AT.

03-06 - Transaction Cycles

Financial Accounting and Reporting (De La Salle Lipa)

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Telephone : (043) 723 8412
Gmail
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AT03-06 – Transaction Cycles

1. Statement 1: PSA 315, Identifying and assessing the risks of material misstatement
through understanding the entity and its environment requires that the auditor documents
his/her understanding of the entity’s internal control activities on a per-transaction-cycle
basis.
Statement 2: The use of transaction cycles in documenting the understanding of internal
controls is a matter of practicality, as these involves aggregating transactions into a
relatively small number of groups (transaction cycles), instead of on a per-FSLI
(Financial Statement Line Item) basis.
a. True, True
b. True, False
c. False, True
d. False, False

Revenue/Receipt Cycle
2. Which of the following is the last step in the revenue/receipt cycle?
a. Customer requests for goods.
b. Recording of the sale transaction in the accounting systems.
c. Receipt of cash and depositing the same to the company’s bank account.
d. Delivery of finished goods to customers.

3. Which of the following is incorrect regarding the difference of customer orders and sales
orders?
a. Customer order form is a document indicating a request for merchandise from a
customer.
b. Sales order is an internal document communicating the description, quantity, and
other related information for goods ordered by a customer.
c. The credit department documents the approval for customer credit on the
customer order form.
d. A sales order form duly approved by the company’s credit department is a
document required before goods are issued from the warehouse to the shipping
department.

4. Sending accounts receivable confirmation letters to the client’s customers is

consistent with the auditor’s objective of validating client’s receivable assertion on:
a. Existence and rights
b. Completeness and valuation
c. Completeness and rights
d. Existence and valuation

5. Which of the following documents would support entries made into the sales journal
and updates made to the accounts receivable / customer master file?
a. Approved sales order
b. Bill of lading
c. Sales invoice
d. Credit memo

6. Which of the following documents would be the starting point for an auditor who wants
to test for the completeness of sales recorded in the sales journal and to determine
whether such sales were appropriately billed to customers and ultimately recorded as
sales?
a. Sales invoice
b. Sales order
c. Delivery notes
d. Credit memo

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Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail
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Purchasing/Disbursement Cycle
7. To properly control purchasing, expenditures and accounts payable, an information
system must include certain source documents. For a manufacturing organization, these
documents should include:
a. Purchase orders, receiving reports, and vendor invoices.
b. Supplier price lists, benchmarking and results of bidding.
c. Purchase requisitions, purchase orders, receiving reports and vendor invoices.
d. Bill of materials, materials requisition, production orders, materials and finished
goods stockcards.

8. Which of the following would an auditor most likely do to perform search for unrecorded
liabilities and which financial statement assertion is most likely validated by this
procedure?
a. Vouch a sample of transactions from the company’s purchases journal just before
year-end and then trace these back to the receiving logs to determine whether
there were goods actually received, and therefore validating the existence
assertion for liabilities.
b. Trace a sample of invoices paid just before year-end and then identify whether
these items were received and properly recorded as liabilities as of year-end, and
therefore validating the completeness assertion for liabilities.
c. Trace a sample of invoices paid just after year-end and then identify whether these
items were received and properly recorded as liabilities as of year-end, and
therefore validating the completeness assertion for liabilities.
d. Vouch a sample of transactions from the company’s purchases journal just before
year-end and then trace these back to the receiving logs to determine whether
there were goods actually received, and therefore validating the completeness
assertions for liabilities.

9. Why does the auditor use the population of vendors with whom the entity has previously
done business with, rather than the amounts recorded in the accounts payable subsidiary
ledger when using confirmations for accounts payable balances?
a. The auditor is more interested in validating the completeness of reported
liabilities rather than their existence.
b. The auditor is more interested in validating the existence of reported
liabilities rather than their completeness.
c. It is possible that some of the liabilities reported in the subsidiary ledger have
already been paid as of year-end.
d. The vendor list provides a more reliable evidence about the obligation
assertion.

10. Which of the following is the most likely reason why the auditor’s cut-off testing for
purchases include entries for both before and after period-end?
a. The auditor wants to vouch the entries before year-end to their supporting
documents to validate the existence assertion, and the entries after year- end to
their supporting documents to validate the completeness assertion.
b. The auditor wants to vouch the entries before year-end to their supporting
documents to validate the completeness assertion, and the entries after year-end to
their supporting documents to validate the existence assertion.
c. The auditor wants to trace the supporting documents to entries made before year-
end to validate the existence assertion, and the supporting documents to entries
made after year-end to validate the completeness assertion.
d. The auditor wants to trace the supporting documents to entries made before year-
end to validate the existence assertion, and the supporting documents to entries
made after year-end to validate the valuation assertion.

11. For good internal control, the purchasing department should not be responsible for:
a. Finding the lowest cost vendor.

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Telephone : (043) 723 8412
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b. Reviewing the vendor’s catalog descriptions and prices for standardized items.
c. Designing the purchase order form.
d. Recording the purchase transactions and maintaining the accounts payable master
file.

Personnel/Payroll Cycle
12. An auditor vouched data for a sample of employees in a payroll register to
approved clock card data to provide assurance that
a. Payments to employees are computed at authorized rates.
b. Employees work the number of hours for which they are paid.
c. Segregation of duties exist between the preparation and distribution of the payroll.
d. Controls relating to unclaimed payroll checks are operating effectively.

13. Considering the proper segregation of duties, which of the following is most likely the
most appropriate person to distribute payroll checks?
a. The payroll accountant.
b. The general accountant.
c. The HR personnel.
d. The accounts payable analyst.

14. Which of the following procedures would most likely assist the auditor in validating
whether the HR department authorizes all hires?
a. Examine employee time cards for proper authorization.
b. Compare payroll budgets to the preceding period budget.
c. Select a sample of employees on the payroll and determine that each has a
properly approved hiring authorization form in his or her personnel file.
d. Select a sample of employee names from the payroll register and briefly
interview each on a surprise basis.

Inventory/Production Cycle
15. Which of the following control procedures would most likely be used to maintain
accurate perpetual inventory records?
a. Independent storeroom count of goods received.
b. Periodic independent reconciliation of control and subsidiary records.
c. Periodic independent comparison of records with actual goods on hand.
d. Independent matching of purchase orders, receiving reports, and vendor’s
invoices.

16. What form of analytical review might uncover the existence of obsolete
merchandise?
a. Inventory turnover rates.
b. Decrease in the ratio of gross profit to sales.
c. Ratio of inventory to accounts payable.
d. Comparison of inventory values to purchase invoices.

17. When auditing inventories of raw materials, purchased parts, and/or merchandise
inventory, the auditor’s most effective means for evaluating the valuation assertion is to:
a. Examine recent invoices from vendors, along with freight bills and compare with
client’s unit costs, as adjusted for freight and discount.
b. Compare purchases with prior year and with industry averages and account for
significant fluctuations.
c. Trace quantities from tags or count sheets to final inventory listings.
d. Scan inventory listings for large extended amounts, and trace related
quantities to auditor’s copy of the inventory tag or listing.

Investing Cycle: Property

18. An auditor is verifying a company’s ownership of equipment. What is the best evidence
of ownership?
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Telephone : (043) 723 8412
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a. The current year’s depreciation expense journal entry.

b. A cancelled check written to acquire the equipment.
c. An interview with the equipment custodian verifying company ownership.
d. The presence of the equipment on the company’s balance sheet.

19. The auditor may conclude that depreciation charges may be insufficient if he or she
notes:
a. Large amounts of fully depreciated assets still in use.
b. Continuous trade-ins of relatively new assets.
c. Insured values greatly in excess of book values.
d. Excessive recurring losses on retired assets.

20. Which of the following procedures would most likely be used by an auditor when testing
for the completeness and accuracy of the depreciation charge for the year?
a. Analytical procedures
b. Physical inspection
c. Documentary inspection
d. Reperformance

Investing Cycle: Securities

21. Which of the following would provide the best form of evidence on the valuation
assertion of a long-term investment of a client owning a 35% voting interest over the
investee?
a. Audited financial statements of the investee.
b. Market quotations of the investee company’s shares.
c. Broker statement on the purchase transaction.
d. Broker’s confirmation reply on the transactions and shares held.

22. In auditing investments for proper valuation, the auditor should do all of the
following procedures except:
a. Confirm securities held in safekeeping off the client’s premises.
b. Vouch purchases and sales of securities by tracing to broker’s advices and
cancelled checks.
c. Compare cost and market values by reference to year-end valuation for selected
securities.
d. Recalculate gains and/or losses on disposals.

23. Which of the following controls would an entity most likely use in safeguarding against
the loss of investment securities?
a. A designated member of the board of directors controls the securities in a bank
safe deposit box.
b. An independent trust company that has no direct contact with the employees who
have record-keeping responsibilities has possession of securities.
c. The internal auditor verifies the investment securities in the entity’s safe each year
on the balance sheet date.
d. The independent auditor traces all purchases and sales of investment securities
through the subsidiary ledgers to the general ledger.

Financing Cycle
24. One control objective of the financing/treasury cycle is the proper authorization of
company transactions dealing with debt and equity instruments. Which of the following
controls would best meet this objective?
a. The company serves as its own registrar and transfer agent.
b. Separation of responsibility for custody of funds from recording the transaction.
c. Written company policies requiring review of major funding/repayment proposals
by the board of directors.
d. Use of an underwriter in all cases of new issue of debt or equity instruments.

25. All corporate capital stock transactions should ultimately be traced to the

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a. Minutes of the meetings of the Board of Directors

b. Cash receipts journal
c. Cash disbursements journal
d. Numbered stock certificates

*End of Handout*

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