Cash Cycle, Revenue Cycle, and Expenditure Cycle
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CPA Auditing and Attestation (AUD) › Cash Cycle, Revenue Cycle, and Expenditure Cycle
Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity’s employees?
Prenumbered remittance advices
A bank lockbox system
Monthly bank reconciliations
Daily deposit of cash receipts
Explanation
A lockbox system is the best means of preventing fraud of cash by employees because they will never have direct access to cash receipts.
Of the following cycles, which would involve purchases, payables, and cash disbursements?
Investment cycle
Revenue cycle
Expenditure cycle
None of the answer choices are correct
Explanation
Only the expenditure cycle would involve these three aspects, whereas the cash cycle may include cash disbursements, only the expenditure cycle deals with all three.
Proper segregation of duties requires that
The purchasing agent does not prepare purchase orders
Purchase requests are generated by the purchasing agent
Bank reconciliations are not done by those in charge of disbursements
The receiving clerk signs the purchase order
Explanation
Proper segregation of duties requires that bank reconciliations are prepared by those employees not associated with disbursing funds.
Management would ensure proper segregation of duties by:
Making sure employees don’t both make adjusting entries and prepare statements
Making sure employees don’t record Accounts Receivable
Making sure employees don’t bill customers
Making sure employees don’t deposit cash
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.
Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity’s employees?
Prenumbered remittance advices
A bank lockbox system
Monthly bank reconciliations
Daily deposit of cash receipts
Explanation
A lockbox system is the best means of preventing fraud of cash by employees because they will never have direct access to cash receipts.
Of the following cycles, which would involve purchases, payables, and cash disbursements?
Investment cycle
Revenue cycle
Expenditure cycle
None of the answer choices are correct
Explanation
Only the expenditure cycle would involve these three aspects, whereas the cash cycle may include cash disbursements, only the expenditure cycle deals with all three.
Management would ensure proper segregation of duties by:
Making sure employees don’t both make adjusting entries and prepare statements
Making sure employees don’t record Accounts Receivable
Making sure employees don’t bill customers
Making sure employees don’t deposit cash
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.
Proper segregation of duties requires that
The purchasing agent does not prepare purchase orders
Purchase requests are generated by the purchasing agent
Bank reconciliations are not done by those in charge of disbursements
The receiving clerk signs the purchase order
Explanation
Proper segregation of duties requires that bank reconciliations are prepared by those employees not associated with disbursing funds.
Of the following, which set of information does an auditor usually confirm on one form?
Inventory on consignment and contingent liabilities
Cash in bank and collateral for loans
A/P and purchase commitments
A/R and accrued interest receivable
Explanation
The AICPA standard 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.
Physical control over those in charge of disbursement would be:
Proper authorization by a supervisor
Bank reconciliations are performed timely
Employees in charge of cash disbursements are bonded
Proper review of timecards are established
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.