Question

12. A CPA examines a sample of copies of December and January sales invoices for the initials of the person who verified the quantitative data and the consistency between prices on purchase order and invoice. This is an example of a:

A) Substantive test with respect to the completeness of revenue.

B) Cutoff test.

C) Tests of internal control.

D) Statistical test.

13. Which of the following revenue related transactions is not linked to the accounts indicated?

A) Recognize revenues too early--accounts receivable and revenue.

B) Understate allowance for doubtful accounts--Bad debt expense, allowance for doubtful accounts.

C) Don't write off uncollectible receivables—accounts receivable, sales discounts.

D) Don't record discounts given to customers--Cash, sales discounts, accounts receivable.

14. Which of the following is necessary if the auditor can plan to observe inventory at interim dates rather than the end of fiscal year?

A) Perpetual inventory records are maintained.

B) Complete recounts are performed by independent teams.

C) Unit cost records are integrated with production-accounting records.

D) The company adopted a sophisticated Peachtree-based accounting system.

15. Effective internal control for purchases generally can be achieved in a well-planned organizational structure with a separate purchasing department that has:

A) The ability to prepare payment vouchers based on the information on a vendor's invoice.

B) The responsibility of reviewing purchase orders issued by user departments.

C) The authority to make purchases of materials and services.

D) A direct reporting responsibility to controller of the organization.

Answer 1

12. The correct answer is "C": Tests of Internal Control

Tests of internal control involve checking the approval process and flow of a process such as checking the authorization for transactions, whether price on invoice is matching with the price master etc. In the current case as well CPA is looking for the person authorizing and verifying the quantitative data and the consistency between prices on purchase order and invoice. Hence this is also a test of internal control.

13.  The correct answer is "C" : Don't write off uncollectible receivables—accounts receivable, sales discounts

The accounts involved in a write off of uncollectible receivables are a) Bad Debt Expense account & b) Accounts Receivable account.

14. The correct answer is "A" : Perpetual inventory records are maintained.

If the auditor plans to perform the inventory count at interim dates rather than the year end date and roll forward the listing as on inventory count to year end date, one of the most important and primary requirement to do so is that the perpetual inventory records are maintained.

15. The correct answer is "C" : The authority to make purchases of materials and services

In order to have an effective internal control in the purchasing department and at the same time function smoothly without any interruptions, it is important that they have the authority to make purchases of materials and services. However these should be based on the request of other user departments and also it is of utmost importance that the purchase orders are reviewed by the respective user department so that there is appropriate seggregation of duties.