ICAEW ARF · Chapter 5
Controls over revenue and purchases MCQs with Answers
11 multiple-choice questions on Controls over revenue and purchases for ICAEW ARF Assurance and Risk Fundamentals. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which control best reduces the risk of sales being made to customers who are unlikely to pay?
- A) Sales invoices are sequentially numbered
- B) Credit limits are set for each customer and checked before an order is accepted
- C) Monthly statements are sent to customers
- D) Goods despatched notes are signed by the customer
Show answer & explanation
Answer: B) Credit limits are set for each customer and checked before an order is accepted
Setting and checking credit limits before accepting orders prevents the company from supplying customers who are a poor credit risk. Sequential numbering supports completeness, statements help detect errors in customer accounts, and signed despatch notes provide evidence of delivery. None of these addresses creditworthiness before the sale.
Question 2
Which control best ensures that all goods despatched to customers are invoiced?
- A) Sales invoices are checked by a second person for arithmetical accuracy
- B) Customer orders are checked against approved credit limits
- C) Goods despatched notes are sequentially numbered, matched to sales invoices, and the sequence is checked for gaps
- D) Sales invoices are authorised by the sales manager before being sent
Show answer & explanation
Answer: C) Goods despatched notes are sequentially numbered, matched to sales invoices, and the sequence is checked for gaps
Matching sequentially numbered despatch notes to invoices and investigating gaps helps ensure that every despatch results in an invoice, which supports the completeness of revenue. Checking arithmetic addresses accuracy, credit checks address recoverability, and authorising invoices addresses occurrence and pricing.
Question 3
A company sends statements to all credit customers each month. Which risk does this control mainly address?
- A) Errors or misappropriations in customers' ledger accounts going undetected
- B) Goods being supplied to customers without a credit check
- C) Sales being recorded in the wrong accounting period at the year end
- D) Sales invoices being raised for goods that have not been ordered
Show answer & explanation
Answer: A) Errors or misappropriations in customers' ledger accounts going undetected
Customers who receive statements are likely to query balances that are too high, so errors, or the misappropriation of payments, are more likely to be detected. The control works best when statements are prepared and sent by someone independent of the receivables ledger and cash. It does not address credit checks, cut-off or unauthorised invoicing directly.
Question 4
Which control best reduces the risk that credit notes are used to conceal the theft of customer receipts?
- A) Credit notes are posted to the receivables ledger on the day they are raised
- B) Credit notes are filed alphabetically by customer name
- C) Credit notes are issued only by the receivables ledger clerk
- D) Credit notes are sequentially numbered and authorised by a manager independent of cash receipts and the receivables ledger
Show answer & explanation
Answer: D) Credit notes are sequentially numbered and authorised by a manager independent of cash receipts and the receivables ledger
An employee who steals receipts might issue fictitious credit notes to clear the customer's balance. Requiring independent authorisation and accounting for the sequence of credit notes makes this more difficult. Posting promptly or filing by customer does not prevent fraudulent credit notes, and allowing the ledger clerk to issue them alone increases the risk.
Question 5
At a client, the sales clerk who raises sales invoices can also change the prices held in the system's standing data. What is the main risk arising?
- A) Goods may be despatched without a despatch note being raised
- B) Sales may be made to customers who exceed their credit limits
- C) Invoices may be raised at unauthorised prices, causing misstated revenue or enabling fraud
- D) Customer receipts may be posted to the wrong customer account
Show answer & explanation
Answer: C) Invoices may be raised at unauthorised prices, causing misstated revenue or enabling fraud
Changes to standing data such as price lists affect every subsequent transaction, so they should be authorised by a senior person independent of invoicing. A clerk who can change prices and raise invoices could undercharge favoured customers or make errors that go unnoticed. The other risks relate to despatch, credit and cash allocation controls.
Question 6
In a purchases system, which three documents are typically matched before a supplier invoice is approved for payment?
- A) The purchase order, the goods received note and the supplier invoice
- B) The purchase requisition, the remittance advice and the bank statement
- C) The sales order, the goods despatched note and the sales invoice
- D) The supplier statement, the cheque stub and the purchase day book
Show answer & explanation
Answer: A) The purchase order, the goods received note and the supplier invoice
Matching the purchase order, the goods received note and the supplier invoice confirms that the goods were authorised, actually received, and invoiced at the agreed price and quantity. The other combinations involve documents relating to payment, sales, or recording rather than approval of the invoice.
Question 7
Which control best ensures that the company records liabilities only for goods it has actually received?
- A) Supplier invoices are matched to goods received notes before being posted to the payables ledger
- B) Purchase orders are authorised by the department manager
- C) Supplier statements are reconciled to the payables ledger each month
- D) Payments to suppliers require two authorised signatories
Show answer & explanation
Answer: A) Supplier invoices are matched to goods received notes before being posted to the payables ledger
Matching invoices to goods received notes confirms that goods were received before the liability is recorded, supporting the occurrence of purchases. Authorising orders controls what is ordered, not what is received. Supplier statement reconciliations are detective controls, and dual signatories control payments rather than the recording of liabilities.
Question 8
Which control best reduces the risk of payments being diverted by changing a supplier's bank details?
- A) Supplier invoices are checked for arithmetical accuracy
- B) The payables ledger is totalled and reconciled to the control account monthly
- C) Goods received notes are checked against purchase orders
- D) Changes to supplier bank details must be authorised by a senior manager and verified with the supplier using contact details already on file
Show answer & explanation
Answer: D) Changes to supplier bank details must be authorised by a senior manager and verified with the supplier using contact details already on file
A common fraud involves false requests to change a supplier's bank details, so payments go to a fraudster. Independent authorisation of master file changes and verification with the genuine supplier using known contact details helps prevent this. The other controls relate to invoice accuracy, ledger integrity and receipt of goods, not standing data.
Question 9
At the year end, a company reviews all goods received notes that have not yet been matched to supplier invoices and accrues for them. Which assertion does this control mainly address?
- A) Existence of trade payables
- B) Valuation of inventory
- C) Occurrence of purchases
- D) Completeness of trade payables and accruals
Show answer & explanation
Answer: D) Completeness of trade payables and accruals
Goods received before the year end but not yet invoiced are liabilities at the year end. Reviewing unmatched goods received notes ensures these liabilities are recorded, which addresses completeness. Existence and occurrence concern whether recorded items are genuine, and inventory valuation concerns the lower of cost and net realisable value.
Question 10
Which of the following controls does NOT help to ensure the completeness of trade payables?
- A) Supplier invoices are checked for arithmetical accuracy before being posted
- B) Supplier statements are reconciled to payables ledger balances each month
- C) The sequence of goods received notes is checked and missing numbers investigated
- D) Goods received but not invoiced are reviewed at the year end
Show answer & explanation
Answer: A) Supplier invoices are checked for arithmetical accuracy before being posted
Completeness concerns whether all liabilities that should be recorded have been recorded. Reconciling supplier statements reveals invoices the company has not recorded, sequence checks on goods received notes identify receipts not processed, and the year-end review identifies uninvoiced receipts. Checking arithmetic addresses the accuracy of invoices already received, not whether any are missing.
Question 11
Which control best reduces the risk of a supplier invoice being paid twice?
- A) Invoices are marked as paid when settled, and the system rejects duplicate invoice numbers for the same supplier
- B) Purchase orders are sequentially numbered
- C) Goods received notes are signed by the storekeeper
- D) Supplier invoices are filed in date order
Show answer & explanation
Answer: A) Invoices are marked as paid when settled, and the system rejects duplicate invoice numbers for the same supplier
Cancelling invoices once paid and having the system reject duplicate invoice references prevents the same invoice being processed twice. Numbering purchase orders and signing goods received notes relate to ordering and receipt, not payment. Filing in date order does not stop a duplicate being processed.