No. 125 Brgy.

San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

AT.08.06 – Transaction Cycles

1. Statement 1: An understanding of the design and implementation of internal controls under the
transaction cycle approach is required by ISA 315, unless a more relevant and reliable approach
can be provided by the auditor.
Statement 2: Internal control policies and procedures are dependent on the nature of risks that an
entity faces. This explains why controls that exist in one type of company may or may not exist in
another.
Statement 3: Internal control policies and procedures identified using the transaction cycle
approach are direct controls that affect the specific classes of transactions, account balances, and
presentation and disclosure affected by transactions under the specific group.
a. All statements are correct.
b. Two of the statements are correct.
c. One of the statements are correct.
d. None of the statements are correct.

2. To achieve good internal control, which department should perform the activities of matching
shipping documents with sales orders and preparing daily summaries?
a. Billing department
b. Shipping department
c. Credit department
d. Sales department

3. Statement 1: The bill of lading or delivery receipt is a document describing the goods to be shipped
and serves as contract between the seller and carrier.
Statement 2: The primary recipient of the sales order form is the credit department, originating from
the sales department, with copies provided to the customer, shipping department, and billing
department.
a. True, True
b. True, False
c. False, True
d. False, False

4. 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

5. 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

6. For effective internal control, employees maintaining the accounts receivable subsidiary ledger
should not also approve:
a. employee overtime wages.
b. credit granted to customers.
c. write-offs of customer accounts.
d. cash disbursements.

7. For most audits, a proper cash receipts cutoff is less important than the sales cutoff because the
improper cutoff of cash:
a. affects the cash and accounts receivable balances on the balance sheet and does not
affect net income.
b. is detected and correct when cash is separately audited.
c. is unlikely to have a material impact on the balance sheet or the income statement.
d. rarely occurs given the control consciousness of most entities.

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JABELLAR/AJABINAL
JMAGLINAO/RBERCASIO/ASARMIENTO/JGERONIMO
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

8. Which of the following functions relating to the revenue and receipt cycle is least likely performed
by the credit department?
a. Reviewing sales orders from the sales department.
b. Conducting credit investigation.
c. Approving write-off of long overdue receivables.
d. Forwarding sales orders to inventory control department.

9. Which of the following personnel is most likely involved in the preparation of the credit memo
forwarded to the customer for returned merchandise?
a. Sales department
b. Accounts receivable department
c. Warehouse department
d. Receiving department

10. Which of the following supporting documents supports the recording of sales transactions into the
client’s accounting information systems?
a. Sales order
b. Shipping documents
c. Sales invoice
d. Remittance advice

11. When considering inherent risks and control risks for the auditor’s combined risk assessment, the
order to cash, or revenue cycle is usually given significant attention because of the risk of
a. Misappropriation of assets
b. Improper revenue recognition
c. Cut-off errors
d. Related party transactions

12. When preparing sales orders, the accounting system of the audit client permits inputs only to the
item code, description and quantity fields only. The selling price is auto-populated based on the
established price list by management. What type of control is demonstrated in this scenario?
a. Automated control
b. IT dependent manual control
c. Manual control
d. Detective control

13. Which of the following is least likely an internal control consideration on accepting and approving
customer orders?
a. List of authorized customers
b. Recent orders/transactions with the customer
c. Credit limit checks
d. C-level endorsement

14. Which of the following document is least likely a critical document that an auditor must examine
when performing an order-to-cash process walkthrough?
a. Available revenue cycle process documentation
b. Daily sales summaries
c. Remittance advices
d. Packing lists

15. Almost all companies need physical controls over their assets to prevent loss. Which of the
following is not an example of such a control?
a. Perpetual inventory master files.
b. Segregated, limited-access storage areas.
c. Custody of assets assigned to specific responsible individuals.
d. Approved prenumbered documents for authorizing movement of inventory.

16. Regarding the physical count of inventory, necessary control procedures include the following,
except:
a. proper instructions for the physical count.
b. independent third-party verification of the counts.
c. third-party reconciliations of the physical counts with perpetual inventory master files.
d. counting the inventory only on the year-end date.

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JABELLAR/AJABINAL
JMAGLINAO/RBERCASIO/ASARMIENTO/JGERONIMO
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

17. Automated ordering based on system-established order points will most likely be implemented by
an audit client using
a. Just in time process
b. Kaizen manufacturing practice
c. Electronic data interchange (EDI)
d. Business process outsourcing

18. An example of a risk that exists in the inventory cycle is the fraudulent tagging of inventory as
obsolete items so inventory personnel may remove them from the warehouse, or acquire it at a low
price from the company. Which of the following is an example of a detective control addressing this
issue?
a. Inventory items tagged as obsolete is independently verified against management
approvals.
b. Obsolete inventory items are located in a separate area of the warehouse.
c. Obsolete inventory items are given a unique code in the warehouse management system.
d. Cash receipts from obsolete inventory dispositions are recorded to a separate account.

19. 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.

20. Which of the following is not a procedure that must be performed by an audit client prior to a
physical inventory count?
a. Prepare sequentially numbered count and DNC (Do Not Count) tags.
b. Count all partial packages, seal them and mark the quantity on the tape.
c. Issue a list of count team members, with a notice regarding where and when they should
appear for the inventory count.
d. Call all outside storage warehouses and ask them to fax in their respective inventory
counts.

21. This document authorizes the start of production activities base on approved sales forecast.
a. Packing list
b. Materials Requisition Form
c. Production Order
d. Move tickets

22. The audit of the acquisition and payment cycle often takes _______ time to audit than other cycles.
a. Less
b. About the same
c. More
d. No less

23. A document used by organizations to establish a formal means of recording and controlling
acquisitions which usually contains a package of documents about the acquisition is the:
a. purchase order.
b. voucher.
c. receiving report.
d. purchase requisition.

24. For good internal control, the purchasing department should not be responsible for:
a. finding the lowest cost vendor.
b. reviewing vendors’ catalog descriptions and prices for standardized items.
c. designing the purchase order form.
d. authorizing the acquisition of goods.

25. 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.

3|Page
JABELLAR/AJABINAL
JMAGLINAO/RBERCASIO/ASARMIENTO/JGERONIMO
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

d. Bill of materials, materials requisition, production orders, materials and finished goods
stockcards.

26. When a client uses perpetual inventory records, the tests of details of balances for inventory can
be significantly reduced if the auditor believes the records are accurate. The controls over the
acquisitions included in the records are normally tested as a part of the:
a. tests of controls.
b. tests of controls and tests of transactions.
c. tests of details of balances.
d. analytical procedures and tests of controls.

27. 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.

28. Which of the following acquisition transactions is likely to be covered by a general authorization by
company policy?
Purchase of office equipment Purchase of office buildings for company
maintenance services use

a. Yes Yes
b. No No
c. Yes No
d. No Yes

29. The auditor’s internal control objective to determine that “recorded acquisitions are for goods and
services received” satisfies the audit objective of:
a. accuracy.
b. occurrence.
c. authorization.
d. completeness.

30. Which of the following expenses is not typically evaluated as part of the audit of the acquisition and
payment cycle?
a. Depreciation expense.
b. Bad debts expense.
c. Insurance expense.
d. Property tax expense.

31. Insurance expense for the period is a function of which of the following?
a. The beginning prepaid balance, current premium payments and the ending prepaid
balance.
b. The beginning prepaid balance and the current period premium payments.
c. The current period premium payments.
d. The current period premium payments and the ending prepaid balance.

32. To achieve effective internal accounting control over fixed asset additions, a company should
establish procedures that require:
a. capitalization of the cost of fixed asset additions in excess of a specific peso amount.
b. classification, as investments, of those fixed asset additions that are not used in the
business.
c. authorization and approval of major fixed asset additions.
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JABELLAR/AJABINAL
JMAGLINAO/RBERCASIO/ASARMIENTO/JGERONIMO
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

d. performance of recurring fixed asset maintenance work solely by maintenance department

employees.

33. The failure to capitalize a permanent asset, or the recording of an asset acquisition at the improper
amount, affects the income statement:
a. for the current period.
b. for the depreciable life of the asset.
c. until the firm disposes of the asset.
d. forever.

34. Depreciation expense is one of the few expense accounts that is not verified as a part of:
a. tests of controls.
b. tests of transactions.
c. test of details of balances.
d. a and b, but not c.

35. Which of the following is the most important internal control procedure over acquisitions of property,
plant, and equipment?
a. Requiring acquisitions to be made by user departments.
b. Using a budget to forecast and control acquisitions and retirements.
c. Analyzing monthly variances between authorized expenditures and actual costs.
d. Establishing a written company policy distinguishing between capital and revenue
expenditures.

36. When labor is a significant part of inventory, verifying the proper accounting of these costs should
be tested in the:
a. inventory and warehousing cycle.
b. payroll and personnel cycle.
c. acquisitions and payments cycle.
d. cash cycle.

37. 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.

38. Which of the following statements is correct?

a. There are relatively few transactions in the capital acquisition and repayment cycle, and
each transaction is typically highly material.
b. Bonds are frequently issued by companies in small amounts.
c. A primary emphasis in auditing debt is on existence.
d. Audit procedures for Notes Payable and Interest Income are often performed
simultaneously.

39. Which one of the following is not a characteristic of the capital acquisition and repayment cycle?
a. There is a legal relationship between the client and the holder of the equity securities.
b. There is a direct relationship between the interest and dividends accounts and debt and
equity.
c. Relatively few transactions affect the account balances, but each transaction is often highly
material in amount.
d. The exclusion of a few transactions is rarely material by itself.

40. A major consideration in the audit of the general cash balance is the possibility of fraud. The auditor
must extend his or her procedures in the audit of year-end cash to determine the possibility of a
material fraud when there are:
a. inadequate internal controls.
b. large cash balances at the end of the year.
c. large cash receipts and disbursements during the year.
d. no imprest accounts used for payroll.

41. The audit of owners’ equity of public and private companies is very different. Which of the following
is not one of these differences?

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JABELLAR/AJABINAL
JMAGLINAO/RBERCASIO/ASARMIENTO/JGERONIMO
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

a. The number of transactions (private companies have fewer transactions).

b. Payment of dividends (public companies rarely pay dividends).
c. Complexity of transactions (public companies generally have more complex transactions).
d. Type of noncurrent debt (public companies issue more bonds).

42. The emphasis in verifying petty cash is normally on which of the following?
a. Year-end balance
b. Controls over petty cash
c. Transactions for the period
d. Balance sheet classifications

43. When a company maintains its own records of stock transactions and outstanding stock, internal
controls must be adequate to ensure that:
a. actual owners are recorded in the bylaws.
b. the correct amount of dividends is paid to stockholders owning the stock on the declaration
date.
c. actual owners are recorded in the minutes.
d. the correct amount of dividends is paid to stockholders owning the stock on the dividend
record date.

44. The audit objective that requires the auditor to determine that notes payable on the notes payable
schedule are properly classified can be tested by performing the procedure to:
a. review the notes to determine whether any are with related parties.
b. confirm notes payable.
c. examine corporate minutes for loan approval.
d. examine notes, minutes, and bank confirmations for restrictions.

45. During the course of an audit, a CPA observes that the recorded interest expense seems to be
excessive in relation to the balance in the long-term debt account. This observation could lead the
auditor to suspect that:
a. discount on bonds payable is overstated.
b. long-term debt is overstated.
c. premium on bonds payable is understated.
d. long-term debt is understated.

*End of Handout*

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JABELLAR/AJABINAL
JMAGLINAO/RBERCASIO/ASARMIENTO/JGERONIMO