University of San Jose-Recoletos

Accountancy and Finance Department- Business Management

Midterms Examination- ACCTG 401

Name: ______________________________________________
Class Schedule: ______________________________________________
Topic: Internal Control, Risk Management, and Assurance Engagement

Instructions:
MCQ - Place the letter of your final answer on the answer sheet provided.

1. Which of the following fraudulent actions is most likely to be

perpetrated as a result of the revenue cycle’s lack of adequate internal
control?
a. The failure to prepare shipping documents may cause an
understatement of inventory balances.
b. Fictitious transactions may be documented, resulting in revenue
understatement and receivable overstatement.
c. Claim received from customers for goods returned may be
intentionally recorded in other customer’s accounts.
d. Authorization of credit memos by cash-handling workers may allow
for cash embezzlement.

2. Internal Control procedures are strengthened when the quantity of

merchandise ordered is omitted from the copy of the purchase order sent
to the:
a. Purchasing agent.
b. Accounts Payable Department.
c. Receiving Department.
d. Department that initiated the requisition.

3. An adequate system of internal control is most likely to detect a fraud

perpetrated by:
a. Group of managers in collusion.
b. Group of employees in collusion.
c. Single employee.
d. Single manager.

4. When a compensating control is present, the absence of a key control:

a. Could cause a material loss.
b. Is no longer a concern because there is no longer a significant
deficiency or material weakness.
c. Is still a major concern to the auditor.
d. Is magnified and must be examined extensively.

5. Emmanuel is employed by Crossover Company and earns P100 per hour. He

usually works 28 hours per week but always claims that she works 32
hours in order to obtain additional pay. Which of the internal control
activities is most likely to prevent this type of theft?
a. The company’s payroll program is tested every month with a test
data to ensure it operates effectively.
b. A separate person delivers the checks each day to Emmanuel after
verifying his identity.
c. The supervisor must review his time sheet each period and indicate
approval.
d. Any check not picked up must be turned over to an independent
person.

6. The following are transaction cycles, except:

a. General ledger and reporting
b. Payroll and Personnel
 c. Expenditure and Disbursement
d. Revenue and Receipt
7. A proper segregation of duties requires:
a. an individual authorizing a transaction also records it.
b. An individual authorizing a transaction maintains custody of the
asset that resulted from the transaction.
c. An individual maintaining custody of the asset should be entitled
to access of the accounting records for that asset.
d. An individual recording the transaction should not compare the
accounting record of the asset with the asset itself.

8. The single most effective control procedure established to avoid

allowing any person to be able to perpetrate and then conceal errors or
fraud is:
a. The separation of functional responsibilities custodianship,
record keeping, operations, and authorization.
b. Require each employee to take a vacation every year.
c. Establish an internal audit department.
d. Require the bonding of personnel in positions that necessitate
handling of cash and other desirable values.

9. Which of the following is not a source document for the revenue cycle?
a. Sales order
b. Receiving report
c. Credit memo
d. Delivery Receipt

10. Which of the following is not one of the specific control activities
that are relevant to financial statement audits:
a. Performance reviews
b. Physical controls
c. Segregation of duties
d. Monitoring

11. A major control available in a small company, which might not be

feasible in a large company, is:
a. A wider segregation of duties.
b. A voucher system.
c. Fewer transactions to process.
d. The owner-manager’s personal interest and close relationship with
personnel.

12. One control that can be implemented to help prevent paychecks being
issued to fictitious employees is:
a. Use of payroll clearing account.
b. Paychecks should be physically distributed by someone who does not
authorize or record payroll.
c. Periodic reconciliation of the payroll bank account.
d. The cashier should sign all payroll checks.

13. As part of its purchasing system, an entity’s receiving department

receives copies of purchase orders for use in identifying and recording
goods received. A possible error that this system could allow is:
a. Payment of unauthorized purchases.
b. Payment of unauthorized vendors.
c. Overpayment of partial deliveries.
d. Delay in recording purchases.

14. Which of the following controls would most effectively prevent payment
for goods not received, if performed prior to invoice payment?
a. Vendor invoices should be approved by a departmental supervisor
other than the employee ordering the goods.
 b. Invoices over a specified amount should be approved by the vice
president of finance.
c. Names and addresses on vendor invoices should be compared to a
list of department-authorized vendors.
d. Vendor invoices should be matched with department purchase orders.

15. To minimize the risk that purchasing agents will use their positions
for personal gain, an entity should:
a. Direct the purchasing department to maintain records on purchases
paid, to be reviewed every 6 months.
b. Request internal auditors to send confirmation requests to
selected vendors.
c. Require competitive bidding.
d. Specify that all items purchased must pass quality control tests.

16. Which of the following controls would an entity most likely use in
safeguarding against the loss of trading securities?
a. The independent auditor traces all purchases and sale of trading
securities through the subsidiary ledgers to the general ledger.
b. An independent trust company that has no direct contact with the
employees who have record-keeping responsibilities has possession
of the securities.
c. The internal auditor inspects the trading securities in the
entity’s safe each year on the balance sheet date.
d. A designated member of the board of directors controls the
securities in a bank safe-deposit box.

17. Which of the following controls would a company most likely use to
safeguard marketable securities when such securities are not in the
custody of an independent trust agent?
a. The chairman of the bod verifies the marketable securities, which
are kept in bank safe-deposit box, each year on the balance sheet
date.
b. The internal auditor and the controller independently trace all
purchases and sales of marketable securities from the subsidiary
ledgers to the general ledger.
c. Two company officials have joint control of marketable securities,
which are kept in a bank safe-deposit box.
d. The investment committee of the bod periodically reviews the
investment decisions delegated to the treasurer.

18. Which of the following is not a proper control over investment

securities?

a. Separation of custodial and treasury functions.

b. Employing an independent trust agent.
c. Proper authorization of transactions.
d. Storage in a safe-deposit box.

19. The following controls are designed to protect investment securities,

except
a. Investment securities should be properly controlled physically in
order to prevent unauthorized usage.
b. Custody over investment securities should be limited to personnel
having record keeping responsibilities over the securities.
c. Securities should be registered in the entity’s name.
d. Access to securities should be vested in two individuals.

20. Which of the following activities is not part of the revenue cycle?
a. Sale order entry
b. Receiving of goods
c. Billing
d. Shipping
21. A customer places an order for a certain product. What step should be
taken before the order is checked for inventory availability?
a. A packing list should be generated for the warehouse.
b. The customer’s credit should be checked for a sale on account.
c. The sales order should be created and written to a file.
d. The shipping department should be notified of an order in process.

22. Which of the following controls most likely would provide reasonable
assurance that all credit sales transactions of an entity are recorded?
a. The accounting department supervisor controls the mailing of
monthly statements to customers and investigates any differences
reported by customers.
b. The accounting department supervisor independently reconciles,
monthly, the accounts receivable subsidiary ledger to the accounts
receivable control account.
c. The billing department supervisor matches the prenumbered shipping
documents with entries in the sales journal.
d. The billing department supervisor sends copies of approved sales
order to the credit department for comparison to authorized credit
limits and current customer account balances.

23. For effective internal control, employees maintaining the accounts

receivable subsidiary ledger should not also approve:
a. Cash disbursements.
b. Write-offs of customer accounts.
c. Granting of credit to customers.
d. Employee overtime wages.

24. A sound internal control procedure should require that defective

merchandise returned by customers be presented initially to the:
a. Receiving clerk.
b. Accounts receivable supervisor.
c. Billing clerk.
d. Shipping department supervisor.

25. Which of the following most likely would be the result of ineffective
controls in the revenue/receipt cycle?
a. omissions of shipping documents could go undetected, causing an
understatement of inventories.
b. Irregularities in recording transactions in the subsidiary ledger
could result delay in goods shipped.
c. Final authorization of credit memos by sales department personnel
could permit an employee defalcation scheme.
d. Fictitious transactions could be recorded causing an
understatement of revenues and an overstatement of receivables.

26. At which point in an ordinary sales transaction of a wholesaling

business is a lack of specific authorization of least concern to the
effectiveness of internal control?
a. Granting of credit
b. Determination of discounts
c. Selling of goods for cash
d. Shipment of goods

27. Mayflor Company uses its sales invoices for posting perpetual
inventory records. Inadequate internal control over the invoicing
function allows goods to be shipped but not invoiced. The inadequate
controls could cause what type of misstatement to each of the following
accounts?
a. Revenues- understatement; receivables- understatement;
inventories- understatement
 b. Revenues- overstatement; receivables- overstatement; inventories-
understatement
c. Revenues- understatement; receivables- understatement;
inventories- overstatement
d. Revenues- overstatement; receivables- overstatement; inventories-
overstatement

28. Which control most likely would be effective in offsetting the

tendency of sales personnel to maximize sales volume at the expense of
high bad debt write-offs?
a. Employees responsible for authorizing sales and bad debt write
offs are denied access to cash.
b. Subsidiary account receivable ledgers are reconciled to the
control account by an employee independent of the authorization of
credit.
c. Employees involved in the credit-granting function are separated
from the sales function.
d. Shipping documents and sales invoices are matched by an employee
who does not authorize write-offs of customer’s accounts.

29. An employee misappropriates cash receipts from sales on account. Which

of the following acts would conceal this embezzlement and be least
likely to be detected?
a. Understating the cash receipts journal.
b. Overstating the accounts receivable subsidiary ledger.
c. Overstating the accounts receivable control account.
d. Understating the sales journal by not recording the sale.

30. Which of the following controls is often lacking in a small retail

cash sales environment?
a. Segregation of functions
b. Competent personnel
c. Monitoring
d. Limited access to assets only to authorized personnel

31. A grid charting the potential frequency and severity of losses is

called:
a. risk management information system.
b. risk management Intranet.
c. risk management web site.
d. risk map.

32. Reasons to adopt an enterprise risk management plan include all of the
following; except:
a. to increase earnings volatility.
b. to treat risks facing the business in a more holistic way.
c. to increase net income.
d. to gain an advantage over competitors.

33. When announcing that an enterprise risk management program would be

implemented at Ping Company, the president of the company observed, "We
must overcome the silo mentality for the program to be successful." The
"silo mentality" refers to:
a. over-emphasis on pure risks and ignoring speculative risks.
b. using too much of one risk treatment measure and ignoring other
risk treatment methods.
c. focusing narrowly on one area and not viewing risk holistically.
d. everyone assuming someone else is responsible for managing a risk
and no one taking leadership.

34. HennaLowe Beef Company has over 10,000 cattle. HennaLowe is concerned
that the price of corn, the grain fed to the cattle, will increase
 significantly. The risk that the price of corn may increase and harm the
profitability of HennaLowe Beef's operations is a(n)
a. currency exchange rate risk.
b. property risk.
c. inflation risk.
d. interest rate risk.

35. You are shifting your plant to an earthquake-prone location. You get
plant foundations designed to absorb the earthquake shocks. What risk
strategy are you adopting?
a. Risk Sharing
b. Risk Avoidance
c. Risk Acceptance
d. Risk Reduction

36. All the following are objectives of risk management, except:

a. To insure all exposures to loss.
b. Minimize reputation risk.
c. Minimize supply chain interruption.
d. Develop and maintain plant safety program.

37. A Pure Risk is defined as:

a. an event that offers no opportunity for financial gain
b. the chance a loss will occur
c. a diversifiable risk
d. a contingency that increases the chance of a loss

38. The COSO ERM enumerates different interrelated components. The

component risk response includes:
a. Analyzing risks to determine how they should be managed.
b. Classifying risks either as inherent or residual.
c. Modifying internal controls as necessary.
d. Establishing policies and procedures.

39. Which component in the framework identifies an organization’s risk

management philosophy, integrity, and ethical values?
a. Internal environment
b. Risk assessment
c. Objective-setting
d. Monitoring

40. When a company purchases property and casualty insurance, they are
attempting to mitigate risk by practicing:
a. Risk avoidance
b. Risk sharing
c. Operational risk
d. Risk reduction

41. Risk that remains after all attempts management might take to mitigate
are commonly called:
a. Inherent risk
b. Financial risk
c. Operations risk
d. Residual risk

42. The key components of ERM include all the following, except:
a. Assess risks.
b. Monitor risks.
c. Improved shareholder value.
d. Set strategy and objectives.

43. Operations risk is manifested in all of the following, except:

a. Interest rate volatility
 b. Process stoppage
c. Technological obsolescence
d. Management fraud

44. ISO 31000 suggests that once risks have been identified and assessed,
techniques to manage the risk should be applied. These techniques
include the following, except:
a. Retention.
b. Sharing.
c. Avoiding.
d. Complete disregard.

45. Which of the following statements is correct?

a. Risk appetite is the degree of risk that a company or other entity
is willing to accept in pursuit of its goals.
b. Enterprise risk management is most effective when these mechanisms
are built into the entity's infrastructure and are part of the
essence of the enterprise.
c. Risk appetite and risk tolerance are different terms in ISO and
COSO, but they relatively have the same meaning.
d. Two statements are correct.
e. All the statements are correct.

46. Which of the following statements is correct?

a. Entities that do not explicitly define their risk philosophy, the
risk culture may form randomly, resulting in significantly
different risk cultures within an enterprise and department.
b. Impact represents the possibility that a given event will occur,
while likelihood represents its effect should it occur.
c. Residual risk can be eliminated.
d. Two statements are correct.
e. All the statements are correct.

47. Which of the following statements is correct?

a. Ongoing monitoring is more effective than separate evaluation.
b. Market risk cannot be eliminated by diversification.
c. The main difference between the third line of defense and the
first two lines is its high level of organizational independence
and objectivity.
d. Two statements are correct.
e. All the statements are correct.

48. Which of the following statements about assurance services is the most
accurate?
a. Professional services designed to express an opinion on the
fairness of the financial statements based on audit findings.
b. Professional services that involve the preparation of financial
statement or the collection, classification, and summarization of
other financial information.
c. Professional services aimed at improving the entity operations and
resulting in better outcomes.
d. Independent professional services aimed at enhancing the
credibility of information to suit the needs of intended users.

49. Which of the following is least likely an objective of an assurance

engagement?
a. The engagement is intended to enhance the credibility of
information about a subject matter.
b. An assurance engagement is intended for a professional accountant
to express a conclusion that provides intended users with a level
of assurance about the subject matter.
 c. The engagement is intended to provide a level of assurance to be
issued by a professional accountant about the information being in
conformity, in all material aspects, with suitable criteria.
d. The engagement is intended to prevent the issuance of materially
misleading information.

50. Independent professional services that are provided on financial or

other information that improves the quality of decision making are known
as:
a. Assurance services.
b. Attestation services.
c. Auditing services.
d. Review services.

51. For assurance engagements regarding historical information, limited

assurance engagements are called:
a. Audit
b. Reviews
c. Compilation
d. Negative Assurance

52. Relevant criteria contribute to conclusions that are:

a. Useful for decision making.
b. Free from bias.
c. Clear and comprehensive.
d. Subject to different interpretations.

53. All of the following generalizations about the reliability of

evidence, except:
a. Evidence is more reliable when it is obtained from the integrated
processes of the company than evidence obtained from independent
sources outside the entity.
b. Evidence is more reliable when it exists in documentary form.
c. Evidence provided by original documents is more reliable than
evidence provided by facsimiles.
d. Evidence generated internally is more reliable when the related
controls are effective.

54. In assurance engagement, the person or persons, either as individuals

or representatives of an entity, responsible for the subject matter is
the
a. Practitioner.
b. Responsible party.
c. Intended user.
d. Client.

55. Which of the following best describes the attest process?

a. Proving the accuracy of the books and records.
b. Assembling and filing the tax returns and related supplemental
information.
c. Gathering sufficient evidence about specific and known assertions.
d. Assisting management in the successful operations of the company.

56. All of the following are characteristics of agreed-upon procedures,

except:
a. The distribution of the conclusion report is restricted to those
parties that have agreed to the procedures to be performed since
others who are unaware of the reasons for the procedures may
misinterpret the results.
b. No assurance is expressed.
c. The report on an agreed-upon procedures engagement is not required
to describe the purpose and the agreed-upon procedures since the
 conclusion report is restricted only to those parties that have
agreed to the procedures to be performed.
d. None. All statements are correct.

57. Which of the following professional services is not an assurance

service?
a. Audit of historical financial statements
b. Review of financial statements
c. Examination of prospective financial information
d. Compilation of financial information

58. CPAs in public practice who perform assurance engagements are governed
by the following, except
a. Philippine Framework for Assurance Engagements
b. Code of Ethics for Professional Accountants in the Philippines
c. Philippine Standards on Related Services
d. Philippine Standards on Quality Control

59. Which of the following professional services would be considered an

assurance engagement?
a. A management consulting engagement to provide IT advice to a
client.
b. An engagement to report on compliance with statutory requirements.
c. An income tax engagement to prepare tax returns.
d. A compilation of financial statements from a client’s accounting
records.

60. In some assurance engagements, the evaluation of the subject matter is

performed by the responsible party, and the subject matter information
is in the form of an assertion by the responsible party that is made
available to intended users. These engagements are called:
a. Direct reporting engagements
b. Assertion-based engagements
c. Recurring engagements
d. Non-assurance engagements

61. A practitioner’s assurance report contains the following conclusion:

“Based on our work described in this report, nothing has come to our
attention that causes us to believe that the internal controls are not
effective, in all material aspects, based on ABC criteria.”
What type of assurance engagement was performed?

a. Limited assurance engagement

b. Reasonable assurance engagement
c. Negative assurance engagement
d. Positive assurance engagement

62. Which of the following statements is true concerning evidence in an

assurance engagement?
a. Sufficiency is the measure of the quantity of evidence.
b. Appropriateness is the measure of the quality of evidence, that
is, its reliability and persuasiveness.
c. The reliability of evidence is influenced not by its nature but by
its source.
d. Obtaining more evidence will compensate for its poor quality.

63. Reducing assurance engagement risk to zero is very rarely attainable

or cost beneficial because of the following factors, except:
a. The use of selective testing.
b. The fact that much of the evidence available to the practitioner
is persuasive rather than conclusive.
c. The practitioner may not have the required assurance knowledge and
skills to gather and evaluate evidence.
 d. The use of judgment in gathering and evaluating evidence and
forming conclusions based on that evidence.

64. The following are components of assurance engagement risk, except:

a. Inherent risk
b. Control risk
c. Detection risk
d. Business risk
65. Which of the following best describes related services?
a. Audit and Review of financial statements
b. Assurance and audit engagements
c. Compilation and agreed-upon procedure engagements
d. Review, compilation, and agreed-upon procedure engagements

66. Which of the following procedures is not included in a review

engagement?
a. Inquiries of management
b. Inquiries regarding subsequent events
c. Procedures designed to identify unusual fluctuations
d. A study and evaluation of internal controls

67. When performing an engagement to review an entity’s financial

statements, an accountant most likely would:
a. Limit the distribution of the accountant’s report.
b. Ask about the actions taken at the board of director’s meetings.
c. Obtain an understanding of the effectiveness of the entity’s
internal control.
d. Confirm a sample of significant accounts receivable balances.

68. If the CPA has reason to believe that the information subject to
review may be materially misstated, the CPA should:
a. Express a qualified negative assurance.
b. Express an adverse opinion.
c. Withdraw from the engagement.
d. Carry out additional or more extensive procedures.

69. In a compilation engagement, if the accountant becomes aware of

material misstatements, the accountant should try to agree appropriate
amendments with the entity. If such amendments are not made and the
financial information is misleading, the accountant should:
a. Do nothing.
b. Withdraw from the engagement.
c. Issue a qualified or adverse opinion.
d. Issue a negative assurance.

70. The basic document created in the billing process is the:

a. Bill of lading.
b. Purchase order.
c. Sales invoice.
d. Packing list.

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The Good Shepherd lays down His life for the sheep.