AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 991:

  Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?

  A. Merchandise received is not promptly reconciled to the outstanding purchase order file.

  B. Obsolete items included in inventory balances are rarely reduced to the lower of cost or market value.

  C. The write-off of receivables by personnel who receive cash permits the misappropriation of cash.

  D. Fictitious transactions are recorded that cause an understatement of revenue and overstatement of receivables.

  Correct Answer: C

  Explanation: Choice "c" is correct. The function of cash receipts is part of the treasurer's department and should be separate from the role of writing off receivables. Failure to separate the recordkeeping function from the custodial function allows an individual to misappropriate cash and then cover up the theft by writing off the related receivable balance. Choice "a" is incorrect. Internal controls in the revenue cycle typically relate to sales, receivables, and cash, not to the purchase and receipt of goods. Choice "b" is incorrect. Internal controls in the revenue cycle typically relate to sales, receivables, and cash, not to inventory valuation. Choice "d" is incorrect. If fictitious transactions in the revenue cycle are recorded, then the impact on revenues and receivables would be the same; either both would be overstated (the most likely case) or both would be understated.

• Question 992:

  Tracing copies of computer-prepared sales invoices to copies of the corresponding computer-prepared shipping documents provides evidence that:

  A. Shipments to customers were properly billed.

  B. Entries in the accounts receivable subsidiary ledger were for sales actually shipped.

  C. Sales billed to customers were actually shipped.

  D. No duplicate shipments to customers were made.

  Correct Answer: C

  Explanation: Choice "c" is correct. Tracing from invoices to shipping documents would provide evidence that sales billed to customers were actually shipped. An invoice for which the corresponding shipping documents could not be located might be indicative of fictitious sales (i.e., sales that were recorded but never actually shipped). Choice "a" is incorrect. The auditor would need to start with shipping documents and trace to invoices to ensure that shipments were properly billed. Choice "b" is incorrect. An invoice may exist for which no entry was made in the accounts receivable subsidiary ledger. Therefore, the auditor would need to trace from entries in the accounts receivable subsidiary ledger (and not from invoices) to shipping documents, to obtain evidence that recorded receivables were for sales actually shipped. Choice "d" is incorrect. Tracing from invoices to shipping documents would not necessarily indicate when a duplicate shipment was made, as the auditor would not necessarily realize that two sets of shipping documents related to the same invoice.

• Question 993:

  An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the:

  A. Collection of receivables.

  B. Purchase of merchandise inventory.

  C. Payment of accounts payable.

  D. Sale of long-term debt.

  Correct Answer: A

  Explanation: Choice "a" is correct. The revenue cycle includes sales, receivables, and cash receipts, so an auditor using a transaction cycle approach would be likely to test sales and receivables together. Choice "b" is incorrect. Purchases are part of the expenditures cycle while sales are part of the revenue cycle, so an auditor using a transaction cycle approach would be unlikely to test these items together. Choice "c" is incorrect. Payables are part of the expenditures cycle while sales are part of the revenue cycle, so an auditor using a transaction cycle approach would be unlikely to test these items together. Choice "d" is incorrect. Sale of long-term debt falls within the "other liabilities" transaction cycle while sales are part of the revenue cycle, so an auditor using a transaction cycle approach would be unlikely to test these items together.

• Question 994:

  Which of the following events occurring in the year under audit would most likely indicate that internal controls utilized in previous years may be inadequate in the year under audit?

  A. The entity announced that the internal audit function would be eliminated after the balance sheet date.

  B. The audit committee chairperson unexpectedly resigned during the year under audit.

  C. The chief financial officer waived approvals on all checks to one vendor to expedite payment.

  D. The frequency of accounts payable check runs was changed from biweekly to weekly.

  Correct Answer: C

  Explanation: Choice "c" is correct. Vouchers should be approved before payment occurs. Overriding this control to expedite payment may result in unauthorized payments being made. The auditor would need to consider this change in evaluating current controls and determining the nature, timing, and extent of testing. Choice "a" is incorrect. If the internal audit function is being eliminated after the balance sheet date, there would be little effect on the current year's audit. Choice "b" is incorrect. Resignation of the audit committee chairperson would not imply that internal controls are less adequate than in the past, as long as a new, competent person steps up to become chair. Choice "d" is incorrect. Changing the frequency of the accounts payable check runs from biweekly to weekly would not automatically imply that controls are inadequate. The auditor would need to review the new procedures to determine whether adequate controls were still in place.

• Question 995:

  To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices, an auditor most likely would select a sample of transactions from the population represented by the:

  A. Sales order file.

  B. Customer order file.

  C. Shipping document file.

  D. Sales invoice file.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. Shipping documents provide evidence that a sale occurred, and therefore selecting

  from a population of shipping documents allows the auditor to test whether corresponding invoices exist for

  each sale.

  Choices "a" and "b" are incorrect. The existence of customer orders and sales orders does not necessarily

  imply that a sale occurred. For example, the particular item requested may be out of stock.

  In such cases, there would properly be no sales invoice.

  Choice "d" is incorrect. Since the weakness the auditor is concerned about involves missing sales

  invoices, selecting from a sample of existing sales invoices would not identify this problem.

• Question 996:

  Under properly designed internal control, the same employee most likely would match vendors' invoices with receiving reports and also:

  A. Post the detailed accounts payable records.

  B. Recompute the calculations on vendors' invoices.

  C. Reconcile the accounts payable ledger.

  D. Cancel vendors' invoices after payment.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. Matching vendor's invoices with receiving reports provides authorization for payment

  and is generally performed in the accounts payable department. Recalculation of vendor invoices is

  compatible with this authorization function.

  Choice "a" is incorrect. Posting the accounts payable records (recording) is incompatible with matching

  (authorization). Generally these functions would be performed by two different employees.

  Choice "c" is incorrect. This review procedure (independent verification) should be performed by someone

  independent of the employee who approved the invoice for payment.

  Choice "d" is incorrect. Payment and cancellation of vendor invoices should be performed by someone

  (generally the treasurer) other than the individual authorizing payment.

• Question 997:

  Which of the following internal controls most likely would assure that all billed sales are correctly posted to the accounts receivable ledger?

  A. Daily sales summaries are compared to daily postings to the accounts receivable ledger.

  B. Each sales invoice is supported by a prenumbered shipping document.

  C. The accounts receivable ledger is reconciled daily to the control account in the general ledger.

  D. Each shipment on credit is supported by a prenumbered sales invoice.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. Comparison of daily sales summaries to daily postings to the accounts receivable

  ledger would ensure the completeness of the accounts receivable ledger.

  Choice "b" is incorrect. Comparison of sales invoices to shipping documents verifies occurrence of the

  sale, not completeness of the accounts receivable ledger.

  Choice "c" is incorrect. Reconciliation of the accounts receivable ledger to the general ledger would not

  assure the accuracy and completeness of the accounts receivable ledger because a sale which was

  improperly excluded from receivables would likely be omitted from both ledgers.

  Choice "d" is incorrect. Ensuring that all shipments are billed verifies completeness of sales transactions,

  but does not provide evidence that all sales are recorded in the accounts receivable ledger. In other words,

  the fact that a shipment was billed does not mean that the invoice was also recorded in the accounts

  receivable ledger.

• Question 998:

  Which of the following audit procedures would an auditor most likely perform to test controls relating to management's assertion concerning the completeness of sales transactions?

  A. Verify that extensions and footings on the entity's sales invoices and monthly customer statements have been recomputed.

  B. Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal.

  C. Compare the invoiced prices on prenumbered sales invoices to the entity's authorized price list.

  D. Inquire about the entity's credit granting policies and the consistent application of credit checks.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. Examination of reports of shipments not recorded in the sales journal is an

  appropriate test of controls to determine whether all sales have been recorded.

  Choice "a" is incorrect. Verification that extensions and footings on sales invoices and statements have

  been recomputed by client personnel ensures that independent checks are being performed, but does not

  address whether all sales transactions have been recorded.

  Choice "c" is incorrect. Comparison of invoiced prices with the client's authorized price list ensures that the

  prices charged are authorized, but does not address whether all sales transactions have been recorded.

  Choice "d" is incorrect. Inquiring about credit policies is an appropriate audit procedure to verify

  authorization and valuation of sales transactions, not completeness.

• Question 999:

  An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about:

  A. Valuation and allocation.

  B. Understandability and classification.

  C. Existence.

  D. Rights and obligations.

  Correct Answer: A

  Explanation: Choice "a" is correct. Assertions about valuation and allocation deal with whether asset, liability, revenue, and expense components have been included in the financial statements at appropriate amounts, and any resulting valuation adjustments are appropriately recorded. For example, management asserts that trade accounts receivable included in the balance sheet are stated at net realizable value. Choice "b" is incorrect. Assertions about understandability and classification deal with whether financial information is appropriately presented and described, and disclosures are clearly expressed. Reviewing credit ratings of delinquent customers does not provide evidence about this type of assertion. Choice "c" is incorrect. Assertions about existence deal with whether assets, liabilities, and equity interest of the entity exist at a given date. Reviewing credit ratings of delinquent customers does not provide evidence about this type of assertion. Choice "d" is incorrect. Assertions about rights and obligations deal with whether assets are the rights of the entity and liabilities are the obligations of the entity at a given date. Reviewing credit ratings of delinquent customers does not provide evidence about this type of assertion.

• Question 1000:

  Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed?

  A. Scan the sales journal for sequential and unusual entries.

  B. Examine shipping documents for matching sales invoices.

  C. Compare the accounts receivable ledger to daily sales summaries.

  D. Inspect unused sales invoices for consecutive prenumbering.

  Correct Answer: B

  Explanation: Choice "b" is correct. Tracing from a sample of shipping documents to matching sales invoices would provide support for the completeness assertion for billing. Choice "a" is incorrect. Scanning the sales journal for sequential and unusual entries tests the completeness and existence assertions for sales, but would not provide assurance that shipped goods

  were properly billed.

  Choice "c" is incorrect. Comparing the accounts receivable ledger to the daily sales summary helps ensure

  that all sales were recorded as receivables and all receivables were recorded as sales, but it does not

  provide assurance that shipped goods were properly billed.

  Choice "d" is incorrect. Inspecting the consecutive numbering of unused sales invoices might identify

  fictitious sales, but it would not ensure that goods that have been shipped were properly billed.