SU 7 Questions Missed
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. A manufacturing organization. B. A retailing organization. C. A wholesaling organization. D. A service organization.
A. A manufacturer is characteristically labor intensive with a high frequency and volume of payroll transactions requiring classification into direct labor and overhead. Payroll information is important in the costing of work-in-process, finished goods inventory, and cost of goods sold.
Before sending or receiving EDI messages, a company should A. Execute a trading partner agreement with each of its customers and suppliers. B. Reduce inventory levels in anticipation of receiving shipments. C. Demand that all its suppliers implement EDI capabilities. D. Evaluate the effectiveness of its use of EDI transmissions.
A. Before sending or receiving EDI messages, a company should execute a trading partner agreement with its customers and suppliers. For example, all parties should understand (1) their responsibilities, (2) the messages each will initiate, (3) how they will interpret messages, (4) the means of authenticating and verifying the completeness and accuracy of messages, (5) the moment when the contract between the parties is effective, and (6) the required level of security.
An effective control that protects against the preparation of improper or inaccurate disbursements is to require that all checks be A. Signed by an officer after necessary supporting evidence has been examined. B. Reviewed by the CFO before mailing. C. Sequentially numbered and accounted for by internal auditors. D. Perforated or otherwise effectively canceled when they are returned with the bank statement.
A. Checks for disbursements should be signed by an officer, normally the CFO, after necessary supporting evidence has been examined. The CFO should also be responsible for canceling the supporting documentation and mailing the signed checks and remittance advices. The documentation typically consists of a payment voucher, purchase order, receiving report, and a vendor invoice.
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? A. Checks are signed by only one person. B. Signed checks are distributed by the controller to approved payees. C. CFO fails to establish that the names and addresses of check payees are bona fide. D. Cash disbursements are made directly out of cash receipts.
A. The auditor should be least concerned that the checks are signed by only one person if that person is not assigned other incompatible functions, and proper documentation is required before signing.
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. To provide assurance that voucher documentation is not used to support a duplicate payment, the individual responsible for cash disbursements should examine the voucher and determine the appropriateness of the supporting documents, sign the check, cancel the payment documents, and mail the check to the vendor.
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 A. The price differences that exist among various vendors who can supply the merchandise at the required time. B. The borrowing cost of money (interest) that the company must incur as a consequence of acquiring the merchandise. C. The trade-off between the cost of owning and storing excess merchandise and the risk of loss by not having merchandise on hand. D. The flow of funds within the company that indicates when money is available to pay for merchandise.
C. Effective purchasing departments should use the basic economic order quantity (EOQ) calculation that minimizes both the cost of owning and storing excess merchandise and the cost of ordering merchandise (and thus the timing of ordering). This model assumes the demand is constant and does not consider the cost of stockouts. Probabilistic models have been developed to incorporate the risk of loss (cost) by not having merchandise on hand.
Organizations that move to implement EDI often use value-added networks (VANs). Which of the following would not normally be performed by a VAN? A. Store electronic purchase orders of one organization to be accessed by another organization. B. Provide common interfaces across organizations thereby eliminating the need for one organization to establish direct computer communication with a trading partner. C. Maintain a log of all transactions of an organization with its trading partner. D. Provide translations from clients' computer applications to a standard protocol used for EDI communication.
D. Companies must purchase their own software to translate their data to a national standard protocol for EDI purposes, either ANSI X.12 in the U.S. or EDIFACT in Europe and most of the rest of the world. Once the data are in the standard format, the VAN handles all aspects of the communication. VANs are privately owned telecommunications carriers that sell capacity to outside users. Among other things, a VAN provides a mailbox service permitting EDI messages to be sent, sorted, and held until needed in the recipient's computer system.