1. A manufacturing client received a substantial amount of goods returned during the last month of the fiscal year and the first month after yearend. The client recorded the returns when credit memos were issued (usually six to eight weeks after receipt of the goods).The control procedure that would have led to timelier recording of the goods would include the following:

a. Prenumbering receiving reports, which are separately identified for goods returned and serve as a control for issuance of credit memos

b. Aging schedules of accounts receivable prepared at year-end by individuals separate from the billing process

c. A reconciliation of the detailed accounts receivable with the general ledger accounts receivable account

d. Prenumbering credit memoranda for which all numbers are periodically accounted for

2. Which of the following would not represent a factor the auditor would consider when assessing the inherent risk associated with a sales transaction?

a. The existence of terms that specify the right of return or the right to modify the purchase agreement

b. Billing for invoices but agreed-upon shipments of goods at a later date

c. Goods billed according to a percentage-of-completion methodology

d. The nature of the credit authorization process

3. The auditor generally makes a decision not to test the effectiveness of controls in operation when

a. The preliminary assessment of control risk is at the maximum.

b. It is more cost efficient to directly test ending account balances than to test control procedures.

c. The auditor believes that controls are not functioning as described.

d. All of the above.

4. A restaurant food chain has more than 680 restaurants. All food orders for each restaurant are required to be input into an electronic device, which records all food orders by food servers and transmits the order to the kitchen for preparation. All food servers are responsible for collecting cash for all their orders and must turn in cash at the end of their shift equal to the sales value of food ordered for their I.D. number. The manager then reconciles the cash received for the day with the computerized record of food orders generated. Management investigates all differences immediately.

Corporate headquarters has established monitoring controls to determine when an individual restaurant might not be recording all its revenue and transmitting the applicable cash to the corporate headquarters. Which one of the following would be the best example of a monitoring control?

a. The restaurant manager reconciles the cash received with the food orders recorded on the computer.

b. All food orders must be entered on the computer, and there is segregation of duties between the food servers and the cooks.

c. Management prepares a detailed analysis of gross margin per store and investigates any store that shows a significantly lower gross margin.

d. Cash is transmitted to corporate headquarters on a daily basis.

5. Which of the following controls would be least effective in ensuring that the correct product is shipped and billed at the approved price?

a. Self-checking digits are used on all product numbers, and customers must order from a catalog with product numbers.

b. The sales order taker verbally verifies both the product description and price with the customer before the order is closed for processing.

c. The sales order taker prepares batch totals of the number of items ordered and the total dollar amount for all items processed during a specified period of time (e.g., 1 hour).

d. The product price table is restricted to the director of marketing, who alone can approve changes to the price file.

6. The auditor wants to determine that only the marketing manager has approved changes to the product price file. Which of the following audit procedures would provide the most persuasive evidence that only those price changes that have been properly authorized by the marketing manager have been made?

a. Use an integrated test facility (ITF) and submit product orders to the ITF. Compare the prices invoiced to the prices in the most recent catalog.

b. Use ACL to create a listing of all customer orders exceeding a specified dollar limit, and print out the results for subsequent investigation.

c. Obtain a copy of all authorized price changes and manually trace to the current edition of the organization's catalog.

d. Obtain a computerized log of all changes made to the price database. Take a random sample of changes and trace to a signed list of changes authorized by the marketing manager.

7. Which of the following should an auditor gain an understanding of during the engagement planning process?

a. Internal control structure related to revenue recognition

b. Revenue-related computer applications

c. Key revenue-related documents

d. All of the above