Audit chapter 7

In meeting the control objective of safeguarding of assets, which department should be responsible for DistributionCustody of of PaychecksUnclaimed Paychecks

CFO CFO

An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively? Select and examine

Canceled checks and ascertain that the related receiving reports are dated no later than the checks.

Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department?

Canceling supporting documentation after payment.

To avoid potential errors and fraud, well-designed internal control in the accounts payable area should include a segregation of which of the following functions?

Cash disbursements and vendor invoice verification.

Which of the following items in a communication about control deficiencies in internal control over cash receipts and disbursements is least significant?

Checks are signed by one person

As an in-charge auditor, you are reviewing a communication about significant deficiencies and material weaknesses related to internal control over cash receipts and disbursements. Which of the following conditions, standing alone, should cause you the least concern?

Checks are signed by only one person.

Question: 34Which of the following is a standard control over cash disbursements?

Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations.

A company employs three accounts payable clerks and one treasurer. Their responsibilities are as follows:EmployeeResponsibilityClerk 1Reviews vendor invoices for proper signature approval.Clerk 2Enters vendor invoices into the accounting system and verifies payment terms.Clerk 3Posts entered vendor invoices to the accounts payable ledger for payment and mails checks.TreasurerReviews the vendor invoices and signs each check.Which of the following would indicate a weakness in the company's internal control?

Clerk 3 mails the checks and remittances after they have been signed.

Organizational independence in the processing of payroll is achieved by functional segregations that are built into the system. Which one of the following functional segregations is not required for internal control purposes?

Segregation of payroll preparation and maintenance of year-to-date records.

One objective of internal control is to record property, plant, and equipment (PPE) additions correctly as to account, amount, and period. Which of the following environmental considerations indicates that the risks of material misstatement of these additions are high?

Most construction is performed in-house.

Question: 65An auditor notes year-to-year increases of over $200,000 for small tool expense at a manufacturing facility that has produced the same amount of identical product for the last 3 years. Production inventory is kept in a controlled staging area adjacent to the receiving dock, but the supply of small tools is kept in an unsupervised area near the exit to the plant employees' parking lot. After determining that all of the following alternatives are equal in cost and are also feasible for local management, the auditor can best address the security issue by recommending that plant management

Move the small tools inventory to the custody of the production inventory staging superintendent and implement the use of a special requisition to issue small tools.

In a well-designed internal control system, employees in the same department most likely would approve purchase orders, and also

Negotiate terms with vendors.

Question: 74Which of the following are essential elements of the audit trail in an electronic data interchange (EDI) system?

Network and sender-recipient acknowledgments.

In determining the effectiveness of an entity's policies and procedures relating to the existence or occurrence assertion for payroll transactions, an auditor most likely would inquire about and

Observe the segregation of duties concerning human resources responsibilities and payroll disbursement.

Effective controls relevant to purchasing of raw materials should usually include all of the following except

Obtaining third-party written quality and quantity reports prior to payment for the raw materials.

In assessing risks of material misstatement for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support?

Occurrence.

Which of the following internal control activities would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments?

The internal auditor compares the securities in the bank safe-deposit box with recorded investments.

To minimize the risk that agents in the purchasing department will use their positions for personal gain, the organization should

Require competitive bidding.

Which of the following payroll control activities would most effectively ensure that payment is made only for work performed?

Require employees to have their direct supervisors approve their time cards.

Each Friday afternoon, payroll checks are distributed by the shift superintendent. The plant is so large and the turnover is so great that the superintendent does not know many of the workers. Undelivered checks are returned to the payroll clerk, from whom the workers can obtain them at some later time. The payroll clerk routinely continues the payroll record for workers one week after their departure from the firm, ultimately cashes the unclaimed checks, and keeps the money. Which of the following is a control designed to prevent this misappropriation?

Require the CFO's office to prepare checks only on the basis of supporting documentation from both the timekeeper and payroll office.

Which of the following controls will most likely allow for a reduction in the scope of the auditor's tests of depreciation expense?

Review and approval of the periodic equipment depreciation entry by a supervisor who does not actively participate in its preparation.

An audit team has concluded that inventory is highly susceptible to misappropriation and that a potential misstatement would be material to the financial statements. How should the audit team address the audit procedures to the increased risk?

Review the client's control procedures over the safeguarding of inventory and perform a physical inventory count on the last day of the current year.

In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor most likely would

Review the entity's descriptions of inventory policies and procedures.

Which of the following organizational controls related to the processing of scrap would you recommend?

Segregate the responsibility for processing scrap materials from the operational activities that produce the scrap materials.

Question: 5Which of the following procedures represents a weakness in internal control for payroll?

The payroll clerk distributes signed payroll checks. Undistributed checks are returned to the payroll department.

An auditor will ordinarily ascertain whether payroll checks are properly endorsed during the audit of

The payroll register.

A client's program that recorded receiving report information entered directly by the receiving department on vendor shipment receipt included a reasonableness or limit test. Which of the following errors would this test likely detect?

The receiving department clerk entered the quantity of the product received as 0.

Which of the following controls would be most effective in assuring that the proper custody of assets in the investing cycle is maintained?

The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safe deposit box by independent personnel.

In planning to assess control risk for purchasing and disbursement procedures, the auditor will be least influenced by

The strength or weakness of internal control in other areas, e.g., sales and accounts receivable.

Effective controls relevant to the efficiency of purchases will result in proper evaluation of the time for ordering merchandise. When making this evaluation, the purchasing company should give primary consideration to

The trade-off between the cost of owning and storing excess merchandise and the risk of loss by not having merchandise on hand.

If a payroll system continues to pay employees who have been terminated, control weaknesses most likely exist because

There were inadequate manual controls maintained outside the computer system.

Which of the following internal control activities most likely would prevent direct labor hours from being charged to manufacturing overhead?

Use of time tickets to record actual labor worked on production orders.

Which of the following is the most important control over acquisitions of property, plant, and equipment?

Using a budget to forecast and control acquisitions and retirements.

Which of the following activities most likely would detect whether payroll data were altered during processing?

Using test data to verify the performance of edit routines.

A company's labor distribution report requires extensive corrections each month because of labor hours charged to inactive jobs. Which of the following data processing input controls appears to be missing?

Validity test.

A university does not have a centralized receiving function for departmental purchases of books, supplies, and equipment. Which of the following controls will most effectively prevent payment for goods not received, if performed prior to invoice payment?

Vendor invoices should be approved by a departmental supervisor other than the employee ordering the goods.

Effective internal control activities over the payroll function may include

Verification of agreement of job time tickets with employee time clock card hours by a timekeeping department employee.

n the accounting system of Apogee Company, the quantities counted by the receiving department and entered at a terminal are transmitted to the computer, which immediately transmits the amounts back to the terminal for display on the terminal screen. This display enables the operator to

Verify that the amount was entered accurately.

Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases?

Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?

In the audit of which of the following types of profit-oriented enterprises is the auditor most likely to place special emphasis on testing the controls over proper classification of payroll transactions?

A manufacturing organization.

Which of the following indicates a potential for fraud in the payroll computer system?

A production manager can make changes in the personnel master file.

Which of the following activities is most likely to prevent the improper disposition of equipment?

A segregation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders.

Which of the following situations most likely could lead to an embezzlement scheme?

Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statement.

Which control is most likely to give the greatest assurance that securities held as investments are safeguarded?

Access to securities requires the signatures and presence of two designated officials.

Which of the following internal control activities is not usually performed in the vouchers payable department?

Accounting for unused prenumbered purchase orders and receiving reports.

Question: 72Which of the following is an essential element of the audit trail in an electronic data interchange (EDI) system?

Activity logs that indicate failed transactions.

Which of the following questions is not appropriate for an internal control questionnaire concerning securities?

All of the questions are appropriate.

Which of the following is an internal control weakness related to factory equipment?

All purchases of factory equipment are required to be made by the department in need of the equipment.

Which of the following controls is most effective in providing reasonable assurance that salary, wage, and benefit expenses are incurred only for work performed?

All time cards and reports are reviewed and approved in writing by immediate line supervisors having no responsibilities for paycheck distribution.

Which of the following constitutes the best evidence of the transfer of accountability for incoming material from the receiving department to other departments or activities?

An authorized signature on the prescribed transfer form.

Which of the following controls would an entity most likely use in safeguarding against the loss of trading securities?

An independent trust company that has no direct contact with the employees who have record-keeping responsibilities has possession of the securities.

Which of the following internal control activities is not usually performed in the CFO's department?

Approving vendors' invoices for payment.

Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable?

Are direct borrowings on notes payable authorized by the board of directors?

Which of the following questions is inappropriate on an internal control questionnaire concerning purchase transactions?

Are intact cash receipts deposited daily in the bank?

Which of the following questions should not appear in an internal control questionnaire relating to cash disbursements?

Are prelistings made of all cash receipts?

Which of the following questions would an auditor least likely include on an internal control questionnaire concerning the initiation and execution of equipment transactions?

Are procedures in place to monitor and properly restrict access to equipment?

The authority to accept incoming goods in receiving should be based on a(n)

Approved purchase order.

Which of the following activities performed by a department supervisor most likely would help in the prevention or detection of a payroll fraud?

Approving a summary of hours each employee worked during the pay period.

To achieve effective internal control over fixed-asset additions, a company should require

Authorization and approval of major fixed-asset additions.

Question: 1The purpose of segregating the duties of hiring personnel and distributing payroll checks is to segregate the

Authorization of transactions from the custody of related assets.

An auditor most likely would assess the risks of material misstatement as unacceptable if the payroll department supervisor is responsible for

Authorizing payroll rate changes for all employees.

Which of the following human resources department procedures reduces the risk of payroll fraud and represents an appropriate responsibility for the department?

Authorizing the addition or deletion of employees from the payroll.

Question: 68An audit of the electronic data interchange (EDI) area of a purchasing department revealed the facts listed below. Which one indicates the need for improved internal control?

Branch office employees may access the server with a single call via modem.

Independent internal verification of inventory occurs when employees who

Compare records of goods on hand with physical quantities do not maintain the records or have custody of the inventory.

Which of the following controls could best prevent direct labor from being charged to manufacturing overhead?

Comparison of daily journal entries with factory labor summary.

During the audit of a construction contract, it was discovered that the contractor was being paid for each ton of dirt removed. The contract called for payment based on cubic yards removed. Which internal control might have prevented this error?

Comparison of invoices with purchase orders or contracts.

In auditing an entity's computerized payroll transactions, an auditor would be least likely to use test data to test controls concerning

Control and distribution of unclaimed checks.

Which of the following control activities is not usually performed with regard to vouchers payable in the accounting department?

Controlling the mailing of the check and remittance advice.

Each of the following is an appropriate control over securities and investments except

Custodian separate from treasury function.

The objectives of internal control for a production cycle are to provide assurance that transactions are properly executed and recorded, and that

Custody of work-in-process and of finished goods is properly maintained.

For effective internal control, which of the following functions should not be the responsibility of the CFO's department?

Data processing.

When the shipping department returns nonconforming goods to a vendor, the purchasing department should send to the accounting department the

Debit memo.

A client's materials purchasing cycle begins with requisitions from user departments and ends with the receipt of materials and the recognition of a liability. An auditor's primary objective in reviewing this cycle is to

Evaluate the reliability of information generated by the purchasing process.

In an entity under audit, employees have the opportunity to change their time worked after their timecards have been approved. This is an example of which of the following types of deficiency?

Design.

A large retail enterprise has established a policy that requires the paymaster to deliver all unclaimed payroll checks to the internal audit department at the end of each payroll distribution day. This policy was most likely adopted to

Detect any fictitious employee who may have been placed on the payroll.

Question: 40The primary audit objective regarding the purchasing of materials by the client is to

Determine the reliability of financial reporting by the purchasing function.

Appropriate control over obsolete materials requires that they be

Determined by an approved authority to be unusable for their normal purposes.

What is the advantage of a payroll computer system?

Direct deposit into employees' accounts.

Which control is not appropriate for property, plant, and equipment?

Disposal of fully depreciated assets.

Effective control over the cash payroll function would mandate which of the following?

Each employee should be asked to sign a receipt.

Which of the following is an advantage of electronic data interchange (EDI)?

Elimination of internal paper documents.

Which of the following statements is true concerning the security of messages in an electronic data interchange (EDI) system?

Encryption performed by physically secure hardware devices is more secure than encryption performed by software.

An administrative tool that aids in the control of the financial management function is a cash budget. The principal aim of a cash budget is to

Ensure that sufficient funds are available at all times to satisfy maturing liabilities.

For effective internal control, the accounts payable department ordinarily should

Establish the agreement of the vendor's invoice with the receiving report and purchase order.

An essential procedural control to ensure the accuracy of the recorded inventory quantities is

Establishing a cutoff for goods received and shipped.

An auditor's tests of controls over the issuance of raw materials to production would most likely include

Examining materials requisitions and reperforming client controls designed to process and record issuances.

Before sending or receiving EDI messages, a company should

Execute a trading partner agreement with each of its customers and suppliers.

10Which of the following departments most likely would approve changes in pay rates and deductions from employee salaries?

Human resources.

In a review of an EDI application using a third-party service provider, the auditor shouldEnsure encryption keys meet ISO standardsDetermine whether an independent review of the service provider's operation has been conductedVerify that only public-switched data networks are used by the service providerVerify that the service provider's contracts include necessary clauses, such as the right to audit

II and IV.

Which of the following would an auditor ordinarily consider the greatest risk regarding an entity's use of electronic data interchange (EDI)?

Improper distribution of EDI transactions.

To strengthen internal control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic

Inspection of equipment and reconciliation with accounting records.

Internal control over inventories is important for all of the following reasons except

Inventories are the most liquid asset.

Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by an internal control activity that provides for

Investigation of variances within a formal budgeting system.

In testing controls over cash disbursements, an auditor most likely would determine that the person who signs checks also

Is responsible for mailing the checks.

Which of the following questions would not be appropriate for an internal control questionnaire concerning inventory?

Is the storeroom located in close proximity to the shipping department?

A purchasing agent places an order for inventory whenever a requisition is received from the warehouse. The warehouse clerk issues requisitions based on periodic physical counts because no perpetual records are maintained. Numerous duplicate orders have been placed for goods previously ordered but not received. To prevent this excess ordering, the firm should

Keep an adequate record of open purchase orders and review it before ordering.

In a well-designed internal control system, the same employee may be permitted to

Mail signed checks and also cancel supporting documents.

Which of the following is an operating control over the staffing function?

Making background checks on all new hires.

A receiving department receives copies of purchase orders for use in identifying and recording inventory receipts. The purchase orders list the name of the vendor and the quantities of the materials ordered. A possible error that this system could allow is

Overpayment for partial deliveries.

Matthews Corp. has changed from a system of recording time worked on time clock cards to a computerized payroll system in which employees record time in and out with magnetic cards. The computer system automatically updates all payroll records. Because of this change

Part of the audit trail is altered.

Propex Corporation uses a voucher register and does not record invoices in a subsidiary ledger. Propex will probably benefit most from the additional cost of maintaining an accounts payable subsidiary ledger if

Partial payments to vendors are continuously made in the ordinary course of business.

Which of the following situations represents an internal control weakness in the payroll department?

Paychecks are distributed by the employees' immediate supervisors.

In a payroll computer system, data from what file is matched periodically with wage rate and other information to calculate payroll?

Payroll master file.

The sampling unit in a test of controls pertaining to the occurrence of payroll transactions ordinarily is a(n)

Payroll register entry.

In manufacturing environments, employees are often required to use time cards and job time tickets. Which is the false statement related to the use of these documents?

Payroll should be prepared from job time tickets.

Which of the following internal control activities most likely would be used to maintain accurate inventory records?

Periodic inventory counts are used to adjust the perpetual inventory records

Which of the following internal control activities most likely justifies reducing the assessment of the risks of material misstatement for plant and equipment acquisitions?

Periodic physical inspection of plant and equipment by the internal audit staff.

Many entities use the Internet as a network to transmit electronic data interchange (EDI) transactions. An advantage of using the Internet for electronic commerce rather than a traditional value-added network (VAN) is that the Internet

Permits EDI transactions to be sent to trading partners as transactions occur.

Which of the following controls most likely would assist in reducing the risks of material misstatement related to the existence or occurrence of manufacturing transactions?

Perpetual inventory records are independently compared with goods on hand.

In a purchases-payables computer system, control activities implemented to ensure proper input include

Preformatted screens.

Which of the following statements is correct concerning internal control in an electronic data interchange (EDI) system?

Preventive controls generally are more important than detective controls in EDI systems.

What information would the auditor expect to find in the data dictionary that would assist in a payroll application audit?

Programs that access the data.

Reduced levels in the inventory master file result in transmission of a purchase requisition to the relevant purchasing staff. Once this requisition has been approved, the

Purchase order program prints the purchase order for mailing to the vendor.

Which of the following controls is most effective in providing assurance that recorded purchases are free of material errors?

Purchase orders, receiving reports, and vendors' invoices are independently matched in preparing vouchers.

In a purchases-payables computer system, a purchase order is created after which document has been processed?

Purchase requisition.

Your objective is to determine that nonrecurring purchases, initiated by various user organizations, have been properly authorized. If all purchases are made through the purchasing department, to which of the following documents should you vouch purchases?

Purchase requisitions.

Question: 37For several years a client's physical inventory count has been lower than what was shown on the books at the time of the count, and downward adjustments of the inventory account have been required. Contributing to the inventory problem could be material weaknesses in internal control that led to the failure to record some

Purchases returned to vendors.

The manager of the production department is concerned that employees have worked too many hours. The company allows full-time employees to work only 40 hours in a normal work week. The control that identifies excess hours is a(n)

Reasonableness test.

Internal control is strengthened when the quantity of merchandise ordered is omitted from the copy of the purchase order sent to the

Receiving department.

Which of the following internal control activities most likely addresses the completeness assertion for inventory?

Receiving reports are prenumbered and periodically reconciled.

In a properly designed internal control system, the same employee most likely would match vendors' invoices with receiving reports and also

Recompute the calculations on vendors' invoices.

Question: 63In a purchases-payables computer system, access logs do which of the following?

Record transactions.

Question: 62Which of the following is usually a benefit of using electronic funds transfer for international cash transactions?

Reduction of the frequency of data entry errors.

Under which of the following circumstances would an auditor be most likely to intensify an audit of a $500 imprest petty cash fund?

Reimbursement occurs twice each week.

Question: 38If internal control is properly designed, the same employee may be permitted to

Sign checks and also cancel supporting documents.

An effective control that protects against the preparation of improper or inaccurate disbursements is to require that all checks be

Signed by an officer after necessary supporting evidence has been examined.

Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity's financial statements?

Significant differences between the physical inventory count and the accounting records are not investigated.

Mailing disbursement checks and remittance advices should be controlled by the employee who

Signs the checks last.

To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is

Stamped "paid" by the check signer.

An internal auditor is reviewing the company's policy regarding investing in financial derivatives. The auditor would normally expect to find all of the following in the policy except a

Statement requiring board review of each transaction because of the risk involved in such transactions.

Fraudulent use of corporate credit cards will be minimized by which of the following controls?

Subjecting credit card charges to the same expense controls as those used on regular company expense forms.

Based on observations made during an audit, the auditor should discuss with management the effectiveness of the company's controls that protect against the purchase of

Supplies individually ordered, without considering possible volume discounts.

Which of the following observations made during the preliminary survey of a local department store's disbursement cycle reflects a control strength?

The CFO's office prepares checks for suppliers based on vouchers prepared by the accounts payable department.

Which of the following describes a weakness in accounts payable procedures?

The accounts payable manager issues purchase orders.

A purchasing agent searches the inventory master file for what information relevant to a purchase?

The approved vendor and the economic order quantity.

Question: 50The procedure that best discourages the resubmission of vendor invoices after they have been paid is

The cancelation of vouchers by CFO personnel.

Which of the following controls should prevent an invoice for the purchase of merchandise from being paid twice?

The check signer reviews and cancels the voucher packets.

Which of the following events occurring in the year under audit would most likely indicate that internal controls utilized in previous years may be inadequate in the year under audit?

The chief financial officer waived approvals on all checks to one vendor to expedite payment.

The client has equity securities classified as available for sale. The auditor is most concerned about controls related to

The determination of the fair value measurements of the securities.

What is a possible consequence of an employee's being able to visit the safe-deposit box unaccompanied?

The employee could pledge corporate investments as security for a short-term personal bank loan.

Which of the following activities most likely would be considered a weakness in an entity's internal control over payroll?

The employee who distributes payroll checks returns unclaimed payroll checks to the payroll department.

In which of the following situations would it be most important to have employees sign for their pay?

The firm uses a cash payment payroll function

Question: 13Which of the following is a control activity that most likely could help prevent employee payroll fraud?

The human resources department promptly sends employee termination notices to the payroll supervisor.

Question: 33Operating control of the check-signing machine normally should be the responsibility of the

Treasury function.

When an entity uses a trust company as custodian of its trading securities, the possibility of concealing fraud most likely will be reduced if the

Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records.

Which of the following controls would a company most likely use to safeguard marketable securities when an independent trust agent is not employed?

Two company officials have joint control of marketable securities, which are kept in a bank safe-deposit box.