CPA Auditing and Attestation (AUD) : Cash Cycle, Revenue Cycle, and Expenditure Cycle
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Example Questions
Example Question #1 : Revenue Cycle
An example of an internal control procedure regarding the sale of an item on credit.
Management would review terms of sale
Management would ensure vendor has an active tax ID Number
Management would check the vendor address
Management would check the vendor account number
Management would review terms of sale
In this scenario, management would review the terms of sale. The other choices are controls over the procurement cycle.
Example Question #1 : Cash Cycle, Revenue Cycle, And Expenditure Cycle
Management would ensure proper segregation of duties by:
Making sure employees don’t record Accounts Receivable
Making sure employees don’t deposit cash
Making sure employees don’t both make adjusting entries and prepare statements
Making sure employees don’t bill customers
Making sure employees don’t both make adjusting entries and prepare statements
Items b, c, and d would be appropriate job duties for specific employees. Combining the preparation of adjusting entries with financial statements would be a departure from internal control.
Example Question #2 : Cash Cycle, Revenue Cycle, And Expenditure Cycle
To ensure all transactions were included in financial statements
none of the above
Any receivable not collected is evaluated subsequent to year end
Receivables are tested on an interim basis
All receivables are collected
Any receivable not collected is evaluated subsequent to year end
A subsequent test of accounts receivable is necessary to determine that all accounts receivable were included in the financial statements. The auditors will test subsequent receipts to determine if the revenue transaction was included in the appropriate period.
Example Question #4 : Revenue Cycle
Tests designed to detect credit sales made before the end of the year that has been recorded in the subsequent year provide assurance about management's assertion regarding:
Existence
Classification
Cutoff
Accuracy
Cutoff
Cutoff tests are designed to determine whether transactions have been recorded in the proper period. Tests to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about both cutoff and completeness.
Example Question #5 : Cash Cycle, Revenue Cycle, And Expenditure Cycle
An auditor is required to confirm A/R if the A/R balances are:
Subject to valuation estimates
Smaller than expected
Material to the financial statements
Older than the prior year
Material to the financial statements
The use of audit confirmations for an entity;'s A/R is a required GAAP procedure if the A/R balances are deemed material to the balance sheet.
Example Question #6 : Cash Cycle, Revenue Cycle, And Expenditure Cycle
Kiting and lapping are methods of potential fraud that would be discovered in which business cycle?
Investment cycle
Inventory cycle
Cash cycle
Expenditure cycle
Cash cycle
These types of fraud would be cash related frauds as they require the movement of cash.
Example Question #1 : Expenditure Cycle
Proper segregation of duties requires that
Bank reconciliations are not done by those in charge of disbursements
The purchasing agent does not prepare purchase orders
The receiving clerk signs the purchase order
Purchase requests are generated by the purchasing agent
Bank reconciliations are not done by those in charge of disbursements
Proper segregation of duties requires that bank reconciliations are prepared by those employees not associated with disbursing funds.
Example Question #2 : Expenditure Cycle
Physical control over those in charge of disbursement would be:
Employees in charge of cash disbursements are bonded
Bank reconciliations are performed timely
Proper review of timecards are established
Proper authorization by a supervisor
Employees in charge of cash disbursements are bonded
Physical control is not associated with procedures. The use methods to protect assets such as physical barriers and mitigating activities such as insurance. The other examples are procedural internal control methods.
Example Question #7 : Cash Cycle, Revenue Cycle, And Expenditure Cycle
At the end of each month, the senior accountant compares a vendor statement to the accounts payable. This is an example of a
segregation of duty
Authorization
review procedure
Physical control
review procedure
Comparing independent documents with company records is a form of the review procedure. It doesn’t require authorization or physical control.
Example Question #3 : Cash Cycle, Revenue Cycle, And Expenditure Cycle
In auditing A/P, an auditor's procedures most likely would focus primarily on management's assertion of:
Valuation and allocation
Existence
Completeness
Understandability and classification
Completeness
When testing liabilities, an auditor generally is concerned about understatement. Therefore, in auditing A/P, an auditor's procedures most likely would focus primarily on management's assertion of completeness.
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