CAF-8 · Chapter 6
Tests of Controls MCQs with Answers
10 multiple-choice questions on Tests of Controls for CAF-8 Audit and Assurance Essentials. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A junior auditor is reviewing the sales system at a retail client. Which of the following represents a major weakness in the segregation of duties regarding the sales process?
- A) The sales representative is responsible for both finding new customers and setting their maximum credit limits.
- B) The warehouse team is responsible for packing goods and creating the physical dispatch notes.
- C) The accounts department generates sales invoices based on signed delivery notes.
- D) The IT system automatically flags orders that exceed predefined customer credit limits.
Show answer & explanation
Answer: A) The sales representative is responsible for both finding new customers and setting their maximum credit limits.
Allowing a sales representative to set credit limits creates a self-interest threat, as they may approve risky customers simply to earn higher sales commissions. Credit limits must be set and authorized by an independent credit control or finance manager.
Question 2
During a walkthrough of the purchases system, you note that goods are recorded in the accounting system purely based on the supplier's invoice rather than the Goods Received Note (GRN). What is the primary risk of this practice?
- A) Goods may be delivered to the wrong warehouse.
- B) The company may pay for goods that it has not actually received.
- C) The supplier might accidentally send two copies of the same invoice.
- D) The inventory valuation method might switch from FIFO to weighted average.
Show answer & explanation
Answer: B) The company may pay for goods that it has not actually received.
If liabilities and inventory are recorded solely based on the supplier's invoice without matching it to a GRN, the company risks recording and paying for fictitious or unfulfilled orders. A three-way match (PO, GRN, and Invoice) is essential.
Question 3
To ensure that wages and salaries are not paid to 'ghost' or fictitious employees, which of the following internal controls is most effective?
- A) Requiring employees to work mandatory overtime during peak seasons.
- B) Ensuring that the individual preparing the payroll is the same person distributing the physical cash or bank transfers.
- C) Implementing a formal, independent authorization process by HR for adding all new employees to the master payroll file.
- D) Processing all payroll calculations on a manual spreadsheet to allow for easy edits.
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Answer: C) Implementing a formal, independent authorization process by HR for adding all new employees to the master payroll file.
Formal authorization by an independent HR department ensures that only real, contracted personnel are added to the payroll. Segregation of duties between payroll preparation and payment is also critical to prevent fraud.
Question 4
To prevent the misappropriation of petty cash at a client's regional office, which of the following controls should management implement?
- A) Keep the petty cash float unlimited to handle any unexpected large expenses.
- B) Allow all junior staff unrestricted access to the cash box to speed up operational purchases.
- C) Conduct periodic surprise physical counts of the petty cash by a senior official independent of the petty cash custodian.
- D) Replenish the petty cash float every day without requiring receipts for prior expenses.
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Answer: C) Conduct periodic surprise physical counts of the petty cash by a senior official independent of the petty cash custodian.
Surprise checks by an independent senior official act as a strong deterrent and detective control against the theft of petty cash. The custodian should not be the one reviewing their own balances.
Question 5
The auditor of a wholesale company is testing the completeness of dispatched goods. Which of the following tests of controls specifically addresses the risk that goods have been shipped but not billed?
- A) Select a sample of sales invoices and trace them back to the dispatch notes.
- B) Select a sample of sequential dispatch notes and trace them forward to the corresponding sales invoices in the ledger.
- C) Verify the mathematical accuracy of the final sales tax calculations on the invoices.
- D) Inspect the aging analysis of the trade receivables at year-end.
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Answer: B) Select a sample of sequential dispatch notes and trace them forward to the corresponding sales invoices in the ledger.
To test for completeness of billing, the auditor must start from the source document of the physical movement (the dispatch note) and trace it forward to ensure an invoice was actually generated. Tracing backward tests for occurrence.
Question 6
While evaluating a client's computerized payroll system, the auditor notes that the software automatically rejects any employee age entered below 18 or above 65. What type of application control is this?
- A) Sequence check
- B) Check digit
- C) Range check
- D) Batch total
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Answer: C) Range check
A range check is an application control that ensures data inputted into the system falls within predefined, logical minimum and maximum boundaries. This prevents illogical data entries.
Question 7
Which of the following describes the use of 'Test Data' as a Computer-Assisted Audit Technique (CAAT)?
- A) Extracting a massive sample of live client data to recalculate depreciation.
- B) The auditor feeding a sample of dummy data (including intentional errors) through the client's IT system to see if the system's controls reject the errors.
- C) Permanently installing the auditor's own software into the client's servers to monitor all daily activity.
- D) Reviewing the manual signatures on the printed purchase orders.
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Answer: B) The auditor feeding a sample of dummy data (including intentional errors) through the client's IT system to see if the system's controls reject the errors.
Test data involves the auditor inputting dummy data into the client's live system (or a safe copy) and comparing the processing results against predetermined expectations. It is specifically used to test the operating effectiveness of application controls.
Question 8
During a physical inventory count, an auditor observes that the count sheets given to the warehouse staff already contain the computerized 'expected quantities' printed on them. Why is this a control weakness?
- A) It prevents the staff from calculating the total inventory value.
- B) It encourages staff to simply agree with the pre-printed expected quantities rather than performing an independent, accurate physical count.
- C) It slows down the counting process significantly.
- D) It violates the principle of using third-party valuation experts.
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Answer: B) It encourages staff to simply agree with the pre-printed expected quantities rather than performing an independent, accurate physical count.
Providing pre-filled quantities creates a bias. Staff may take the easy route and just confirm the printed numbers rather than rigorously counting the physical items, defeating the entire purpose of a physical inventory check.
Question 9
A client uses an 'Approved Suppliers List' within its automated purchasing system. Which of the following is a General IT Control (GITC) that protects this list?
- A) A three-way match before paying the supplier invoice.
- B) Restricting access to edit the Approved Suppliers List via a high-level password known only to the senior procurement director.
- C) A calculation summing up the total number of invoices in a batch.
- D) Generating a purchase requisition when inventory falls below minimum levels.
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Answer: B) Restricting access to edit the Approved Suppliers List via a high-level password known only to the senior procurement director.
Restricting logical access to master files via passwords and access rights is a General IT Control. It secures the overall IT environment, ensuring that application controls (like ordering only from approved vendors) cannot be bypassed.
Question 10
In smaller entities, a strict segregation of duties is often difficult to achieve due to limited staff. What is the most common mitigating control the auditor will look for in such environments?
- A) The complete outsourcing of all accounting functions to a foreign firm.
- B) High levels of direct involvement and oversight by the business owners or senior management.
- C) The elimination of all computerized accounting systems in favor of manual ledgers.
- D) Stopping the use of external bank accounts and dealing only in cash.
Show answer & explanation
Answer: B) High levels of direct involvement and oversight by the business owners or senior management.
In small entities where formal segregation of duties is impractical, the active, hands-on involvement of the owner/manager acts as a powerful compensating control, though it does raise the risk of management override.