Auditing The Revenue Receipt Cycle Quiz

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AUDITING THEORY
Revenue and Receipt Cycle
1. After the auditor has prepared a flowchart of internal control for sales, and cash receipts
transactions and evaluated the design of the system, the auditor would perform tests of
controls on all control procedures a. Documented in the flowchart.
b. Considered to be deficiencies that might allow errors to enter the accounting system.
c. Considered to be strengths that the auditor plans to rely on in assessing control risk.
d. That would aid in preventing irregularities.
2. Which of the following is not a universal rule for achieving control over cash?
a. Separate the cash-handling and record-keeping functions.
b. Deposit each day’s cash receipts by the end of the day.
c. Have bank reconciliation’s performed by employees who do not handle cash.
d. Decentralize the receiving of cash as much as possible.
3. The least crucial element of control over cash is

a. Separation of cash record keeping from custody of cash.
b. Preparation of the monthly bank reconciliation.
c. Separation of cash receipts from cash disbursements.
d. Batch processing of checks.
4. The use of fidelity bonds protects a company from embezzlement losses and also
a. Minimizes the possibility of employing persons with dubious records in positions of trust.
b. Protects employees who make unintentional errors form possible monetary damages
resulting from such errors.
c. Allows the company to substitute the fidelity bonds for various parts of internal control.
d. Reduces the company’s need to obtain expensive business interruption insurance.
5. An auditor is reviewing internal control for accounts receivable:

I. The billing function should not be assigned to the person who is responsible for maintaining
accounts receivable records.
II. Responsibility for approval of the write-off of accounts receivable that are uncollectible
should not be assigned to the cashier.
a. Only I is true c. Both I and II are true
b. Only II is true d. Neither I nor II is true
6. Which of the following is an effective internal control over accounts receivable?

a. Only persons who handle cash receipts should be responsible for the preparation of
documents that reduce accounts receivable balances.
b. Responsibility for approval of the write-off of uncollectible accounts receivable should be
assigned to the cashier.
c. Balances in the subsidiary accounts receivable ledger should be reconciled to the general
ledger control account once a year, preferably at year-end.
d. The billing function should be assigned to persons other than those responsible for
maintaining accounts receivable subsidiary records.
7. To achieve control when there is no billing department, the billing function should be performed
by the
a. Accounting department c. Shipping department
b. Sales department d. Credit and collection department
8. 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. c. Sales manager.
b. Receptionist. d. Accounts receivable clerk.
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9. Which of the following would the auditor consider to be an incompatible operation if the cashier
receives remittances from the mail room?
a. The cashier makes the daily deposit at a local bank.
b. The cashier prepares the daily deposit.
c. The cashier endorses the checks.
d. The cashier posts the receipts to the accounts receivable subsidiary ledger.
10. Which of the following would best protect a company that wishes to prevent lapping?
a. Segregating duties so that accounting has no access to an incoming mail
b. Segregating duties so that no employee has access both to checks from customers and to
currency from daily cash receipts
c. Having customers send payments directly to the company’s bank
d. Requesting that customers checks be made payable to the company and be addressed to
the treasurer
11. Defective merchandise returned by customers should be presented to

a. Inventory control personnel. c. Purchasing personnel
b. Sales personnel. d. Receiving personnel
12. In considering internal control within the revenue/receipt cycle, what is the purpose of a
transaction walk through?
a. To assure that employees are performing assigned functions accurately.
b. To confirm the auditor’s understanding of the internal control structure.
c. To select documents for detailed tests of controls.
d. To verify the results of the auditor’s sampling plan.
13. To determine whether internal control operates effectively to minimize errors of failure to bill a
customer for a shipment, the auditor would select a sample of transactions from the population
represented by the
a. Shipping records file c. Sales invoice
b. Customer order file d. Subsidiary customer accounts ledger
14. The purpose of tests of controls over shipping is to determine whether

a. Billed goods have been shipped.
b. Shipments are billed.
c. Shipping department personnel are competent.
d. Credit is approved before goods are shipped.
15. The purpose of tests of controls over billing is to determine whether

a. Billed goods have been shipped.
b. Shipments are billed.
c. Billing department personnel are competent.
d. Credit is approved before goods are billed.
16. 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.
c. Prenumber bills of lading and assure that related billings are made on a periodic basis.
d. Prepare and periodically update lists of authorized customers.
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Revenue and Receipt Cycle

3. The least crucial element of control over cash is

5. An auditor is reviewing internal control for accounts receivable:

6. Which of the following is an effective internal control over accounts receivable?

11. Defective merchandise returned by customers should be presented to

14. The purpose of tests of controls over shipping is to determine whether

15. The purpose of tests of controls over billing is to determine whether

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