EDP AUDITING SEMI-FINAL EXAM

CHAPTERS 9 – 12 8. In a well-designed internal control structure in which the

cashier receives remittances from the mailroom, the
1. Which document is not prepared by the sales cashier should not
department? a. Endorse the checks.
a. packing slip c. bill of lading b. Prepare the bank deposit slip.
b. shipping notice d. stock release c. Deposit remittances daily at a local bank.
d. Prepare a list of mail receipts.
2. Which document triggers the update of the inventory e. Post the receipts to the accounts receivable subsidiary
subsidiary ledger? ledger cards.
a. bill of lading c. sales order
b. stock release d. shipping notice
9. Which one of the following situations represents an
internal control weakness in accounts receivable?
3. Which function should not be performed by the billing
a. Internal auditors confirm customer account
department?
periodically.
a. Recording the sales in the sales journal
b. Only the sales manager reviews delinquent accounts.
b. Sending the ledger copy of the sales order to
c. The cashier is denied access to customers’ records
accounts receivable
and monthly statements.
c. Sending the stock release document and the shipping
d. Customers’ statements are mailed monthly by the
notice to the billing department as proof of shipment
d. Sending the stock release document to inventory accounts receivable department.
control e. Customers’ subsidiary records are maintained by
someone who has no access to cash.
4. When will a credit check approval most likely require
specific authorization by the credit department? 10. A record that accompanies the sales order file through all
a. When verifying that the current transaction does not the data processing runs is
a. customer open order file c. shipping notice
exceed the customer's credit limit
b. batch control totals d. sales invoice file
b. When verifying that the current transaction is with ::l
valid customer 11. A file containing a copy of the sales order
c. When a valid customer places a materially large order a. customer open order file c. shipping notice
d. When a valid customer returns goods b. batch control totals d. sales invoice file

5. Which type of control is considered to be a compensating 12. The identification and elimination of non-value-added
control? tasks by replacing traditional procedures with those that
a. segregation of duties c. supervision are innovative and different
b. access control d. accounting records a. open invoice system c. cycle billing
b. analytical review d. reengineering
6. Which of the following is not an output control?
a. The shipping department verifies that the goods sent 13. Which document helps to ensure that the receiving clerks
from the warehouse are correct in type and quantity. actually count the number of goods received?
b. General ledger clerks reconcile journal vouchers that a. packing list
were independently prepared in various departments. b. blind copy of purchase order
c. The use of pre-numbered sales orders c. shipping notice
d. The billing department reconciles the shipping notice d. invoice
with the sales invoice to ensure that customers are
billed only for the quantities shipped. 14. When the goods are received and the receiving report has
been prepared, which ledger may be updated?
7. Which one of the following poses the biggest threat with a. standard cost inventory ledger
respect to potential losses? b. inventory subsidiary ledger
a. The petty cash custodian has the opportunity to steal c. general ledger
petty cash. Documentation for all disbursements from d. accounts payable subsidiary ledger
the fund must be submitted with the request for
replenishment of the fund. 15. Which statement is not correct for an expenditure system
b. An inventory control clerk at a manufacturing plant has with proper internal controls?
the ability to steal one completed television set from a. Cash disbursements maintain the check register.
inventory a year. The theft probably will never be b. Accounts payable maintains the accounts payable
detected. subsidiary ledger.
c. An accounts receivable clerk, who approves sales c. Accounts payable is responsible for paying invoices.
returns and allowances, receives customer remittances d. Accounts payable is responsible for authorizing
and deposits them in the bank. Limited supervision is invoices
maintained over the employee.
d. A clerk in the invoice processing department fails to 16. Which duties should be segregated?
match a vendor's invoice with its related receiving a. matching purchase requisitions, receiving reports, and
report. Checks are not signed unless all appropriate invoices and authorizing payment
documents are attached to a voucher. b. authorizing payment and maintaining the check register
e. An accounting clerk has the ability to record c. writing checks and maintaining the check register
unauthorized journal entries. All journal entries are d. authorizing payment and maintaining the accounts
reviewed by an accounting department supervisor each payable subsidiary ledger
month.
17. Which documents would an auditor most likely choose to 25. Which characteristic is not associated with software as
examine closely in order to ascertain that all expenditures intellectual property?
incurred during the accounting period have been recorded a. uniqueness of the product
as a liability? b. possibility of exact replication
a. invoices c. purchase requisitions c. automated monitoring to detect intruders
b. purchase orders d. receiving reports d. ease of dissemination

18. Which task must still require human intervention in an 26. For an action to be called fraudulent, all of the following
automated purchases/cash disbursements system? conditions are required except
a. determination of inventory requirements a. poor judgment. c. intent to deceive
b. preparation of a purchase order b. false representation. d. injury or loss
c. preparation of a receiving report
d. preparation of a check register 27. One characteristic of employee fraud is that the fraud
a. is perpetrated at a level to which internal controls do
19. In a well-designed internal control structure, two tasks that not apply
should be performed by different persons are b. involves misstating financial statements.
a. preparation of purchase orders and authorization of c. involves the direct conversion of cash or other assets
monthly payroll. to the employee's personal benefit.
b. preparation of bank reconciliations and recording of d. involves misappropriating assets in a series of
cash disbursements. complex transactions involving third parties.
c. distribution of payroll checks and approval of credit
sales. 28. Forces that may permit fraud to occur do not include
d. posting of amounts from both the cash receipts journal a. a gambling addiction.
and cash disbursements journal to the general ledger. b. lack of segregation of duties.
e. posting of amounts from the cash receipts journal to c. centralized decision-making environment.
the general ledger and distribution of payroll checks.
d. questionable integrity of employees.
20. Which one of the following situations represents a strength
29. Who is responsible for establishing and maintaining the
in the internal control for purchasing & accounts payable?
internal control system?
a. Prenumbered receiving reports are issued randomly.
a. the internal auditor c. management
b. Invoices are approved for payment by the purchasing
b. the accountant d. the external auditor
department.
c. Unmatched receiving reports are reviewed on an
30. Which of the following indicates a strong internal control
annual basis. environment?
d. Vendors’ invoices are matched against purchase a. The internal audit group reports to the audit committee
orders and receiving reports before a liability is
of the board of directors.
recorded.
b. There is no segregation of duties between
e. The purchasing department reconciles the accounts
organization functions.
payable subsidiary vendor ledger with the general
c. There are questions about the integrity of
ledger control account.
management.
21. An account into which a single check for the entire amount d. Adverse business conditions exist in the industry.
of the payroll is deposited is a
a. payroll imprest account c. paymaster account 31. Employee fraud involves three steps. Of the following,
which is not involved?
b. payroll account d. disbursement account
a. concealing the crime to avoid detection
22. Which ethical principle states that the benefit from a b. stealing something of value
decision must outweigh the risks, and that there is no c. misstating financial statements
alternative decision that provides the same or greater d. converting the asset to a usable form
benefit with less risk?
a. minimize risk c. informed consent 32. The importance to the accounting profession of the
b. justice d. proportionality Sarbanes-Oxley Act of 2002 is that
a. bribery will be eliminated.
23. Individuals who acquire some level of skill and knowledge b. management will not be able to override the
in the field of computer ethics are involved in which level company's internal controls.
of computer ethics? c. firms are required to have an effective internal control
a. para computer ethics system.
b. pop computer ethics d. firms will not be exposed to lawsuits.
c. theoretical computer ethics
d. practical computer ethics 33. The board of directors consists entirely of the CEO’s close
business associates and management of the organization.
24. All of the following are issues of computer security except This
a. releasing incorrect data to authorized individuals. a. indicates a weakness the accounting system.
b. permitting computer operators unlimited access to the b. is incompliant with the Sarbanes-Oxley Act.
computer room. c. is a red flag for auditors to review and report on
c. permitting access to data by unauthorized individuals. executive compensation.
d. providing correct data to unauthorized individuals. d. is a normal board structure and not an issue of audit
concern.
34. Business ethics involves 42. To conceal the theft of cash receipts from customers in
a. how managers decide on what is right in conducting payment of their accounts, which of the following journal
business. entries should the bookkeeper make?
b. how managers achieve what they decide is right for DR CR
the business. a. Miscellaneous Expense Cash
c. both a and b. b. Petty Cash Cash
d. only a. c. Cash Accounts Receivable
d. Sales Returns Accounts Receivable
35. All of the following are conditions for fraud except e. None of the above
a. false representation. c. intent
b. injury or loss. d. material reliance 43. Which of the following controls would best prevent the
lapping of accounts receivable?
36. The conditions to a fraudulent act that the a. Segregate duties so that the clerk responsible for
misrepresentation must have been a substantial factor on recording in the accounts receivable subsidiary ledger
which the injured party relied has no access to the general ledger.
a. false representation. c. justifiable reliance b. Request that customers review their monthly
b. situational pressure d. opportunity statements and report any unrecorded cash payments.
c. Require customers to send payments directly to the
37. The combination of situational pressures, opportunities, & company's bank.
personal characteristics that can lead to the act of fraud
d. Request that customers make the check payable to
a. false representation. c. misappropriation
the company.
b. collusion d. fraud triangle
44. Providing timely information about transactions in
38. Deceptive practices to inflate earnings or to forestall the
sufficient detail to permit proper classification and financial
recognition of either insolvency or a decline in earnings
reporting is an example of
a. fraudulent financial reporting c. management fraud
a. control environment c. information & communication
b. performance fraud d. fraud transaction
b. risk assessment. d. monitoring
39. Management can expect various benefits to follow from
implementing a system of strong internal control. Which of 45. What fraud scheme is similar to the "borrowing from Peter
the following benefits is least likely to occur? to pay Paul" scheme?
a. reduced cost of an external audit a. expense account fraud c. lapping
b. preventing employee collusion to commit fraud b. kiting d. transaction fraud
c. availability of reliable data for decision-making purposes
46. Which of the following best describes lapping?
d. some assurance of compliance with the FCPA of 1977
a. applying cash receipts to a different customer's
e. some assurance that important documents and records
account in an attempt to conceal previous thefts of
are protected
funds
40. Which of the following situations is not a segregation of b. inflating bank balances by transferring money among
duties violation? different bank accounts
a. The treasurer has the authority to sign checks but gives c. expensing an asset that has been stolen
the signature block to the assistant treasurer to run the d. creating a false transaction
check-signing machine.
b. The warehouse clerk, who has the custodial responsibility 47. Operations fraud includes
over inventory in the warehouse, selects the vendor & a. altering program logic to cause the application to
authorizes purchases when inventories are low. process data incorrectly.
c. The sales manager has the responsibility to approve credit b. misusing the firm's computer resources.
and the authority to write off accounts. c. destroying or corrupting a program's logic using a
d. The department time clerk is given the undistributed computer virus.
payroll checks to mail to absent employees. d. creating illegal programs that can access data files to
e. The accounting clerk who shares the recordkeeping alter, delete, or insert values.
responsibility for the accounts receivable subsidiary ledger
performs the monthly reconciliation of the subsidiary 48. The action in which the perpetrator taps into the
ledger and the control account. telecommunication line from a remote source and latches
into an authorized user who is logging onto the system
41. What does the underlying assumption of reasonable a. hacking c. eavesdropping
assurance regarding implementation of internal control b. tracing d. piggybacking
mean?
a. Auditor’s are reasonably assured that fraud has not 49. Gaining access to the system from a remote site by
occurred in the period. pretending to be an authorized user
b. Auditor's are reasonably assured that employee a. hacking c. masquerading
carelessness can weaken an internal control structure. b. piggybacking d. cracking
c. Implementation of the control procedure should not
have a significant adverse effect on efficiency or 50. The act of rewarding an official for taking a particular
profitability. course of action
d. Management assertions about control effectiveness a. bribery c. corruption
should provide auditors with reasonable assurance. b. illegal gratuity d. extortion
e. A control applies reasonably well to all forms of
computer technology. - END -
ANSWER KEY:

1. C 26. A
2. B 27. C
3. C 28. C
4. B 29. C
5. C 30. A
6. C 31. C
7. C 32. C
8. E 33. B
9. B 34. C
10. B 35. D
11. A 36. C
12. D 37. D
13. B 38. B
14. B 39. B
15. D 40. A
16. C 41. C
17. D 42. D
18. A 43. C
19. D 44. C
20. D 45. C
21. A 46. A
22. D 47. B
23. A 48. D
24. B 49. C
25. C 50. B