Practice Material - Transaction Cycles

Professor George R. James, CPA

TRANSACTION CYCLES PART 1 8. For most firms, the function of indicating credit
Revenue-Receivables-Cash Cycle – Overview approval is recorded on the
1. In the revenue and collection cycle, of the order of A. Customer order.
activities listed, which is in the best order of a typical B. Sales order.
sequence of activities? C. Sales invoice.
A. Delivering goods, billing customers, D. Remittance advice.
credit granting, collection activity.
B. Customer ordering, delivering goods, 9. Sales order forms and invoice blanks should be
billing customer, cash receipts. controlled in the:
C. Customer ordering, delivering goods, A. Sales order section of the sales
credit granting, collection activity. department.
D. Credit granting, billing customers, B. Billing clerk in the accounting
delivering goods, cash receipts. department.
C. Credit manager in the credit department.
2. The overall objective in the audit of the sales and D. Sales manager in the sales department.
collection cycle is to evaluate whether:
A. The sales account and accounts 10. Procedures to test whether the client’s pricing policies
receivable are free of errors. are being followed are normally:
B. The sales account and the accounts A. Necessary, regardless of the quality of
receivable account are free of material the controls.
errors. B. Necessary only if the controls are weak.
C. The sales account and the accounts C. Skipped unless fraud is suspected.
receivable account are presented fairly in D. Superfluous during substantive testing.
accordance with PFRS.
D. The account balances affected by the 11. A document prepared to initiate shipment of the
cycle are fairly presented in accordance goods sold is the:
with PFRS. A. Sales order.
B. Bill of lading.
3. For the most part, the audit of the sales and collection C. Sales invoice.
cycle: D. Customer order.
A. Cannot be performed until the audit of
cash is completed. 12. The document used to indicate to the customer the
B. Can be performed independently of the amount of a sale and due date of the payment is the:
audit of other cycles. A. Sales order.
C. Must be performed simultaneously with B. Shipping document.
the audit of the purchases and C. Bill of lading.
disbursements cycles. D. Sales invoice.
D. Must be performed first so that the audit
of the other cycles can rely on the data. 13. Most companies recognize sales when a/the:
A. Merchandise is received by the customer.
4. Which one of the following is not typically included in B. Merchandise is shipped.
the sales and collection cycle? C. Customer order is received.
A. Allowance for uncollectible accounts. D. Cash is received on account.
B. Cash credits from the cash
disbursements journal. 14. The report which typically includes information
C. Sales returns and allowances. analyzed by key components as sales person,
D. Bad debt expense. product, and territory is the:
A. Remittance advice.
5. The customer’s request for merchandise, the B. Summary sales report.
customer order, would be in the form of: C. Accounts receivable master file.
A. An oral request. D. Monthly statement.
B. A written request on customer’s
letterhead. 15. A file for recording individual sales, cash receipts, and
C. A written request on pre-printed form. sales returns and allowances for each customer is
D. Any of these formats. the:
A. Sales journal.
6. A document for recording the description, quantity, B. Cash receipts journal.
and related information for goods ordered by a C. General ledger.
customer is the: D. Accounts receivable subsidiary ledger.
A. Customer order.
B. Sales order. 16. A document sent to each customer showing their
C. Shipping document. beginning accounts receivable balance and the
D. Remittance advice. amount and date of each sale, cash payment
received, credit memo issued, and the ending
7. Before goods are shipped on account, a properly accounts receivable balance is the:
authorized person must: A. Accounts receivable subsidiary ledger.
A. Prepare the sales invoice. B. Monthly statement.
B. Approve the journal entry. C. Remittance advice.
C. Approve credit. D. Sales invoice.
D. Verify that the unit price is accurate.
 Practice Material - Transaction Cycles
Professor George R. James, CPA
17. To achieve good internal control, which department D. Remittance advises, letters, or envelopes
should perform the activities of matching shipping that accompany receipts are separated
documents with sales orders and preparing daily sales and given directly to the accounting
summaries? department.
A. Billing. C. Credit.
B. Shipping. D. Sales order. 26. Which of the following control procedures could
prevent or detect errors or frauds arising from
18. For effective internal control, the billing function shipments made to unauthorized parties?
should be performed by the: A. Document policies and procedures for
A. Accounting department. scheduling the shipments of goods.
B. Sales department. B. Establish procedures for reviewing and
C. Shipping department. approving the prices and sales terms
D. Credit and collection department. before sale.
C. Pre-number the bills of lading and assure
19. The document which supports reductions in accounts that the related billings are made on a
receivable is the: periodic basis.
A. Remittance advice. D. Prepare and periodically update the lists
B. Credit memo. of authorized customers.
C. Sales invoice.
D. Monthly statement. 27. Which of the following control procedures may
prevent the failure to bill customers for some
20. The document which accompanies the customer’s shipments?
payment is the: A. Each shipment should be supported by a
A. Remittance advice. pre-numbered sales invoice that is
B. Credit memo. accounted for.
C. Sales invoice. B. Each sales order should be approved by
D. Monthly statement. authorized personnel
C. Sales journal entries should be reconciled
21. The daily entries in the cash receipts journal are to daily sales summaries.
supported by the: D. Each sales invoice should be supported
A. Sales invoices. by a shipping document.
B. Shipping documents.
C. Remittance advices. 28. Which of the following control internal control
D. Credit memos. procedures would most likely deter lapping of
collections from customers?
22. Internal control over cash receipts is weakened when A. Independent internal verification of dates
an employee who receives customer mail receipts of entry in the cash receipts journal with
also: the dates of daily cash summaries.
A. Prepares initial cash receipts records. B. Authorization of write-offs of
B. Records credits to individual accounts uncollectible accounts by a supervisor
receivable. who is independent of credit approval.
C. Prepares bank deposit slips for all mail C. Segregation of duties between receiving
receipts. cash and posting collections to the
D. Maintains a petty cash fund. accounts receivable ledger.
D. Supervisor’s comparison of the daily cash
23. When accounts receivable is considered uncollectible, summary with the sum of the cash
the person who generally authorizes the write-off is receipts journal entries.
the:
A. Credit manager. 29. To determine whether refunds granted to customers
B. Treasurer. were properly approved, the auditor should trace
C. Accountant. accounts receivable entries to:
D. Sales manager. A. Sales invoices.
B. Remittance advices.
24. The two most important considerations the auditor C. Shipping documents.
should keep in mind in the verification of the write-off D. Credit memos.
of individual uncollectible accounts are:
A. Cut-off and completeness.
B. Cut-off and authorization.
C. Validity and authorization.
D. Validity and completeness.
25. The cashier diverted cash received over the counter
from a customer to his own use and wrote-off the
receivable as an impairment loss. Select the control
that should have prevented the error:
A. Aging schedules of accounts receivable
are prepared periodically and reviewed
by a responsible official.
B. Journal entries are approved by a
responsible official.
C. Receipts are given directly to the cashier
by the person who opens the mail.
 Practice Material - Transaction Cycles
Professor George R. James, CPA
TRANSACTION CYCLES PART 2
Purchasing-Payables-Disbursement Cycle –
Overview
30. In the purchasing disbursements cycle, of the order of
activities listed, which is in the best order of a typical
sequence of activities?
A. Ordering goods, receiving vendor’s
invoice, selecting authorized vendor,
payment activity.
B. Ordering goods, receiving goods,
receiving vendor’s invoice, cash
payments.
C. Ordering goods, receiving vendor’s
invoice, receiving goods, payment
activity.
D. Selecting authorized vendor, receiving
vendor’s invoice, receiving goods,
payment activity.
31. The overall objective in the audit of the purchasing
and disbursements cycle is to evaluate whether:
A. The cost of goods sold account and
inventory accounts are free of errors.
B. The cost of goods sold account and the
inventory account are free of material
errors.
C. The cost of goods sold account and the
inventory account are presented fairly in
accordance with Philippine Financial
Reporting Standards.
D. The account balances affected by the
cycle are fairly presented in accordance
with Philippine Financial Reporting
Standards.
32. The major balance sheet account in the acquisition
and payments cycle is:
A. Accounts payable.
B. Purchases.
C. Merchandise inventory.
D. Ordinary shares.
33. A request by an authorized employee for goods or
services is made on the:
A. Purchase order.
B. Purchase requisition.
C. Debit memo.
D. Acquisition transaction file.
34. The purchase order, usually in writing, is a legal
document that is:
A. A binding agreement between client and
vendor.
B. An offer to buy.
C. Not enforceable if it is not in writing.
D. An acceptance of a vendor’s catalog offer
to sell.
35. The controls over purchase requisition and the related
purchase orders are evaluated and tested as part of
the:
A. Inventory and warehousing cycle.
B. Acquisitions and payments cycle.
C. Payroll and personnel cycle.
D. Capital acquisitions cycle.
36. The receipt of goods and services in the normal
course of business represents the date clients
normally recognize:
A. Income.
B. The liability.
C. Warranty assets.
D. Expenses.
37. Internal control is strengthened 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. Receiving department.
C. Purchasing agent.
D. Accounts payable department.
38. An auditor usually examines receiving reports to
support entries in the
A. Voucher register and sales returns
journal.
B. Sales journal and sales returns journal.
C. Voucher register and sales journal.
D. Check register and sales journal.
39. The document which specifies the amount of money
owed to the vendor for an acquisition is the:
A. Receiving report.
B. Purchase order.
C. Vendor’s invoice.
D. Accounts payable trial balance.
40. A file for recording individual acquisitions, cash
disbursements and acquisition returns and allowances
for each vendor is the:
A. Accounts payable master file.
B. Cash disbursements transactions file.
C. Acquisitions transactions file.
D. Summary acquisitions report.
41. The client’s accounts payable master file should be
the same as the vendor’s statement, except for the
following:
A. Disputed amounts.
B. Timing differences.
C. Both a and b.
D. None of these.
42. An important control in the accounts payable and IT
departments is to require that those personnel who
record acquisitions do not have access to the:
A. Lists of vendor’s names and addresses.
B. Cash, trading securities, and other
assets.
C. Vendor’s price lists.
D. The accounts payable master file.
43. The accounts payable department usually has
responsibility for verifying the propriety of acquisitions
by comparing the details on the:
A. Vendor’s invoice and the purchase
requisition.
B. Vendor’s invoice and the receiving report.
C. Purchase requisition, purchase order and
receiving report.
D. Purchase order, receiving report, and
vendor’s invoice.
44. A client erroneously recorded a large purchase twice.
Which of the following control procedures would most
likely detect this error in a timely and efficient
manner?
A. Footing the purchases journal.
B. Reconciling vendor’s monthly statements
with subsidiary payable ledger accounts
C. Tracing totals from the purchases journal
to the ledger accounts.
D. Sending written quarterly confirmation to
all vendors.
 Practice Material - Transaction Cycles
Professor George R. James, CPA
45. In assessing control risk for purchases, an auditor
vouches a sample of entries in the voucher register to
the supporting documents. Which assertion would
this test of controls most likely pertain to?
A. Completeness.
B. Existence or occurrence.
C. Valuation or allocation.
D. Rights and obligations.
46. A document indicating a reduction in the amount
owed to a vendor because of returned goods is
known as:
A. Vendor-issued credit memo.
B. Purchase adjustment slip.
C. Receiving room report.
D. Shipping room report.
47. For several years, a client’s physical inventory count
has been lower than what was shown on the books at
the time of the count so that downward adjustments
to the inventory account were required. Contributing
to the inventory problem could be weaknesses in
internal control that led to the failure to record some:
A. Purchases returned to vendors.
B. Sales returns received.
C. Sales discounts allowed.
D. Cash purchases.
48. The internal control objectives for purchases would
not include:
A. Purchase transaction accounting is
complete and proper.
B. Purchases are paid for within cash
discount date.
C. Purchase orders are accurately prepared.
D. Recorded purchases are valid and
documented.
49. For good internal control, the person who should sign
checks is the:
A. Person preparing the checks.
B. Purchasing agent.
C. Accounts payable clerk.
D. Treasurer.
50. Operating control of the check-signing machine
normally should be the responsibility of the:
A. General accounting function.
B. Treasury function.
C. Legal counsel.
D. Internal audit function.
51. When processing and recording cash disbursements,
it is important to have a method of canceling the
supporting documents to prevent their reuse as
support for another check at a later time. A common
method is to:
A. Shred the documents so they can’t be
reused.
B. Transfer possession of the documents to
a bank vault such as a safety deposit
box.
C. Move the documents to a permanent off-
site facility such as a warehouse.
D. Write the check number on the
supporting documents.
52. The internal control which requires the “cancellation
of documents to prevent their reuse” satisfies the
objective of:
A. Validity. C. Completeness.
B. Authorization. D. Valuation.
53. Bell’s accounts payable clerk has a brother who is one
of Bell’s vendors. The brother will often invoice Bell
twice for the same delivery. The accounts payable
clerk removes the receiving report for the first invoice
from the paid-vouchers file and uses it for support of
payment for the duplicate invoice. The most effective
procedure for preventing this activity is to:
A. Use pre-numbered receiving reports.
B. Mail signed checks without allowing them
to be returned to the accounts payable
clerk.
C. Cancel vouchers and supporting
documents when payment is made.
D. Use dual signatures.
54. Which of the following control procedures could
prevent or detect payment for goods that have not
been received?
A. Counting goods when received.
B. Matching the purchase order, receiving
report and vendor’s invoice
C. Comparing goods received with goods
requisitioned.
D. Verifying vouchers for accuracy and
approval
55. For which of the following transactions would an
auditor most likely propose an adjustment to the
financial statements?
A. Inventory is included on the balance
sheet at year-end but the check for
payment has not been paid until January
5.
B. An order for office supplies that has not
been recorded because the goods have
neither been received nor paid for by
year-end.
C. Purchase of P20,000 of office furniture
that was ordered on December 20, 2019
with a P5,000 deposit being made with
an entry debiting Deposits on Furniture
for P5,000 and a credit to Cash for
P5,000. The office furniture was
received on January 3, 2020.
D. Shop supplies are included on the
balance sheet at year-end but the
payable and subsequent cash
disbursements are not recorded
56. Accrued liabilities generally differ from accounts
payable in that accrued liabilities:
A. Accumulate over time.
B. Are usually confirmed at year-end
C. Can be found by a review of unpaid
invoices.
D. Are never included in the cost of sales
computation.
 Practice Material - Transaction Cycles
Professor George R. James, CPA
TRANSACTION CYCLES PART 3
Other Cycles: Personnel and Payroll Cycle
57. In the personnel and payroll cycle, of the order of
activities listed, which is the best order of a typical
sequence of activities?
A. Attendance and work, payroll accounting,
cash disbursement, payroll distribution.
B. Personnel hiring, labor relations,
attendance and work, payroll accounting,
payroll distribution.
C. Personnel hiring, attendance and work,
payroll distribution, payroll accounting.
D. Labor relations, personnel hiring, payroll
distribution, payroll accounting.
58. The total of the individual employee earnings in the
payroll master file equals the:
A. Total balance of gross payroll in the
general ledger accounts.
B. Total of the checks drawn to employees
for payroll.
C. Total gross payroll plus the total
contributed by the employer for payroll
taxes.
D. Total gross pay for the current week’s
payroll.
59. Which of the following best describes proper internal
control over payroll?
A. The preparation of the payroll must be
under the control of the personnel
department.
B. The confidentiality of employee payroll
data should be carefully protected to
prevent fraud.
C. The duties of hiring, payroll computation,
and payment to employees should be
segregated.
D. The payment of cash to employees
should be replaced with payment by
checks.
60. The purpose of segregating the duties of hiring
personnel and distributing payroll checks is to
separate the:
A. Administrative controls from the internal
accounting controls
B. Human resources function from the
controllership function
C. Operational responsibility from record-
keeping function.
D. Authorization of transactions from the
custody of related assets (i.e. cash)
61. Which of the following control procedures could best
prevent direct labor from being charged to
manufacturing overhead?
A. Comparison of daily journal entries with
factory labor summary.
B. Examination of routing tickets from
finished goods on delivery.
C. Reconciliation of work-in-process
inventory with cost records.
D. Recomputation of direct labor based on
inspection of time cards.
62. The proper use of pre-numbered termination notice
forms by the payroll department should provide
assurance that all
A. Uncashed payroll checks were issued to
employees who have not been
terminated.
B. Personnel files are kept up to date.
C. Employees who have not been
terminated receive their payroll checks.
D. Terminated employees are removed from
the payroll.
63. Arizona Lemonades, Inc., has changed from a
conventional to a computerized payroll clock card
system. Factory employees now record time in and out
with magnetic cards, and the computer system
automatically updates all payroll records. Because of
this change,
A. The auditor must audit through the
computer.
B. Internal control has improved.
C. Part of the audit trail has been lost.
D. The potential for payroll-related fraud
has been diminished.
64. 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. A control total for hours worked,
prepared from time cards collected by
the timekeeping department.
B. 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.
C. Use of a check digit for employee
numbers.
D. Use of a header label for the payroll
input sheet.
65. To minimize the opportunities for fraud, unclaimed
cash payroll should be
A. Deposited in a safe deposit box.
B. Held by the payroll custodian.
C. Deposited in a special bank account.
D. Held by the controller.
66. Which of the following departments most likely would
approve changes in pay rates deductions from
employee salaries?
A. Personnel C. Controller
B. Treasury D. Payroll
67. Which of the following is not a common activity within
the personnel department?
A. Distributing paychecks to employees.
B. Preparing and updating personnel
records.
C. Preparing and recording payroll.
D. Initiating terminations.
68. Which of the following controls would be the most
appropriate means to ensure that terminated
employees had been removed from the payroll?
A. Mailing checks to employees’ residences
B. Establishing direct deposit procedures
with employee’s respective banks.
C. Reconciling the payroll and time-keeping
records.
D. Establishing computerized limit checks on
payroll rates.
 Practice Material - Transaction Cycles
Professor George R. James, CPA
Conversion-Production Cycle
69. The objectives of the internal structure for a
production cycle are to provide assurance that
transactions are properly executed and recorded, and
that
A. Custody of work in process and of
finished goods is properly maintained.
B. Production orders are pre-numbered and
signed by a supervisor.
C. Independent internal verification of
activity reports is established.
D. Transfers to finished goods are
documented by a completed production
report and a quality control report.
70. Which of the following procedures is most likely to
ensure that employee job time tickets are accurate?
A. Make sure that the number of hours per
week on each employee’s job time ticket
is not more than 40 hours.
B. Keep employment information in the
human resources department.
C. Approve the payroll voucher in the
accounts payable department.
D. Check the employee check cards against
the job time tickets.
71. A major difficulty in the verification of inventory cost
records is determining the reasonableness of
A. The direct labor hourly rate.
B. The raw materials cost per unit.
C. The cost allocations.
D. All of the answers.
72. Perpetual inventory master files provide a record:
A. That can be used to pinpoint
responsibility for custody.
B. Of the use of raw materials and the sale
of finished goods.
C. Of items on hand.
D. For all three of the above.
73. Which of the following activities is not common to the
conversion cycle?
A. Maintaining perpetual inventory records.
B. Accounting for fixed asset disposals and
retirements.
C. Implementing a just-in-time order entry
system.
D. Recording depreciation allocations.
74. Sauron Corporation's parts inventory consists of
thousands of different items that are small in value
individually, but quite significant in total. Sauron could
establish effective control over the parts by requiring
A. An officer's approval of requisitions for
inventory parts.
B. Maintaining inventory records for all
parts included in the inventory.
C. Physical counts on a cycle basis rather
than at year-end.
D. Separation of the storekeeping function
from the production and inventory
record-keeping functions.
75. From the auditor's point of view, inventory counts are
more acceptable prior to the year-end, when
A. Internal control is deficient.
B. Accurate perpetual inventory records are
maintained.
C. Inventory is slow moving.
D. Significant amounts of inventory are held
on consignment.
76. The accuracy of perpetual inventory records may be
established, in part, by comparing inventory records
with
A. Purchase requisitions.
B. Receiving reports.
C. Purchase orders.
D. Vendor payments.
77. Arrowheads Manufacturing Corporation mass
produces eight different products. The controller who
is interested in strengthening control procedures over
the accounting for materials used in production would
be most likely to implement
A. An economic order quantity (EOQ)
system.
B. A job order cost accounting system.
C. A perpetual inventory system.
D. A separation of duties among production
personnel.
78. When perpetual inventory records are maintained in
quantities and in dollars, and internal control
procedures over inventory are deficient, the auditor
would probably
A. Want the client to schedule the physical
inventory count at the end of the year.
B. Insist that the client perform physical
counts of inventory items several times
during the year.
C. Increase the extent of tests for
unrecorded liabilities at the end of the
year.
D. Have to disclaim an opinion on the
income statement that year.
79. An auditor has accounted for a sequence of inventory
tags and is now going to trace information on a
representative number of tags to the physical
inventory sheets. The purpose of this procedure is to
obtain assurance that
A. The final inventory is valued at cost.
B. All inventory represented by an inventory
tag is listed on the inventory sheets.
C. All inventory represented by an inventory
tag is bona fide.
D. Inventory sheets do not include
untagged inventory items.
80. An effective internal control procedures covering fixed
asset additions should require:
A. Classification as investments of those
fixed asset additions that are not used in
the business.
B. Capitalization of the cost of fixed asset
addition in excess of a specific peso
amount.
C. Performance of recurring fixed asset
maintenance work solely by company
maintenance staff.
D. Authorization and approval of major fixed
asset additions.
81. The emphasis in auditing manufacturing equipment is
on the verification of:
A. The balance carried forward in the
account from the previous period
(beginning balance).
B. The current period’s acquisitions and
retirements.
 Practice Material - Transaction Cycles
Professor George R. James, CPA
C. The balance in the account after the
current year’s activities are recorded
(ending balance).
D. All three of the above.
82. Which of the following is an internal control weakness
related to the acquisition of equipment?
A. Advance executive approvals are
required for equipment acquisitions.
B. Variances between authorized equipment
expenditures and actual costs are to be
immediately reported to management.
C. Depreciation policies are reviewed only
once a year.
D. Acquisitions are to be made through and
approved by the department in need of
the equipment.
83. To strengthen control procedures over the custody of
heavy mobile equipment, the client would most likely
institute a policy requiring a periodic
A. Increase in insurance coverage.
B. Verification of liens, pledges, and
collateralizations.
C. Accounting for work orders.
D. Inspection of equipment and
reconciliation with accounting records.
84. In tests of property, plant, and equipment, the
auditor tries to determine all of the following except
the
A. Adequacy of the internal control.
B. Extent of property abandoned during the
year.
C. Adequacy of replacement funds.
D. Reasonableness of depreciation.
85. To improve accountability for fixed asset retirements,
management most likely would implement an internal
control structure that includes
A. Continuous analysis of the repairs and
maintenance account.
B. Periodic inquiry of plant executives by
internal auditors as to whether any plant
assets have been retired.
C. Continuous utilization of serially
numbered retirement work orders.
D. Periodic inspection of insurance policies
by internal auditors.
86. The audit procedure of analyzing the repairs and
maintenance accounts is primarily designed to provide
evidence in support of the audit proposition that all
A. Expenditures for plant assets have been
recorded in the proper period.
B. Capital expenditures have been properly
authorized.
C. Noncapitalizable expenditures have been
properly expensed.
D. Expenditures for plant assets have been
capitalized.
87. When verifying debits to a manufacturing company's
perpetual inventory records, an auditor would be
most interested in testing a sample of purchase
A. Approvals. C. Invoices.
B. Requisitions. D. Orders.
88. An auditor's tests of a client's cost accounting system
are designed primarily to determine that
A. Quantities on hand have been computed
based on acceptable methods that
reasonably approximate actual quantities
on hand.
B. Physical inventories substantially agree
with book inventories.
C. The system complies with generally
accepted accounting principles and
functions as planned.
D. Costs have been assigned properly to
finished goods, work in process, and cost
of goods sold.
89. Which of the following procedures would least likely
lead the auditor to detect unrecorded fixed asset
disposals?
A. Examine insurance policies.
B. Review repairs and maintenance
expense.
C. Review property tax files.
D. Scan invoices for fixed asset additions.
90. In violation of company policy, Doy Company
erroneously capitalized the cost of painting its
warehouse. An auditor would most likely detect this
when:
A. Discussing capitalization policies with
Doy’s controller.
B. Examining maintenance expense
accounts.
C. Observing that the warehouse had been
painted.
D. Examining construction work orders that
support items capitalized during the year.
Investing and Financing Cycles
91. Estimates in the finance and investment cycle include:
A. Probability of a correlated hedge
B. Classification of equity investments
C. Actuarial assumptions for pension costs
D. All of the choices are correct.
92. It is most likely to be efficient to test the controls over
investments when:
A. Controls are thought to be weak.
B. Substantive tests may be performed.
C. Analytical procedures are cost-beneficial.
D. The company trades or holds a large
number of securities.
93. Inspecting evidence related to trading securities and
available for sale securities provide primary support for
the assertion of:
A. Existence.
B. Rights and obligations.
C. Valuation and accuracy.
D. All of these assertions.
94. PSA 545 covers fair value measurements. If market
prices are not readily available for fair value
measurements, management should use:
A. The auditor’s best estimate of fair value.
B. Historical cost of the investment.
C. Their own assumptions as long as there
are no contrary data or evidence.
D. The previous year’s value.
95. Jumong, CPA, audits ABC Company. ABC Company
owns ordinary shares of DEF Company. DEF has
recently declared bankruptcy. Which of the following
is Jumong’s concern with regards to the investment in
DEF?
A. Existence.
B. Valuation.
 Practice Material - Transaction Cycles
Professor George R. James, CPA
C. Completeness.
D. Presentation.
96. A company holds bearer bonds as a short-term
investment (i.e. trading security). Responsibility for
custody of these bonds and submission of coupons for
periodic interest collections probably should be
delegated to the:
A. Chief accountant.
B. Internal auditor.
C. Cashier.
D. Treasurer.
97. A company has additional funds to invest. The Board
of Directors decided to purchase investment securities
and assigned the future purchase and sale decisions
to a responsible financial executive. The best
person(s) to make periodic reviews of the investment
activity should be
A. BOD investment committee.
B. The chief operating officer.
C. The corporate controller.
D. The treasurer.
98. Honeymi Corporation owns a large amount of
investments in bonds that pay interest semi-annually –
August 1 and February 1. On the financial statements
the company accrued the 5 months of interest it was
due as interest receivable. In this case, the auditor
should:
A. Require the accrual to be reversed since
the interest has not yet been paid.
B. Confirm the interest accrual with the
investee company.
C. Verify that Honeymi owns the bonds,
recomputed the amount of accrual, and if
no exceptions are noted, the auditor
should no longer propose an adjustment.
D. Require the reversal of the accrual since
Honeymi has not yet received the
interest.
99. One of the items of interest to the auditor is the
measurement of impairment losses. Which of the
following categories of investments is not subject to
tests for impairment?
A. Trading securities.
B. Available for sale debt securities.
C. Held to maturity securities.
D. Available for sale equity securities.
100. The financing cycle includes financial planning.
Financial planning usually starts with which of the
following?
A. Capital budget.
B. Cash flow forecast.
C. Authorization for share sales.
D. Authorization for debt issuance.
101. Who should have control over the authorization of
corporate bonds?
A. Controller.
B. Treasurer.
C. President or CEO.
D. Board of Directors.
102. An in-charge auditor is drafting the audit program for
debenture bonds. Which of the following is least likely
to be included in the audit program?
A. Examine securities pledged relating to
the loan.
B. Confirmation.
C. Review bonds paid during the period.
D. Perform substantive analytical
procedures.
103. Which of the following phrases best describes the
reason why auditors often set control risk at a HIGH
(maximum) level for bonds?
A. Use of bond certificates book.
B. Small number of transactions per year.
C. Outside investors monitor payments.
D. All transactions are approved by the
Board of Directors.
104. Grace, CPA, has calculated the interest paid on a
company’s bonds and found the interest paid was 12%.
In examining the bonds, she notes that they are 10%
bonds and were sold without a premium or a discount.
Which of the following is most likely?
A. Understated debt outstanding.
B. Understated interest expense.
C. Overstated ordinary shares.
D. Overstated accrued interest receivable.
105. Ruben. CPA, has audited the bonds of ABC Company
and noted that P5,000,000 of these bonds will be due
in 6 months. The financial statement assertion that
must be addressed in determining that the proper
amount of debt is included as part of current liabilities
is:
A. Existence.
B. Rights and obligations.
C. Completeness.
D. Presentation and disclosure.
106. Notes payable which have been repaid in full should
be:
A. Destroyed so that they will not be paid
again inadvertently.
B. Canceled and destroyed.
C. Canceled and returned to the creditor.
D. Canceled and retained by an authorized
company official.
107. Which of the following questions would an auditor
most likely include on an internal control
questionnaire for notes payable?
A. Are direct borrowings on notes payable
authorized by the board of directors?
B. Are two or more authorized signatures
required on checks that repay notes
payable?
C. Are the proceeds from notes payable
used for the purchase of noncurrent
assets?
D. Are assets that collateralize note payable
critically needed for the entity’s
continued existence?
108. Which of the following types of owners’ equity
transactions would require authorization by the board
of directors of a company?
A. Issuance of share capital.
B. Repurchase of share capital.
C. Declaration of dividends.
D. All of the above.
 Practice Material - Transaction Cycles
Professor George R. James, CPA
109. In an examination of shareholder’s equity, an auditor
is most concerned that
A. Capital stock transactions are properly
authorized.
B. Stock splits are capitalized at par or
stated value on the dividend declaration
date.
C. Dividends during the year under audit
were approved by the shareholders.
D. Changes in the accounts are verified by a
bank serving as a registrar & stock
transfer agent.
110. When no independent stock transfer agents are
employed and the corporation issues its own stocks
and maintains stock records, canceled stock
certificates should
A. Not be defaced but segregated from
other stock certificates and retained in a
canceled certificates file.
B. Be destroyed to prevent fraudulent
reissuance.
C. Be defaced and sent to the Secretary of
State.
D. Be defaced to prevent reissuance and
attached to their corresponding stubs.
C. Maintenance of the shareholder ledger.
D. Check on the share issuances to ensure
such transactions happen at the most
convenient times.
115. Veron Corporation has convertible debentures and
share options. Which of the following procedures
should the auditor perform regarding these debentures
and options?
A. Verify that dividends paid are being held
in a secured account.
B. Determine that enough shares are held
in reserve to fulfill the obligations.
C. Determine that all convertible debentures
have been recorded in the share capital
ledger.
D. Confirm the debentures and options with
underwriters and share transfer agents.
-end-

111. For a large publicly traded client, the auditor’s

examination of share capital accounts will ordinary
include:
A. Analysis of share capital accounts.
B. Confirmation of shares issued with the
independent registrar.
C. Accounting for the proceeds of a major
share issuance.
D. All of the above are included.

112. An audit program for the examination of the net

accumulated profits and losses account (retained
earnings) should include which of the following
procedures?
A. Verification of the market value used to
charge retained earnings to account for a
two-for-a-share split.
B. Verification of the approval of the
adjustment of the beginning balance as a
result of a write-off of an account
receivable.
C. Verification of the approval for both cash
and share dividends.
D. Verification of gain or loss resulting from
disposition of treasury shares.

113. Shower, CPA, is verifying the dividend amounts paid by

Powerplus Corporation. Shower will typically do all of
the following procedures, except:
A. Determine dates and amounts of
dividends paid.
B. Examine how unclaimed dividends are
disposed of or treated.
C. Examine arrearages of cumulative
preference shares.
D. Send confirmations to shareholders to
verify payments.

114. The primary responsibility of a share transfer agent is

the:
A. Maintenance of detailed shareholder
records.
B. Maintenance of the share certificate
book.