AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 1011:

  In testing controls over cash disbursements, an auditor most likely would determine that the person who signs checks also:

  A. Reviews the monthly bank reconciliation.

  B. Returns the checks to accounts payable.

  C. Is denied access to the supporting documents.

  D. Is responsible for mailing the checks.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. Once signed, the check should be mailed to the payee by the check signer or an

  employee operating under the supervision of the check signer to prevent defalcations of checks.

  Generally this occurs in the treasurer's department.

  Choice "a" is incorrect. The check signer would not normally review bank reconciliations.

  Choice "b" is incorrect. Accounts payable personnel should not have custody of signed checks since this

  would constitute a lack of segregation of duties between recording and custody.

  Choice "c" is incorrect. The check signer should have access to supporting documentation so that it can be

  reviewed before the check is signed.

• Question 1012:

  Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity's employees?

  A. A bank lockbox system.

  B. Prenumbered remittance advices.

  C. Monthly bank reconciliations.

  D. Daily deposit of cash receipts.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. A lockbox system is the best means of preventing defalcation of cash by employees

  because the employees never have direct access to cash receipts.

  Choice "b" is incorrect. The use of prenumbered remittance advices is not effective in preventing theft of

  receipts by employees because it does not prevent employee access to cash receipts.

  Choice "c" is incorrect. While the performance of monthly bank reconciliations is a good control, it would

  not be effective in preventing the theft of receipts because it does not prevent employee access to cash

  receipts. (However, it might be effective at detecting a theft that has already occurred).

  Choice "d" is incorrect. Daily deposit of cash receipts is not an effective control for preventing theft of

  receipts by employees because it does not prevent employee access to cash receipts.

• Question 1013:

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

  A. Fictitious transactions may be recorded that cause an understatement of revenues and overstatement of receivables.

  B. Claims received from customers for goods returned may be intentionally recorded in other customers' accounts.

  C. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.

  D. The failure to prepare shipping documents may cause an overstatement of inventory balances.

  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 posting credits to the A/R ledger. Failure to separate the recordkeeping function from the custodial function allows an individual to misappropriate cash and then cover up the theft by posting credits against the related A/R balance. Choice "a" 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. Choice "b" is incorrect. Even the lack of effective internal controls would not allow this fraud to be perpetrated for long, since the customers that submitted the claim would complain that the credit was not properly applied as soon as they received their next statement or invoice. Choice "d" is incorrect. The failure to prepare shipping documents may cause inventory to be overstated, but it is unlikely to be perpetrated as a fraud since it does not allow theft of cash. In addition, the internal controls in the revenue cycle typically relate to sales, receivables, and cash, not to inventory.

• Question 1014:

  Which of the following characteristics most likely would be indicative of check kiting?

  A. High turnover of employees who have access to cash.

  B. Many large checks that are recorded on Mondays.

  C. Low average balance compared to high level of deposits.

  D. Frequent ATM checking account withdrawals.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. Kiting occurs when a check drawn on one bank is deposited in another bank and no

  record is made of the disbursement in the balance of the first bank. Frequent kiting may result in a high

  level of deposits coupled with a low average balance.

  Choice "a" is incorrect. High turnover of employees who have access to cash may be normal in certain

  industries, or it may be indicative of poor hiring policies, but it would not be indicative of check kiting.

  Choice "b" is incorrect. More checks may arrive on Mondays simply because Monday's mail includes the

  mail from over the weekend. This characteristic is not particularly indicative of check kiting.

  Choice "d" is incorrect. Frequent ATM checking account withdrawals indicate a frequent need for cash, but

  this situation is not particularly indicative of check kiting.

• Question 1015:

  On receiving a client's bank cutoff statement, an auditor most likely would trace:

  A. Prior-year checks listed in the cutoff statement to the year-end outstanding checklist.

  B. Deposits in transit listed in the cutoff statement to the year-end bank reconciliation.

  C. Checks dated after year-end listed in the cutoff statement to the year-end outstanding checklist.

  D. Deposits recorded in the cash receipts journal after year-end to the cutoff statement.

  Correct Answer: A

  Explanation: Choice "a" is correct. The auditor should obtain bank cutoff statements that include transactions for 10 to 15 days after year-end. The outstanding checks and deposits in transit at year-end on the bank reconciliation should agree with the information in the bank cutoff statement. Choice "b" is incorrect. The deposits in transit are listed in the year-end bank reconciliation and traced to actual deposits appearing on the bank cutoff statement. The cutoff statement includes actual deposits received, not deposits in transit. Choice "c" is incorrect. Checks dated after year-end would not be included in the year-end outstanding checklist. Choice "d" is incorrect. Deposits recorded in the cash receipts journal after year-end do not affect the cash balance at year-end, and therefore the auditor would not perform audit procedures with respect to those deposits.

• Question 1016:

  Which of the following items does not pertain to the control environment?

  A. Management's philosophy and operating style.

  B. Participation of those charged with governance.

  C. The accounting records.

  D. Personnel policies and practices.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. The accounting records pertain to the information and communication system, not to

  the control environment.

  Choices "a", "b", and "d" are incorrect, as management's philosophy and operating style, participation of

  those charged with governance, and personnel policies and practices are all part of the control

  environment.

• Question 1017:

  Lake, CPA, is auditing the financial statements of ABC Co. ABC uses the XYZ, Inc. to process its payroll transactions. XYZ's financial statements are audited by Cope, CPA, who recently issued a report on XYZ's internal control structure. Lake is considering Cope's report on XYZ's internal control structure in assessing control risk on the ABC engagement. What is Lake's responsibility concerning making reference to Cope as a basis, in part, for Lake's own opinion?

  A. Lake may refer to Cope only if Lake is satisfied as to Cope's professional reputation and independence.

  B. Lake may refer to Cope only if Lake relies on Cope's report in restricting the extent of substantive tests.

  C. Lake may refer to Cope only if Lake's report indicates the division of responsibility.

  D. Lake may not refer to Cope under the circumstances above.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. The user auditor should not make reference to the report of the service auditor as a

  basis, in part, for his or her own opinion on the user organization's financial statements. Since the service

  auditor is not responsible for the examination of any part of the user organization's financial statements,

  division of responsibility would be inappropriate.

  Choices "a", "b", and "c" are incorrect, based on the above explanation.

• Question 1018:

  When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the:

  A. Extent of tests of details.

  B. Level of inherent risk.

  C. Extent of tests of controls.

  D. Level of detection risk.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. When an auditor increases the planned assessed level of control risk because

  certain control activities were determined to be ineffective, detection risk must be reduced accordingly.

  This may be accomplished by increasing the extent of tests of details.

  Choice "b" is incorrect. The level of inherent risk is not directly related to the planned level of control risk.

  Choice "c" is incorrect. The auditor performs tests of controls to evaluate the operating effectiveness of

  those controls. Once they have been determined to be ineffective, there would be no reason to perform

  further tests of those controls.

  Choice "d" is incorrect. The level of detection risk that the auditor could accept would decrease if the

  planned level of control risk increased.

• Question 1019:

  A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor's:

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: C

  Explanation:

  Choice "c" is correct. It is not appropriate for the successor auditor to request a review of the predecessor

  auditor's engagement letter. This is a business matter between the client and the predecessor auditor that

  has no impact on the successor's audit. Conversely, review of the predecessor auditor's audit

  documentation is appropriate and customary to facilitate the successor's audit.

  Choices "a", "b", and "d" are incorrect, based on the above explanation.

• Question 1020:

  ABC Company processes payroll transactions for schools. Drake, CPA, is engaged to report on ABC's internal controls placed in operation as of a specific date. These internal controls are relevant to the schools' internal control, so Drake's report will be useful in providing the schools' independent auditors with information necessary to plan their audits. Drake's report expressing an opinion on ABC's internal controls placed in operation as of a specific date should contain a(an):

  A. Description of the scope and nature of Drake's procedures.

  B. Statement that ABC's management has disclosed to Drake all design deficiencies of which it is aware.

  C. Opinion on the operating effectiveness of ABC's internal controls.

  D. Paragraph indicating the basis for Drake's assessment of control risk.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. A report on internal controls for a service organization should include a description of

  the scope and nature of Drake's procedures.

  Choice "b" is incorrect. No statement is made in the report that all design deficiencies have been disclosed.

  Choice "c" is incorrect. The service auditor's opinion is not intended to provide evidence of operating

  effectiveness.

  Choice "d" is incorrect. No paragraph indicating the basis for the assessment of control risk is included in

  Drake's report.