Topic 7- CPA

According to PCAOB standards which of the following is a control deficiency that is at least a significant deficiency? a. Weak controls over the selection and application of accounting principles. b. Weak controls over safeguarding of inventories. c. Weak controls over bank reconciliations. d. Weak controls over authorization of payroll.

A Option "a" is correct because PCAOB standards identify lack of controls in this area as being at least a significant deficiency. Option "b" is incorrect because a lack of controls in this area is not identified as being at least a significant deficiency. Option "c" is incorrect because a lack of controls in this area is not identified as being at least a significant deficiency. Option "d" is incorrect because a lack of controls in this area is not identified as being at least a significant deficiency.

An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using a. A bank lockbox system. b. Employee fidelity bonds. c. Independently prepared mailroom prelists. d. Daily check summaries.

A Option "a" is correct because a bank lockbox system will result in collection of receivables by a bank, thereby eliminating employee contact with the cash. Option "b" is incorrect because while fidelity bonds do provide control, they are not generally as effective as a lockbox system since employees still handle cash. Option "c" is incorrect because independently prepared mailroom prelists are a less effective control than is a lockbox system—cash may still be misappropriated. Option "d" is incorrect because a summary of checks received daily is unlikely to be as effective as a lockbox system.

A client erroneously recorded a large purchase twice. Which of the following controls would be most likely to detect this error in a timely and efficient manner? a. Footing the purchases journal. b. Reconciling vendors' monthly statements with subsidiary payable ledger accounts. c. Tracing totals from the purchases journal to the ledger accounts. d. Sending written quarterly confirmations to all vendors.

B Option "a" is incorrect because footing the purchases journal is unlikely to detect the error since the journal's totals will have been mathematically accumulated properly. Option "b" is correct because reconciling the vendors' monthly statements with the subsidiary ledger for payables should disclose a difference in the month following the error. Option "c" is incorrect because the incorrect total will be reflected in both the purchases journal and in the ledger accounts. Thus, the error would not be detected by this internal control measure. Option "d" is incorrect because such confirmations will only detect the error quarterly which is neither timely nor efficient.

Which of the following is ordinarily considered a test of a control? a. Send confirmation letters to banks. b. Count and list cash on hand. c. Examine signatures on checks. d. Test the clerical accuracy of inventory listings as of the balance sheet date.

C Option "a" is incorrect because sending confirmation letters to banks helps substantiate the existence of cash at year end. Therefore, this is a substantive rather than a test of a control. Option "b" is incorrect because a cash count is a test of transactions and balances which is a substantive test rather than a test of a control. Option "c" is correct because tests of controls are directed toward the effectiveness of the design or operation of controls. In this case the control procedure is to determine that only authorized persons sign checks. Option "d" is incorrect because testing the clerical accuracy of inventory listings as of the balance sheet date is primarily a substantive test to determine whether inventory listings are accurately compiled

When preparing a record of a client's internal control, the independent auditor sometimes uses a flowchart, which can best be described as a a. Pictorial presentation of the flow of instructions in a client's internal computer system. b. Diagram which clearly indicates an organization's internal reporting structure. c. Graphic illustration of the flow of operations which is used to replace the auditor's internal control questionnaire. d. Symbolic representation of a system or series of sequential processes.

D Option "a" is incorrect because it refers to processing within the computer rather than the entire internal control structure. Option "b" is incorrect because it deals with reporting structure rather than with internal control. Option "c" is incorrect because an internal control flowchart depicts the organization and recordkeeping system rather than a flow of operations. Option "d" is correct because the flowchart prepared during the consideration of internal control is a symbolic representation of a system of sequential processes. It can be used in lieu of the internal control questionnaire which has the same purpose (i.e., to prepare a record of prescribed internal control).