Becker CPA Review, PassMaster Questions
Lecture: Auditing 4
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Lecture: Auditing 4
Transaction Cycles
CPA-02574 Type1 M/C A-D Corr Ans: A PM#1 A 4-01
1. CPA-02574 Au R03 #8 Page 15
On receiving a client's bank cutoff statement, an auditor most likely would trace:
a. Prior-year checks listed in the cutoff statement to the year-end outstanding checklist.
b. Deposits in transit listed in the cutoff statement to the year-end bank reconciliation.
c. Checks dated after year-end listed in the cutoff statement to the year-end outstanding checklist.
d. Deposits recorded in the cash receipts journal after year-end to the cutoff statement.
CPA-02574 Explanation
Choice "a" is correct. The auditor should obtain bank cutoff statements that include transactions for 10 to
15 days after year-end. The outstanding checks and deposits in transit at year-end on the bank
reconciliation should agree with the information in the bank cutoff statement.
Choice "b" is incorrect. The deposits in transit are listed in the year-end bank reconciliation and traced to
actual deposits appearing on the bank cutoff statement. The cutoff statement includes actual deposits
received, not deposits in transit.
Choice "c" is incorrect. Checks dated after year-end would not be included in the year-end outstanding
checklist.
Choice "d" is incorrect. Deposits recorded in the cash receipts journal after year-end do not affect the
cash balance at year-end, and therefore the auditor would not perform audit procedures with respect to
those deposits.
CPA-02591 Type1 M/C A-D Corr Ans: C PM#3 A 4-01
2. CPA-02591 Au R03 #17 Page 5
Which of the following characteristics most likely would be indicative of check kiting? a.
High turnover of employees who have access to cash.
b. Many large checks that are recorded on Mondays.
c. Low average balance compared to high level of deposits.
d. Frequent ATM checking account withdrawals.
CPA-02591 Explanation
Choice "c" is correct. Kiting occurs when a check drawn on one bank is deposited in another bank and no
record is made of the disbursement in the balance of the first bank. Frequent kiting may result in a high
level of deposits coupled with a low average balance.
Choice "a" is incorrect. High turnover of employees who have access to cash may be normal in certain
industries, or it may be indicative of poor hiring policies, but it would not be indicative of check kiting.
Choice "b" is incorrect. More checks may arrive on Mondays simply because Monday's mail includes the
mail from over the weekend. This characteristic is not particularly indicative of check kiting.
Choice "d" is incorrect. Frequent ATM checking account withdrawals indicate a frequent need for cash,
but this situation is not particularly indicative of check kiting.
CPA-02593 Type1 M/C A-D Corr Ans: C PM#4 A 4-01
2
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Lecture: Auditing 4
3. CPA-02593 Au R97 #14 Page 4
Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective
internal controls in the revenue cycle?
a. Fictitious transactions may be recorded that cause an understatement of revenues and overstatement
of receivables.
b. Claims received from customers for goods returned may be intentionally recorded in other customers'
accounts.
c. Authorization of credit memos by personnel who receive cash may permit the misappropriation of
cash.
d. The failure to prepare shipping documents may cause an overstatement of inventory balances.
CPA-02593 Explanation
Choice "c" is correct. The function of cash receipts is part of the treasurer's department and should be
separate from the role of posting credits to the A/R ledger. Failure to separate the recordkeeping function
from the custodial function allows an individual to misappropriate cash and then cover up the theft by
posting credits against the related A/R balance.
Choice "a" is incorrect. If fictitious transactions in the revenue cycle are recorded, then the impact on
revenues and receivables would be the same; either both would be overstated (the most likely case) or
both would be understated.
Choice "b" is incorrect. Even the lack of effective internal controls would not allow this fraud to be
perpetrated for long, since the customers that submitted the claim would complain that the credit was not
properly applied as soon as they received their next statement or invoice.
Choice "d" is incorrect. The failure to prepare shipping documents may cause inventory to be overstated,
but it is unlikely to be perpetrated as a fraud since it does not allow theft of cash. In addition, the internal
controls in the revenue cycle typically relate to sales, receivables, and cash, not to inventory.
CPA-02598 Type1 M/C A-D Corr Ans: A PM#6 A 4-01
4. CPA-02598 Au Nov 95 #12 Page 5
Which of the following internal controls most likely would reduce the risk of diversion of customer receipts
by an entity's employees?
a. A bank lockbox system.
b. Prenumbered remittance advices.
c. Monthly bank reconciliations.
d. Daily deposit of cash receipts.
CPA-02598 Explanation
Choice "a" is correct. A lockbox system is the best means of preventing defalcation of cash by employees
because the employees never have direct access to cash receipts.
Choice "b" is incorrect. The use of prenumbered remittance advices is not effective in preventing theft of
receipts by employees because it does not prevent employee access to cash receipts.
Choice "c" is incorrect. While the performance of monthly bank reconciliations is a good control, it would
not be effective in preventing the theft of receipts because it does not prevent employee access to cash
receipts. (It might, however, be effective at detecting a theft that has already occurred).
3
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Lecture: Auditing 4
Choice "d" is incorrect. Daily deposit of cash receipts is not an effective control for preventing theft of
receipts by employees because it does not prevent employee access to cash receipts.
CPA-02604 Type1 M/C A-D Corr Ans: D PM#8 A 4-01
5. CPA-02604 Au Nov 95 #29 Page 11
In testing controls over cash disbursements, an auditor most likely would determine that the person who
signs checks also:
a. Reviews the monthly bank reconciliation.
b. Returns the checks to accounts payable.
c. Is denied access to the supporting documents.
d. Is responsible for mailing the checks.
CPA-02604 Explanation
Choice "d" is correct. Once signed, the check should be mailed to the payee by the check signer or an
employee operating under the supervision of the check signer to prevent defalcations of checks.
Generally this occurs in the treasurer's department.
Choice "a" is incorrect. The check signer would not normally review bank reconciliations.
Choice "b" is incorrect. Accounts payable personnel should not have custody of signed checks since this
would constitute a lack of segregation of duties between recording and custody.
Choice "c" is incorrect. The check signer should have access to supporting documentation so that it can
be reviewed before the check is signed.
CPA-02608 Type1 M/C A-D Corr Ans: B PM#10 A 4-01
6. CPA-02608 Au Nov 95 #40 Page 17
Which of the following sets of information does an auditor usually confirm on one form? a.
Accounts payable and purchase commitments.
b. Cash in bank and collateral for loans.
c. Inventory on consignment and contingent liabilities.
d. Accounts receivable and accrued interest receivable.
CPA-02608 Explanation
Choice "b" is correct. The standard AICPA bank confirmation form includes spaces for the bank to
confirm both cash balances on deposit at the bank and collateral pledged on loans originating from the
bank.
Choice "a" is incorrect. Purchase commitments are not typically confirmed on an accounts payable
confirmation request.
Choice "c" is incorrect. Contingent liabilities (confirmed in a letter of inquiry to the client's attorney or
bank) and inventory on consignment (confirmed with the consignee) are not confirmed together.
Choice "d" is incorrect. Accrued interest receivable (usually on investments held by a trust company) is
not typically confirmed along with trade accounts receivable.
CPA-02610 Type1 M/C A-D Corr Ans: D PM#11 A 4-01
4
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Lecture: Auditing 4
CPA PassMaster expert
curated Questions and
answers –Auditing 4
latest updated version
Export Date: 10/30/24
1
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
, Becker CPA Review, PassMaster Questions
Lecture: Auditing 4
Transaction Cycles
CPA-02574 Type1 M/C A-D Corr Ans: A PM#1 A 4-01
1. CPA-02574 Au R03 #8 Page 15
On receiving a client's bank cutoff statement, an auditor most likely would trace:
a. Prior-year checks listed in the cutoff statement to the year-end outstanding checklist.
b. Deposits in transit listed in the cutoff statement to the year-end bank reconciliation.
c. Checks dated after year-end listed in the cutoff statement to the year-end outstanding checklist.
d. Deposits recorded in the cash receipts journal after year-end to the cutoff statement.
CPA-02574 Explanation
Choice "a" is correct. The auditor should obtain bank cutoff statements that include transactions for 10 to
15 days after year-end. The outstanding checks and deposits in transit at year-end on the bank
reconciliation should agree with the information in the bank cutoff statement.
Choice "b" is incorrect. The deposits in transit are listed in the year-end bank reconciliation and traced to
actual deposits appearing on the bank cutoff statement. The cutoff statement includes actual deposits
received, not deposits in transit.
Choice "c" is incorrect. Checks dated after year-end would not be included in the year-end outstanding
checklist.
Choice "d" is incorrect. Deposits recorded in the cash receipts journal after year-end do not affect the
cash balance at year-end, and therefore the auditor would not perform audit procedures with respect to
those deposits.
CPA-02591 Type1 M/C A-D Corr Ans: C PM#3 A 4-01
2. CPA-02591 Au R03 #17 Page 5
Which of the following characteristics most likely would be indicative of check kiting? a.
High turnover of employees who have access to cash.
b. Many large checks that are recorded on Mondays.
c. Low average balance compared to high level of deposits.
d. Frequent ATM checking account withdrawals.
CPA-02591 Explanation
Choice "c" is correct. Kiting occurs when a check drawn on one bank is deposited in another bank and no
record is made of the disbursement in the balance of the first bank. Frequent kiting may result in a high
level of deposits coupled with a low average balance.
Choice "a" is incorrect. High turnover of employees who have access to cash may be normal in certain
industries, or it may be indicative of poor hiring policies, but it would not be indicative of check kiting.
Choice "b" is incorrect. More checks may arrive on Mondays simply because Monday's mail includes the
mail from over the weekend. This characteristic is not particularly indicative of check kiting.
Choice "d" is incorrect. Frequent ATM checking account withdrawals indicate a frequent need for cash,
but this situation is not particularly indicative of check kiting.
CPA-02593 Type1 M/C A-D Corr Ans: C PM#4 A 4-01
2
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
, Becker CPA Review, PassMaster Questions
Lecture: Auditing 4
3. CPA-02593 Au R97 #14 Page 4
Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective
internal controls in the revenue cycle?
a. Fictitious transactions may be recorded that cause an understatement of revenues and overstatement
of receivables.
b. Claims received from customers for goods returned may be intentionally recorded in other customers'
accounts.
c. Authorization of credit memos by personnel who receive cash may permit the misappropriation of
cash.
d. The failure to prepare shipping documents may cause an overstatement of inventory balances.
CPA-02593 Explanation
Choice "c" is correct. The function of cash receipts is part of the treasurer's department and should be
separate from the role of posting credits to the A/R ledger. Failure to separate the recordkeeping function
from the custodial function allows an individual to misappropriate cash and then cover up the theft by
posting credits against the related A/R balance.
Choice "a" is incorrect. If fictitious transactions in the revenue cycle are recorded, then the impact on
revenues and receivables would be the same; either both would be overstated (the most likely case) or
both would be understated.
Choice "b" is incorrect. Even the lack of effective internal controls would not allow this fraud to be
perpetrated for long, since the customers that submitted the claim would complain that the credit was not
properly applied as soon as they received their next statement or invoice.
Choice "d" is incorrect. The failure to prepare shipping documents may cause inventory to be overstated,
but it is unlikely to be perpetrated as a fraud since it does not allow theft of cash. In addition, the internal
controls in the revenue cycle typically relate to sales, receivables, and cash, not to inventory.
CPA-02598 Type1 M/C A-D Corr Ans: A PM#6 A 4-01
4. CPA-02598 Au Nov 95 #12 Page 5
Which of the following internal controls most likely would reduce the risk of diversion of customer receipts
by an entity's employees?
a. A bank lockbox system.
b. Prenumbered remittance advices.
c. Monthly bank reconciliations.
d. Daily deposit of cash receipts.
CPA-02598 Explanation
Choice "a" is correct. A lockbox system is the best means of preventing defalcation of cash by employees
because the employees never have direct access to cash receipts.
Choice "b" is incorrect. The use of prenumbered remittance advices is not effective in preventing theft of
receipts by employees because it does not prevent employee access to cash receipts.
Choice "c" is incorrect. While the performance of monthly bank reconciliations is a good control, it would
not be effective in preventing the theft of receipts because it does not prevent employee access to cash
receipts. (It might, however, be effective at detecting a theft that has already occurred).
3
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
, Becker CPA Review, PassMaster Questions
Lecture: Auditing 4
Choice "d" is incorrect. Daily deposit of cash receipts is not an effective control for preventing theft of
receipts by employees because it does not prevent employee access to cash receipts.
CPA-02604 Type1 M/C A-D Corr Ans: D PM#8 A 4-01
5. CPA-02604 Au Nov 95 #29 Page 11
In testing controls over cash disbursements, an auditor most likely would determine that the person who
signs checks also:
a. Reviews the monthly bank reconciliation.
b. Returns the checks to accounts payable.
c. Is denied access to the supporting documents.
d. Is responsible for mailing the checks.
CPA-02604 Explanation
Choice "d" is correct. Once signed, the check should be mailed to the payee by the check signer or an
employee operating under the supervision of the check signer to prevent defalcations of checks.
Generally this occurs in the treasurer's department.
Choice "a" is incorrect. The check signer would not normally review bank reconciliations.
Choice "b" is incorrect. Accounts payable personnel should not have custody of signed checks since this
would constitute a lack of segregation of duties between recording and custody.
Choice "c" is incorrect. The check signer should have access to supporting documentation so that it can
be reviewed before the check is signed.
CPA-02608 Type1 M/C A-D Corr Ans: B PM#10 A 4-01
6. CPA-02608 Au Nov 95 #40 Page 17
Which of the following sets of information does an auditor usually confirm on one form? a.
Accounts payable and purchase commitments.
b. Cash in bank and collateral for loans.
c. Inventory on consignment and contingent liabilities.
d. Accounts receivable and accrued interest receivable.
CPA-02608 Explanation
Choice "b" is correct. The standard AICPA bank confirmation form includes spaces for the bank to
confirm both cash balances on deposit at the bank and collateral pledged on loans originating from the
bank.
Choice "a" is incorrect. Purchase commitments are not typically confirmed on an accounts payable
confirmation request.
Choice "c" is incorrect. Contingent liabilities (confirmed in a letter of inquiry to the client's attorney or
bank) and inventory on consignment (confirmed with the consignee) are not confirmed together.
Choice "d" is incorrect. Accrued interest receivable (usually on investments held by a trust company) is
not typically confirmed along with trade accounts receivable.
CPA-02610 Type1 M/C A-D Corr Ans: D PM#11 A 4-01
4
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
