasonable assurance that payments will
Activities
Possible controls
L-RevieWis and Compares purchase
ofdeF receivingjreport and vendors)
‘invoice (i.e. 3-way match)
| 2.Prepares:
3.Prepares package’
(requisition slip, purchase order,
receiving report, vendors invoice,
and voucher) and
tema el
to
ger
Common controls adopted by
different entities in this department
include:
+ Véliélier should be Supported by
and
+ supporting documents
othe!
je by dueidate so as
to pay liability on time and take
Co advantage of discounts, ifany
E. Treasury department (Disbursement)
authorized signatories
(Forwards cheeks and _ remittance |
53
ties Possible controls
1. Reviews Common controls adopted by
2.Prepares| fave it signed by | different entities in this department
include: 4 - Transaction cycles
Chapte!
‘cancels the
mark such as
placing a
” or writing the chec
number.
Entity may adopt any of the
following in relation to issuance of
checks
fo vendors
ae ayes which
: general accounting,
be forwarded to
: a c@
should have an id
No checks
shall be
~ Checks should be si
HUMAN RESOURCES AND PAYROLL CYCLE
jluman resource and payroll cycle are P
ttisbursement cycle. This cycle COvErS the u
“the following are main reasons why the
ees eet)
art of the expenditure and
ror is concerned with this cycle.
Payroll include different categories of (short-
term; post-employment, other long-term and retirement) that could
significantly affect major elements “of financial statements; and
id
b._For most entities,
Two major business functions are
Business
functions . from employees in exchange for
Entit
‘Accounts Accounts affected include, but not limited to the follow!
affected ‘« Salaries and wages expense and payable
« Premiums expense and payable .
# Withholding taxes payable
© Inventories (for inventoriable salaries and wages)
* Cash
Departments _| Significant department: i
ii 's affecti :
involved Eeaaiare affecting the cycle are:
* User (any department within the entity)
« Human resources (HR) or personnel
© Payroll
© Accounting (inventory and general)
Disbursement and distribution
54 Chapter 4 - Transaction Cycles
Forms or documents received, initiated and processed
Form Description Initiated by: | Distributed to:
fiRrecords | It contains HR © Payroll
(Personnel to department (limited to
records or payroll
01 fle) ir related
It information
documents all actions only)
taken by the employees or
management on behalf of
an employee. Commonly, it
also documents
ind
other payroll __ related |
information
Dailytime | Describes the User * Payroll
record hours ee department
(DTR) employee during a
particular day covered by a
pay period
Payroll Shows all relatéd/payroll | Payroll © Treasury
register i (gross pay, all © General
deductions, and net pay) accounting
Labor cost | Shows Payroll * Inventory
summary —_| which is accounting
can be attributed to a
particular job or customer
order
Employee [Shows the cumulative, | Payroll * Accounts
earnings payable
record ind
Daily transaetions | Payroll (for | _* General
summaries =... the day by | liability accounting
the different department recognition)
Inventory (for
inventoriable
labor costs)
Treasury (for
payment)
55 Chapter 4 ~ Transaction Cycles
Summary of Fun
Cycle
A. User department
Primary objective: To ensure that
+Note: However, due to introduction of
computerized human_resources
systems, time records are commonly
tracked through bi6imétfits andjaccess
devices.
B. HR department
Primary objective: To ensure
Activities
employees included ‘i
ctions of Departments in Human Resource and Payroj
Common controls adopted _ by
different entities in this department
include:
* Appropriate =
be made to of
daily@time records prepared by
employees :
In case of computerizediisystems,
approval of any exceptions shall be
made by the user department head
Pos:
aes, ops and maintains HR
"
2. Forwards
to payroll department (e.g. salary and
wage rates, bonuses, overtime pays,
and payroll deductions)
3.Determines terms of
(lump-sum or installment) in case of
termination of employee/s
notify
e
to avoid inclusions of these
employees in the subsequent payroll
calculations
4.
Common controls adopted by
different entities in this department
include:
# Access, including ifitiatinigichangesn,
to HR records shall be limited only
to the HRidepartment
Information
calculation shall
other departments
C. Payroll department
Primary objective: To provide
reasoWabletassurance that the paral
1. Receives and E a9
i from
and user departments
2.Considers n employees”
3, Prepares
Activities Possible controls
Common controls adopted bY
different entities in this departmert
include:
. i
cmaemnasianlene ‘a member who is "
involved in payroll _preparatio®
56 Chapter 4 - Transaction Cycies
te
* ning * OGRE Teens the naa RER fr
accuracy
5 's and ic ‘acy and reasonableness
pT * To assure adequacy of segregation
in| of duties, payeollmacpareaian
case of servicing and manufacturin, i be ;
i i should
companies with inventoriable labor es i
costs
D. Treasury department - disbursement
Primary objective: To provide reasonable assurance that all payroll
s
tis based on
: Activities Possible controls
1. Reviews e Common controls adopted by
2 and have it by | different entities in this department
authorized signatories*
include:
3. DistribUtESICHEEKS to employees . should be
‘Prepares dallisutitnay which i wo |” manained eee a
be forwarded to generallaccouriting disbursements
* On a surprise basis, an
*Note: Most US disburse independent from rc
payroll through transfers | departments may distribute)
from company’s payroll fund to | paychecks The purpose of this is to
individual employees payroll account. | identify whether»or-not fictitious
In this case, the employees exist
k.
E, Accounting department
Primary objective: To provide reasonable assurance that
are appropriatelyiiclassifiéd and recorded in
© Inventory: Records to appropriate jobs or
customers account and forward a dailylisUmmary to general
accounting. 4
* General: Reviews dailydsummaries) and docunientsiireceivedfrom
it 5. It records the
payroll) treasury) and inventory departments.
recognition of payroll related expenses and liabilities in the general
journal.
PRODUCTION OR CONVERSION CYCLE atten
covers the production of entity's product for
sale. It is where materials, labor and overhead are converted into finished
goods.
Such objective encompasses the
57 Chapter 4 - Transaction Cycles
‘Nn, Yo orie: to wain this Ge ua
it. In order to attai
department uses a and disburse this, the production
rovides resouireesiand information to revenue and'receipticyc! -
PI to B and
The details of the processes used in this c
a yycle have been di
Accounting course. The focus of this discussion note lll Be cot
controls over custody of resources involved, authorization oi
recording of transactions. As for the substantive test, you Pia and
2 efer to
Chapter 11.
Summary of control-related duties and responsibilities
Dutiesand | Person/s assigned to perform Procedures
the function
of materials
and labor documents is normall
held by the a
Since most of the assets here are
highly susceptible If held by other parties,
misappropriation, ‘sonal may — S@iid
must be conan oe
(ee
consignees, agents, or
branches)
‘Authorization | The is | Auditor reviews
supporting production
However, in case a run: made by the
(to meet a special order), S Mel
department |
izati e m
authorization must come OM | etermine_ wheter dl
r its | bears the neces
authorization
such count to entitys
records.
=
=
Recording Transactions are recorded by the | Auditor normally
reviews the
are then
forwarded to
for recording and posting in the
general journal and ledger,
respectivel
FINANCE AND INVESTMENT CYCLE Pe
Finance and investment cycle generally involves
i sand si
transactions: investments, startles mere
covers complicated processes such as accounting
Jong-term liabilities, and equity transactions.
58 <<
chapter 4 - Transaction Cycles
qhapter4—TransactionCydes
This cycle normally Se Ny ————— ars =a
auditor commonly employs to
appropriate evidence. However, it must be noted that prior to designing of
substantive test procedures,
With this, similar with the production or conversion cycle, the focus of this
discussion note will be on the different
and récording oftheifferent'transactions covered by this cycle. As for the
substantive tests, you may refer to Chapters 14, 25 and 31.
summary of control-related duties and responsibilities
Finance cycle
Dutiesand | Person/s assigned to perform Procedures
responsibilities the function performed by auditor
Custody and (@ebr\] Auditor
7 I (eg. | eustodiais.
Corporate ‘ecretary) or
Authorization As previously mentioned, | Auditor
transactions covered in this cycle
es. With this,
transactions shall be approved
by the boandofdirectos.
Recording Transactions are recorded in the | Auditor normally
by pérsonneljin | reviews the
19.
the, v of the
Important notes:
1. Incase of of the
is (e.g. the certificate is shredded).
The purpose of this is to The
are then
2. Incase of debt instruments, the
any
= i,
Chapter 4 - Transaction Cycles
ent cycle
co ri Person/s assigned to perform Procedures
|_responsibilities | ___the function erformed b AUdito,
Custody Generally, investment [Autor 2S
certificates are kept as follows: to es
+ Negotiable” certificates
brokerage account of
* Titles to real estate - may be | request
with theyentity
a x If held internally, the
auditor observes. tne
accounting ie
certificates held,
Authorization !'As previously mentioned, | Auditor "ei
transactions covered in this cycle
the
involve large amounts of cash or directorsmectings 2
other resources. With this,
transactions shall be approved
by the i
by an
i
by
——— —_|
Recording
Transactions are recorded in the | AudRor
erreral journal by personnel in | reviews the
the general accounting Y competency of the
normally
Moreover, most
individuals — making
companies | journal entries
inven transactions in the | v periodic
investment cycle through a
subsidiary ledger/s
Feconciliation of,
maintained
subsidiary and
y the treasury department, general ledgers
Regardless of the manner
given to at lea:
Of safekeeping, access to these certificates is
ist two high-ranking Officers (e.g, President, Treasurer,
CEO, COO, CFO, or Chairman of the board). This control is sometimes
called dual control or joint custody.
The auditor normally requests for the conduct of securities count in the
financial institutions holding the client's certificates
60 | <<
chapter 4 - Transaction Cycles
CHAPTER 4: REVIEW QUESTIONS - THEORETICAL
problem 4-1: Introduction
1, The transaction cycles approach leads to efficient processing of large
number of transactions because
a, Transaction cycles are easy to understand.
b. Transaction cycles are easier to computerize.
c. The transaction cycle approach represents the natural order of
business.
4. Alarge number of transactions within a given cycle can be categorized
intoa relatively small number of distinct types.
2, What is the major difference between the revenue and the expenditure
cycle?
a. The revenue cycle includes marketing activities; the expenditure cycle
does not.
b, In the revenue cycle, cash is received; in the expenditure cycle cash is
paid out.
c. The expenditure cycle includes paying employees.
d, The revenue cycle includes the activity of obtaining funds from
investors.
3, The business owners obtain financing from outside investors, which result
to an inflow of cash into the company. This transaction is considered to be
part of which cycle?
a. Revenue cycle
b. Payroll cycle
¢. Production cycle
d. Financing cycle
4, The basic "give and take" functions of a business have been grouped into
transaction cycles. The cycle that includes the events of hiring employees
and paying them is known as the
a. Human resources cycle
b. Financing cycle
© Expenditure cycle
4. Revenue cycle
5. The transaction cycles relate to one another and interface with this to
generate information for both management and external parties.
a. General ledger and reporting system
b. Accounting information systems
©. Human resources cycle
d. Computer processor
Problem 4-2: Revenue and Receipt Cycle / Order to Cash (OTC)
1. Which of the following business function is associated with the
Tevenue/receipt cycle?
61 Chapter 4 - Transaction Cycles
‘Chapter 4 = Transaction Cyeles
Resources are held, used or transformed. ~
Obligations are paid to vendors and employees.
Capital funds are received from investors and creditors.
Resources are distributed to outsiders in exchange for promises
future payments. of
oe
2. Which of the following is not normally considered a step in the credit sa
functions? les
a. Approving credit
b. Accepting customer orders
c. Shipping the sales orders
d. Acquiring goods to fill the order
3. Which of the following is not typically included in the sales and collection
cycle?
a. Bad debt expense.
b. Sales returns and allowances.
c. Allowance for uncollectible accounts.
d. Cash credits from the cash disbursement journal.
4. 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 are free of material
errors.
c. The account balances affected by the cycle are fairly presented in
accordance with GAAP.
d. The sales account and the accounts receivable account are presented
fairly in accordance with GAAP.
5. The internal controls surrounding the revenue cycle provide the
organization with several assurances that include all of the following except
the
a. Approval of all credit sales transactions after they are processed.
b. Accurate recording, shipping, and billing of all valid sales transactions.
¢. Proper authorization of all sales and sales return and allowance
transactions.
4. Proper safeguarding of finished goods inventories while in stock ant
during the shipment process.
‘The internal control objectives of the revenue cycle include all of the
following except
a. Revenue cycle transactions are properly executed.
b. Transactions relating to revenue are properly recorded.
¢. Appropriate goods are ordered so that sales can be made.
rh
d. Custody over assets resulting from the revenue cycle is proper”
maintained.
62
—— | access to shipping, bi
restricted to personnel authorized eo oto and accounting records is
bili ’y Management?
a Sei davened responsibilities for authorization, execution and recordi
Prenumber and control custody of docu cording,
b. Establish cash rec ments
c Establish policy and procedures manuals, ni
un i
: : p res ials, organization charts, and
d, Periodically substantiate and evaluate recorded account balances,
fore goods i
e be re goods are shipped on account, a properly authorized person must
b. Prepare the sales invoice
Approve the journal entry
d. Verify that the unit price is accurate
9. In a credit merchandising organization,
approval is in: :
a. Accounts receivable department.
b. Sales department.
c Acompletely separate department.
d._ The cashier area where receipts will eventually be sent.
the best place to vest credit
10. To achieve good internal control, which department should perform the
activities of matching shipping documents with sales orders and preparing
daily summaries?
a. Billing department
b. Shipping department
c. Credit department
d. Sales order department
11. Which of the following control procedures may prevent the failure to bill
customers for some shipments?
a. Each shipment should be supported by a pre-numbered sales invoice
that is accounted for.
b. Each sales order should be approved by authorized personnel.
¢. Sales journal entries should be reconciled to daily sales summaries.
d. Each sales invoice should be supported by a shipping document.
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. 3
©. Prenumber bills of lading and assure that related billings are made on a
periodic basis. .
4. Prepare and periodically update lists of authorized customers:
63 Chapter 4 ~ Transaction Cycles
13.
14.
15.
16.
7
18.
Which of the following controls most likely would be effective in offetn
Thetendency of sales personnel to maximize sales volume at the expense
2
high bad debt write-offs
a, 8! Employees responsible for authorizing bad debt write-offs are denigy
access to cash.
bh, Employees involved in the credit granting are Separated from sa,
function. sore E eke
sl ct are matches
Shipping documents and sales invoices ee oa
who does not have authority to write-off bad debts. yee
4. Subsidiary accounts receivable records are reconciled to the contr
srecount by an employee independent of the authorization of credit,
‘The use of pre-numbered invoices, then accounting for their numeric
sequence, meets primarily the:
a. Completeness assertion
b. Rights and obligations assertion
c. Valuation or allocation assertion
d. Existence or occurrence assertion
Which of the following controls most likely would assure that all billed sales
are correctly posted to the account's receivable ledger?
‘a. Each shipment on credit is supported a prenumbered sales invoice.
bb. Each sales invoice is supported by prenumbered shipping document.
c. Daily sales summaries are compared to daily postings to the accounts
receivable ledger.
d. The accounts receivable ledger is reconciled daily to the control
account in the general ledger.
To achieve control when there is no billing department, the billing function
should be performed by the
a. Accounting department
b. Shipping department
c. Sales department
d. Credit and collection department
‘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
b. Sales manager
c. Receptionist
d. Accounts receivable clerk
Which of the following is an effective internal control over accounts
receivable?
a. Balances in the subsidiary accounts receivable ledger should be
reconciled to the general ledger control account once a year, preferably
at year-end.
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Transaction Cycles
chapter
Responsibility for approval of the write-off of uncollectible accounts
receivable should be assigned to the cashier.
The billing function should be assigned to persons other than those
responsible for maintaining accounts receivable subsidiary records.
4. Only persons who handle cash receipts should be responsible for the
preparation of documents that reduce accounts receivable balances.
19, Which of the following would the auditor consider to be an incompatible
operation if the cashier receives remittances from the mail room?
a. Thecashier endorses the checks.
b, The cashier prepares the daily deposit.
¢, Thecashier makes the daily deposit at a local bank.
d. The cashier posts the receipts to the accounts receivable subsidiary
ledger.
20, Which of the following would best protect a company that wishes to
prevent lapping?
a. Having customers send payments directly to the company’s bank
b. Segregating duties so that accounting has no access to an incoming mail
c. Requesting that customers checks be made payable to the company and
be addressed to the treasurer
d. Segregating duties so that no employee has access both to checks from
customers and to currency from daily cash receipts
21, Which of the following is not a universal rule for achieving control over
cash?
a. Separate the cash-handling and record-keeping functions.
b. Decentralize the receiving of cash as much as possible.
© Deposit each day's cash receipts by the end of the day.
d._ Have bank reconciliation's performed by employees who do not handle
cash.
22, Which of the following fraudulent activities most likely could be
perpetrated due to lack of effective control in the revenue cycle?
a The failure to prepare shipping documents may cause an
overstatement of inventory balances.
b. Authorization of credit memos by personnel who receives cash may
permit the misappropriation of cash.
Fictitious transactions may be recorded that may cause an
understatement of revenues and overstatement of receivables.
Claims received from customers for goods returned may be
intentionally recorded in other customer's accounts.
23, Assuming cash receipts from credit sales have been misappropriated, which
of the following is likely to conceal the misappropriation and unlikely to be
detected?
4 Understating the sales journal
Overstating the accounts receivable control account
Overstating the accounts receivable subsidiary ledger
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c
a _— Chapter 4 - Transaction Cycles
ts journal
a. Overstating the cash rec
24, Which of the following control procedures will likely preve
concealment of a cash shortage that was perpetrated by improperl nt the
stra trade accounts receivable? Writing
ofa ite-offs must be approved by the cashier.
a Wtiteoffs must be authorized by the field sales representatives.
bo Mitecoffs must be supported by an aging schedule showing th
receivables months overdue have been written off. idl
4. write-offs must be approved by a responsible officer after rev
weriie department recommendations and supporting evidence, .
mall owner-managed company’s internal contro}
t the accounts receivable clerk approves credh
hh. Which of the following controls would offset
ing
25. During the review of a si
the auditor discovers tha
memos and has access to cas!
this deficiency?
a. The owner reviews errors in
subsidiary records.
b. The owner reviews credit me
¢. The controller reconciles #
general ledger.
d. The controller reviews
reconciles the checking accounts.
billings to customers and postings to
mos after they are recorded.
the detailed receivables records to the
the monthly bank statement directly and
26. Defective merchandise returned by customers should be presented to
a. Inventory control personnel
b. Receiving personnel
c. Purchasing personnel
d. Sales personnel
in the incorrect accounting period. 4
27. Sales invoices may be recorded i
period when
computer comparison of the invoice date with the accounting
the goods were shipped relates to the
a. Valuation or allocation assertion.
b. Completeness assertion.
c._ Existence or occurrence assertion.
d._ Existence or occurrence assertion an
d to the completeness assertion.
28. The purpose of tests of controls over shipping is to determine whether
a. Shipments are billed
b. Billed goods have been shipped
c. Credit is approved before goods are shipped
d. Shipping department personnel are competent
29. The purpose of tests of controls over billing is to determine whether
Shipments are billed
Billed goods have been shipped
Credit is approved before goods are billed
Billing department personnel are competent
7 ad
pose gga Tntacton cytes —___
1a
g mine whether internal control operates effectively to minimize
: 1 of allure to invoice a shipment, the auditor would select a sample of
erpsactions from the population represented by the
aN sales invoice
Bill of lading file
Customer order file
§. subsidiary customer accounts ledger
31, Tracing copies of sales invoice to shipping documents pro
” that
m ‘Shipments were billed
b,. Billed sales were shipped
¢. Shipments were recorded as receivables
4. Debits to accounts receivable were for sales shipped
racing shipping documents to sales invoices provides evidence that
a. Shipments were recorded as sales
b. Recorded sales were shipped
¢_ Invoiced sales were shipped
d._ Shipments were billed
32.
33, 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 bill of lading
Sales journal to the accounts receivable subsidiary ledger
4. Bill of lading to the supporting customer order and sales order
34, To test for the possibility of a shipment to a fictitious customer, the auditor
traces from the
a. Sales journal to the accounts receivable ledger
b. Accounts receivable ledger to the bill of lading
© Credit authorization to the bill of lading
4. Bill of ading to the credit authorization
35, From the standpoint of good internal control, the credit manager should be
responsible to the
a Treasurer
Sales manager
Controller
Customer-service manager
Problem 4-3: Expenditure and Disbursement Cycle
Which of the following functions is not common to the
€xpenditure/disbursement cycle?
2. Obligations to vendors are paid.
Resources are held, used or transformed
Resoureds are acquired from vendors in exchange for obligations to
y.
‘
67
ee Chapter 4 - Transaction Cycles
Resources are acquired from employees in exchange for obligation,
pay. i:
2. The primary audit objective regarding the purchasing of materials py
clientiis to the
Observe the annual physical count.
a
b. Ascertain that materials paid for are on hand.
¢. Investigate the recording of unusual transactions regarding materia,
Determine the reliability of financial reporting by the purchas;
ng
function.
3, Arequest by an authorized employee for goods or services is made on the
a. Debit memo
b. Purchase requisition
c. Purchase order
d. Acquisition transaction file
4, Which of the following is a primary function of the purchasing departmeny,
a. Authorizing the acquisition of goods °
b. Reducing expenditures for goods acquired
c. Verifying the propriety of goods ofa specified quality
d. Ensuring the acquisition of goods of a specified quality
5. If internal control is well-designed, employees in the same department
most likely would approve purchase orders and also
a. Inspect goods upon receipt
b. Negotiate terms with vendors
¢. Authorize requisition of goods
d. Reconcile the open invoice file
6. The authority to accept incoming goods in receiving should be based on
a(n)
a. Bill oflading
b. Materials requisitions
c. Vendor's invoice
d. Approved purchase order
7. 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
b. Accounts payable department
c. Receiving department
d. Purchasing agent
8. When goods are received, the receiving clerk should match the goods with
the
a. Purchase order and requisition
b. Vendor's invoice and the receiving report
¢. Vendor's shipping document and the purchase order
d. Receiving report and the vendor's shipping documents
68 ~~
cchapte!
9.
10.
1.
2
13,
4
4 - Transaction Cycles
ints payable department receiv
Te esi all ofthe following except
accor nparing invoice price to purchase order price
Comparing quantity ordered to quantity purchased
Ensuring that the purchase had been properly authorized
gnsuring that the goods had been received by the party requesting the
goods
itching the suppliers’ invoice, the purchase order, and the receiving
Na renormally should be the responsibilty of the
“freasuty function
& Receiving department
accounting function
§ Purchasing department
a purchase order form to
a
b.
©
a
a
Accounts payable department usually has responsibility for verifying the
propriety of acquisitions by comparing the details on the
3. Vendor's invoice and the receiving report
Vendor's invoice and the purchase requisition
Purchase order, receiving report, and vendor's invoice
4. Purchase requisition, purchase order, and receiving report
What is the reason for ensuring that every copy of a vendor's invoice has a
receiving report?
a. Toascertain that merchandise billed by the vendor was received by the
company
b, To ascertain that merchandise received by the company was billed by
the vendor
c. Toascertain that a check was prepared for every invoice
4. Toascertain that the invoice was correctly prepared
Which of the following is the most effective control procedure to detect
vouchers that were prepared for the payment of goods that were not
received?
a Match the purchase order, receiving report and vendor's invoice for
each voucher in accounts payable department
b. Compare goods received with goods requisitioned in receiving
department
Verify vouchers for accuracy and approval in internal audit department
Count goods upon receipt in the storeroom
«
d,
Which of the following controls is not usually performed in the vouchers
Payable department?
a.
Approving vouchers for payment by having an authorized employee
sign the vouchers
Accounting for unused prenumbered purchase orders and receiving
Teports.
¢._ Matching the vendor's invoice with the related receiving report
* Indicating the asset and expense accounts to be debited
69
b,
a Chapter 4 - Transaction Cycles
15, Which of the following controls is not usually performed
department?
a. Verifying the accuracy of checks and vouchers
b. Controlling the mailing of checks to vendors
c. Approving vendor's invoices for payment
d. Cancelling payment vouchers when paid
the teasun
:
16. When processing and recording cash disbursements, it
is im
a method of cancelling the supporting documents to preveny got
7 to haye
support for another check ata later time. A common method ae Teuse a
a. Transfer the possession of the documents to a bank vault
safety deposit box Such as .
b. Move the documents to a permanent off-site facility such
warehouse Ba
«
Write the check number on the supporting documents
d. Shred the documents so that they can't be reused
17. For good internal control, the person who should sign checks is the
a. Person preparing the checks
b. Purchasing agent
©. Accounts payable clerk
4. Treasurer
18. Operating control of the check-signing machine normally should be the
responsibility of the
a. General accounting function
b. Treasury function
c. Internal audit function
4. Legal counsel
19. The mailing of disbursement checks and remittance advices should be
controlled by the employee who
a, Signed the checks last
b. Approved the vouchers for payment
. Matched the receiving reports, purchase orders, and vendor invoices
d.
Verified the mathematical accuracy of the vouchers and remittan
advices
20. The procedure that would discourage the resubmission of vendor invoices
after they have been paid is
a. Arequirement for double endorsement of checks.
b. The cancellation of vouchers by accounting personnel.
¢. The cancellation of vouchers by treasurer personnel. td
4. The mailing of payments directly to payees by accounting pers
2
21. Which of the following is a standard control over cash disbursements
othet
a. Checks should be signed by the controller and at least on?
employee of the company.
70
ae ee |
per 4 ~ Transaction Cycles.
cha
Checks should be sequentially numbered and the numerical se quence
b. Should be accounted for by the person preparing bank reconciliations. |
Checks and supporting documents should be marked “paid’
immediately after the check returned with the bank statement.
44. Checks should be sent directly to the payee by the employee who
"prepares documents that authorize check preparation.
c
which ofthe following would prevent a paid disbursement from being paid
asecond time? : atus
Individuals responsible for signing checks should prepare vouchers.
tthe official signing the check should cancel the supporting documents.
t pisbursements should be approved by at least two responsible officials
@. The disbursement date should be within a few days of the date the
voucher is presented for payment.
22.
ya the receipt of goods and services in the normal course of business
* [epresents the date clients normally recognize
a. Liability
b. Warranty
c. Income
d. Expenses
24, The internal control objective to determine that “existing acquisition
transactions are recorded” satisfies the objective of
a. Validity
b, Authorization
c. Valuation
4. Completeness
25, The internal control which requires “examination of supporting
documentation before signing of checks by an authorized person” satisfies
the objective of,
a. Validity
b. Valuation and allocation
©. Completeness
4. Posting and summarization
26, Which of these functions is not a test of acquisitions?
a. Recognizing the liability
b. Receiving goods and services
© Processing purchase orders
4. Processing cash disbursements
7. Wow can an auditor test to determine whether Receiving Department
Procedures are applied properly?
2 Review procedures manuals
Test a sample of receiving documents
Interview Receiving department personnel
Observe receiving procedures on a surprise basis
>
‘
71 jon Cycles
est to determine whether all merchandise for w}
pter 4 Transacti
d, The population for this test consists
t
n auditor performs @
28. AM pe client was billed Was receive
all
a. Mercham
b, Cancelled checks
Vendor's invoices
Receiving reports
29, In assessing control risk for purchases, an auditor vouches a sample g
entries in the voucher register to the supporting documents, Whi,
Gesertion would this test of controls most likely support?
‘a. Completeness
bb, Existence or occurrence
Valuation or allocation
4. Rights and obligations
30. An auditor traced a sample of purchase orders and the related receiving
reports to the purchases journal and the cash disbursement journal. The
purpose of this substantive audit procedure most likely was to
port gentify unusually large purchases that should be investigated further.
. Verify that the cash disbursements were for goods actually received.
¢. Test whether payments were for goods actually ordered.
{Determine that purchases were properly recorded.
Problem 4-4: Human resources and payroll
rrolWhich ofthe following departments most likely would approve changes in
pay rates and deductions from employee salaries?
a. Payroll
b. Treasurer
c. Controller
d. Personnel
2. For appropriate segregation of duties, journalizing and posting summary
payroll transactions should be assigned to
a. Payroll accounting
b, Treasury department
c. General accounting
4. Timekeeping department
3. Which of the following is not a common activity within personnel até
payroll?
a. Initiating terminations
b, Preparing and recording payroll
¢. Distributing paychecks to employees
d. Preparing and updating personnel records
4. Which of the following best describes proper internal control over’ payrol
a. The preparation of the payroll must be under the contr? ft
personnel department.
n
oo le chapter 4 - Transaction Cycles
b. The confidentiality of employee payroll data should be carefully
protected to prevent fraud,
The duties of hiring, payroll computation, and payment to employees
should be segregated.
4. The payment of cash to employees should be replaced with payment by
checks.
5, The proper use of pre-numbered termination notice forms by the payroll
department should provide assurance that all
a. Personnel files are kept up to date.
b. Terminated employees are removed from the payroll.
Employees who have not been terminated receive their payroll checks.
4. Uncashed payroll checks were issued to employees who have not been
terminated.
6, The purpose of segregating the duties of hiring personnel and distributing
payroll checks is to separate the
a, Human resources function from the controllership function
b, Administrative controls from the internal accounting controls
c. Authorization of transactions from the custody of related assets
d. Operational responsibility from the record keeping responsibility
7. Which of the following procedures is most likely to ensure that employee
job time tickets are accurate?
a, Check the employee check cards against the job time tickets.
b. Approve the payroll voucher in the accounts payable department.
c._ Keep employment information in the human resources department.
4, Make sure that the number of hours per week on each employee's job
time ticket is 49.
8 Tominimize the opportunities for fraud, unclaimed cash payroll should be
a. Held by the controller
b. Held by the payroll custodian
c. Deposited ina safe deposit box
4. Deposited in a special bank account
9. In the weekly computer run to prepare payroll checks, a check was printed
for an employee who had been terminated the previous week. Which of the
following control procedures, if properly utilized, would have been most
effective in preventing the error or assuring prompt detection?
a, Use ofa check digit for employee numbers
b. Use of a header label for the payroll input sheet
© Acontrol total for hours worked, prepared from time cards collected by
the timekeeping department
d. Requiring the treasurer's office to account for the numbers of the pre-
numbered checks issued to the computer department for the
processing of the payroll
10. Which of the following control procedures could best prevent direct labor
from being charged to manufacturing overhead?
73
zp chapter 4 = 7
nT
12,
13.
14.
15.
ransaction Cycles.
‘Comparison of daily journal entries with factory labor summary,
te Examination of routing tickets from finished goods on delivery,
Reconciliation of work in process inventory with cost records,
§ Recomputation of direct labor based on inspection of time cards,
In the audit of the following types of profit-oriented enterprises, which o
il the auditor be most likely to place special emphasis on testing the
internal controls over proper classification of payroll transactions? :
a. Aservice organization
b. Awholesaling organization
c. Aretailing organization
@. Amanufacturing organization
Which of the following procedures is most effective in providing reasonay,
assurance that payroll checks are distributed only to bona fide employees”
sean employee independent of payroll preparation compare
endorsements on canceled payroll checks with employee signatures i,
personnel records.
bs All changes in pay rates and deductions are reviewed and approved by
a responsible official independent of payroll preparation ang
distribution.
All unclaimed paychecks are returned to an employee independent of
payroll preparation and distribution.
. Allpersonnel and payroll records and documents are prenumbered and
physically protected from unauthorized access.
Which of the following statements best explains why the accuracy of payrol
calculations and of payroll account distribution is critical to auditor?
a. Employees will complain to management if their paychecks do not
reflect wages or salaries earned.
b. Payroll is paid in cash, an account that is highly susceptible to frauds.
¢ Auditing standards require that tests of cash and payroll te
coordinated
d. Payroll impacts several statement of financial position and statements!
comprehensive income accounts
Test of controls over personnel and payroll focus on the preparation
distribution, and recording of earned salaries and wages. Which of
following is the primary source from which tests of personnel and payroll
are derived?
a. Payroll register
b. Employee earnings record
¢. Time records
4. Labor distribution summary
®
On a surprise basis, an auditor may elect to distribute payee ie
i
employees personally, What is the primary purpose of @
procedure?
a. To assure that no extra payroll checks are prepared and istributed
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4
