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.

Possible Answers:

Management would review terms of sale

Management would check the vendor address

Management would ensure vendor has an active tax ID Number

Management would check the vendor account number

Correct answer:

Management would review terms of sale

Explanation:

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:

Possible Answers:

Making sure employees don’t record Accounts Receivable

Making sure employees don’t both make adjusting entries and prepare statements

Making sure employees don’t bill customers

Making sure employees don’t deposit cash

Correct answer:

Making sure employees don’t both make adjusting entries and prepare statements

Explanation:

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

Possible Answers:

Receivables are tested on an interim basis

none of the above

All receivables are collected

Any receivable not collected is evaluated subsequent to year end

Correct answer:

Any receivable not collected is evaluated subsequent to year end

Explanation:

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 #3 : Cash Cycle, Revenue Cycle, And Expenditure 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:

Possible Answers:

Cutoff

Classification

Accuracy

Existence

Correct answer:

Cutoff

Explanation:

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 #2 : Cash Cycle, Revenue Cycle, And Expenditure Cycle

An auditor is required to confirm A/R if the A/R balances are:

Possible Answers:

Subject to valuation estimates

Older than the prior year

Smaller than expected

Material to the financial statements

Correct answer:

Material to the financial statements

Explanation:

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 #1 : Revenue Cycle

Kiting and lapping are methods of potential fraud that would be discovered in which business cycle?

Possible Answers:

Expenditure cycle

Investment cycle

Cash cycle

Inventory cycle

Correct answer:

Cash cycle

Explanation:

These types of fraud would be cash related frauds as they require the movement of cash.

Example Question #4 : Cash Cycle, Revenue Cycle, And Expenditure Cycle

Proper segregation of duties requires that

Possible Answers:

The receiving clerk signs the purchase order

Bank reconciliations are not done by those in charge of disbursements

Purchase requests are generated by the purchasing agent

The purchasing agent does not prepare purchase orders

Correct answer:

Bank reconciliations are not done by those in charge of disbursements

Explanation:

Proper segregation of duties requires that bank reconciliations are prepared by those employees not associated with disbursing funds.

Example Question #5 : Cash Cycle, Revenue Cycle, And Expenditure Cycle

Physical control over those in charge of disbursement would be:

Possible Answers:

Proper authorization by a supervisor

Employees in charge of cash disbursements are bonded

Bank reconciliations are performed timely

Proper review of timecards are established

Correct answer:

Employees in charge of cash disbursements are bonded

Explanation:

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 #6 : 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

Possible Answers:

Authorization 

segregation of duty

review procedure

Physical control

Correct answer:

review procedure

Explanation:

Comparing independent documents with company records is a form of the review procedure. It doesn’t require authorization or physical control.

Example Question #1 : 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:

Possible Answers:

Existence

Valuation and allocation

Understandability and classification

Completeness

Correct answer:

Completeness

Explanation:

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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