Auditing Chapter 7

Which of the following controls would an entity most likely use in safeguarding against the loss of trading securities? A. An independent trust company that has no direct contact with the employees who have record-keeping responsibilities has possession of the securities B. The internal auditor verifies the trading securities in the entity's safe each year on the balance sheet due C. The independent auditor traces all purchases and sales of trading securities through the subsidiary ledgers to the general ledger D. A designated member of the board of directors controls the securities in a bank safe-deposit box

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

The purpose of segregating the duties of hiring personnel and distributing payroll checks is to segregate the A. Authorization of transactions from the custody of related assets B. Operational responsibility from the record-keeping responsibility C. Human resources function from the controllership function D. Administrative controls from the internal accounting controls

A. Authorization of transactions from the custody of related assets

In meeting the control objective of safeguarding of assets, which department should be responsible for A. Distribution of Paychecks (CFO) Custody of Unclaimed Paychecks (CFO) B. Distribution of Paychecks (Payroll) Custody of Unclaimed Paychecks (CFO) C. Distribution of Paychecks (CFO) Custody of Unclaimed Paychecks (Payroll) D. Distribution of Paychecks (Payroll) Custody of Unclaimed Paychecks (Payroll)

A. Distribution of Paychecks (CFO) Custody of Unclaimed Paychecks (CFO)

Which of the following departments most likely would approve changes in pay rates and deductions from employee salaries? A. Human resources B. CFO C. Controller D. Payroll

A. Human resources

In a well-designed internal control system, the same employee may be permitted to A. Mail signed checks and also cancel supporting documents B. Prepare receiving reports and also approve purchase orders C. Approve vouchers for payment and also have access to unused purchase orders D. Mail signed checks and also prepare bank reconciliations

A. Mail signed checks and also cancel supporting documents

In determining the effectiveness of an entity's policies and procedures relating to the existence or occurrence assertion for payroll transaction, an auditor most likely would inquire about and A. Observe the segregation of duties concerning human resources responsibilities and payroll disbursement B. Inspect evidence of accounting for renumbered payroll checks C. Recompute the payroll deductions for employee fringe benefits D. Verify the preparation of the monthly payroll account bank reconciliation

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

The sampling unit in a test of controls pertaining to the occurrence of payroll transactions ordinarily is a(n) A. Time clock card B. Employee Form W-2 C. Employee personnel record c

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

Which of the following internal control activities most likely justifies reducing the assessment of the risks of material misstatement for plant and equipment acquisitions? A. Periodic physical inspection of plant and equipment by the internal audit staff B. Comparison of current-year plant and equipment account balances with prior-year actual balances C. The review of renumbered purchase orders to detect unrecorded trade-ins D. Approval of periodic depreciation entries by a supervisor independent of the accounting department

A. 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 A. Permit EDI transactions to be sent to trading partners as transactions occur B. Automatically batches EDI transactions to multiple trading partners C. Possesses superior characteristics regarding disaster recovery D. Convert EDI transactions to a standard format without translation software

A. Permit 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? A. Perpetual inventory records are independently compared with goods on hand B. Forms used for direct materials requisitions are prenumbered and accounted for C. Finished goods are stored in locked limited-access warehouses D. Subsidiary ledgers are periodically reconciled with inventory control accounts

A. Perpetual inventory records are independently compared with goods on hand

Which of the following statements in correct concerning internal control in an electronic data interchange (EDI) system? A. Preventive controls generally are more important than detective controls in EDI systems B. Control objectives for EDI systems generally are different from the objectives for other information systems C. Internal controls in EDI systems rarely permit the risks of material misstatement to be assessed at an acceptably low level D. Internal controls related to the segregation of duties generally are the most important controls in EDI systems

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

Which of the following is a control activity that most likely could help prevent employee payroll fraud? A. The human resources department promptly sends employee termination notices to the payroll supervisor B. Employees who distribute payroll checks forward unclaimed payroll checks to the absent employees' supervisors C. Salary rates resulting from new hires are approved by the payroll supervisor D. Total hours used for determination of gross pay are calculated by the payroll supervisor

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

The authority to accept incoming goods in receiving should be based on a(n) A. Vendor's invoice B. Materials requisition C. Bill of lading D. Approved purchase order

D. Approved purchase order

Which of the following statements is true concerning the security of messages in an electronic data interchange (EDI) system? A. When confidentiality of data is the primary risk, message authentication is the preferred control rather than encryption B. Encryption performed by physically secure hardware devices is more secure than encryption performed by software C. Message authentication in EDI systems performs the same function as separation of duties in other information systems D. Security in the transaction phase in EDI systems is not necessary because problems at that level will usually be identified by the service provider

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

For effective internal control, the accounts payable department ordinarily should A. Obliterate the quantity ordered on the receiving department copy of the purchase order B. Establish the agreement of the vendor's invoice with the receiving report and purchase order C. Stamp, perforate, or otherwise cancel supporting documentation after payment is mailed D. Ascertain that each requisition is approved as to price, quantity, and quality by an authorized employee

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

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 A. A generalized computer audit program must be used B. Part of the audit trail is altered C. The potential for payroll-related fraud is diminished D. Transactions must be processed in batches

B. Part of the audit trail is altered

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 A. Supported by a vendor's invoice B. Stamped "paid" by the check signer C. Prenumbered and accounted for D. Approved for authorized purchases

B. Stamped "paid" by the check signer

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? A. Senior management verifies that securities in the bank safe-deposit box are registered in the entity's name B. The internal auditor compares the securities in the bank safe-deposit box with recorded investments C. The CFO vouches the acquisition of securities by comparing brokers' advices with canceled checks D. The controller compares the current market prices of recorded investments with the brokers' advices on file

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

Which of the following controls would a company most likely use to safeguard marketable securities when an independent trust agent is not employed? A. The investment committee of the board of directors periodically reviews the investment decisions delegated to the CFO B. Two company officials have joint control of marketable securities, which are kept in a bank safe-deposit box C. The internal auditor and the controller independently trace all purchases and sales of marketable securities from the subsidiary ledgers to the general ledger D. The chairman of the board verifies the marketable securities, which are kept in a bank safe-deposit box, each year on the balance sheet date

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

Which of the following activities most likely would detect whether payroll data were altered during processing? A. Monitoring authorized distribution of data control sheets B. Using test data to verify the performance of edit routines C. Examining source documents for approval by supervisors D. Segregating duties between approval of hardware and software specifications

B. Using test data to verify the performance of edit routines

In 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 A, Establish the validity of the account number B. Verify that the amount was entered accurately C. Verify the authorization of the disbursement D. Prevent the overpayment of the account

B. Verify that the amount was entered accurately

Which of the following situations most likely could lead to an embezzlement scheme? A. The accounts receivable bookkeeper receives a list of payments prepared by the cashier and personally makes entries in the customers' accounts receivable subsidiary ledger B. Each vendor invoice is matched with the related purchase order and receiving report by the vouchers payable clerk who personally approves the voucher for payment C. Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statement D. Vouchers and supporting documentation are examined and then canceled by the CFO who personally mails the checks to vendors

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

Which of the following is an essential element of the audit trail in an EDI system? A. Disaster recovery plans that ensure proper backup of files B. Encrypted hash totals that authenticate messages C. Activity logs that indicate failed transactions D. Hardware security modules that store sensitive data

C. Activity logs that indicate failed transactions

Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by an internal control activity that provides for A. Segregation of duties for employees in the accounts payable department B. Independent verification of invoices for disbursements recorded as equipment acquisitions C. Investigations of variances within a formal budgeting system D. Authorization by the board of directors of significant equipment acquisitions

C. Investigations of variances within a formal budgeting system

Which of he following is usually a benefit of using electronic funds transfer for international cash transactions? A. Improvement of the audit trail for cash receipts and disbursements B. Creation of self-monitoring access controls C. Reduction of the frequency of data entry errors D. Off-site storage of source documents for cash transactions

C. Reduction of the frequency of data entry errors

In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor most likely would A. Analyze the liquidity and turnover ratios of the inventory B. Perform analytical procedures designed to identify cost variances C. Review the entity's descriptions of inventory policies and procedures D. Perform test counts of inventory during the entity's physical count

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

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? A. The entity announced that the internal audit function would be eliminated after the balance sheet date B. The audit committee chairperson unexpectedly resigned during the year under audit C. The chief financial officer waved approvals on all checks to one vendor to expedite payment D. The frequency of accounts payable check runs was changed from biweekly to weekly

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

Which of the following activities performed by a department supervisor most likely would help in the prevention or detection of a payroll fraud? A. Distributing paychecks directly to department employees B. Setting the pay rate for departmental employees C. Hiring employees and authorizing them to be added to payroll D. Approving a summary of hours each employee worked during the pay period

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

Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable? A. Are assets that collateralize notes payable critically needed for the entity's continued existence B. Are two or more authorized signatures required on checks that repay notes payable? C. Are the proceeds from notes payable used for the purchase of concurrent assets? D. Are direct borrowings on notes payable authorized by the board of directors?

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

An auditor's tests of controls over the issuance of raw materials to production would most likely include A. Reconciling raw materials and work-in-progress perpetual inventory records to general ledger balances B. Inquiring of the custodian about the procedures followed when defective materials are received from vendors C. Observing that raw materials are stores in secure areas and that storeroom security is supervised by a responsible individual D. Examining materials requisitions and reperforming client controls designed to process and record issuances

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

In a well-designed internal control system, employees in the same department most likely would approve purchase orders, and also A. Reconcile the open invoice file B. Inspect goods upon receipt C. Authorize requisitions of goods D. Negotiate terms with vendors

D. Negotiate terms with vendors

Which of the following internal control activities most likely would be used to maintain accurate inventory records? A. Perpetual inventory records are periodically compared with the current cost of individual inventory items B. A just-in-time inventory ordering system keeps inventory levels to a desired minimum C. Requisitions, receiving reports, and purchase orders are independently matched before payment is approved. D. Periodic inventory counts are used to adjust the perpetual inventory records

D. Periodic inventory counts are used to adjust the perpetual inventory records

Which of the following controls is most effective in providing assurance that recorded purchases are free of material errors? A. The receiving department compares the quantity ordered on purchase orders with the quantity received on receiving reports B. Vendors' invoices are compared with purchase orders by an employee who is independent of the receiving department C. Receiving reports require the signature of the individual who authorized the purchase D. Purchase orders, receiving reports, and vendors' invoices are independently matched in preparing vouchers

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

Which of the following describes a weakness in accounts payable procedures? A. The accounts payable clerk files invoices and supporting documentation after payment B. The accounts payable clerk manually verifies arithmetic on the vendor invoice C. Receiving reports require the signature of the individual who authorized the purchase D. Purchase orders, receiving reports, and vendors' invoices are independently matched in preparing vouchers

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