Module 3 - Understanding Internal Control and Assessing Control Risk [WILEY]

Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal control?

a. Incompatible duties.

b. Management override.

c. Mistakes in judgment.

d. Collusion among employees.

a. Incompatible duties.

When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that

a. Internal control may be ineffective due to mistakes in judgment and personal carelessness.

b. Adequate safeguards over access to assets and records should permit an entity to maintain proper accountability.

c. Establishing and maintaining internal control is an important responsibility of management.

d. The cost of an entity's internal control should not exceed the benefits expected to be derived.

d. The cost of an entity's internal control should not exceed the benefits expected to be derived.

Proper segregation of functional responsibilities calls for separation of the functions of

a. Authorization, execution, and payment.

b. Authorization, recording, and custody.

c. Custody, execution, and reporting.

d. Authorization, payment, and recording

b. Authorization, recording, and custody.

An entity's ongoing monitoring activities often include

a. Periodic audits by the audit committee.

b. Reviewing the purchasing function.

c. The audit of the annual financial statements.

d. Control risk assessment in conjunction with quarterly reviews.

b. Reviewing the purchasing function.

The overall attitude and awareness of an entity's board of directors concerning the importance of internal control usually is reflected in its

a. Computer-based controls.

b. System of segregation of duties.

c. Control environment.

d. Safeguards over access to assets.

c. Control environment.

Management philosophy and operating style most likely would have a significant influence on an entity's control environment when

a. The internal auditor reports directly to management.

b. Management is dominated by one individual.

c. Accurate management job descriptions delineate specific duties.

d. The audit committee actively oversees the financial reporting process.

b. Management is dominated by one individual.

Which of the following factors are included in an entity's control environment?

-Audit committee

-Integrity and ethical values

-Organizational

a. Yes Yes No

b. Yes No Yes

c. No Yes Yes

d. Yes Yes Yes

d. Yes Yes Yes

Which of the following is not a component of an entity's internal control?

a. Control risk.

b. Control activities.

c. Monitoring.

d. Control environment.

a. Control risk.

Which of the following is a provision of the Foreign Corrupt Practices Act?

a. It is a criminal offense for an auditor to fail to detect and report a bribe paid by an American business entity to a foreign official for the purpose of obtaining business.

b. The auditor's detection of illegal acts committed by officials of the auditor's publicly held client in conjunction with foreign officials should be reported to the Enforcement Division of the Securities and Exchange Commission.

c. If the auditor of a publicly held company concludes that the effects on the financial statements of a bribe given to a foreign official are not susceptible to reasonable estimation, the auditor's report should be modified.

d. Every publicly held company must devise, document, and maintain internal control sufficient to provide reasonable assurances that internal control objectives are met

d. Every publicly held company must devise, document, and maintain internal control sufficient to provide reasonable assurances that internal control objectives are met

An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet without recording the purchase or receipt of the merchandise. When vendors' invoices arrive, one of the employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all

a. Cash disbursements.

b. Approved vouchers.

c. Receiving reports.

d. Vendors' invoices.

a. Cash disbursements.

Which of the following procedures most likely would provide an auditor with evidence about whether an entity's internal control activities are suitably designed to prevent or detect material misstatements?

a. Reperforming the activities for a sample of transactions.

b. Performing analytical procedures using data aggregated at a high level.

c. Vouching a sample of transactions directly related to the activities.

d. Observing the entity's personnel applying the activities.

d. Observing the entity's personnel applying the activities.

Which statement is correct concerning the relevance of various types of controls to a financial audit?

a. An auditor may ordinarily ignore a consideration of controls when a substantive audit approach is taken.

b. Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit, but other controls may also be relevant.

c. Controls over safeguarding of assets and liabilities are of primary importance, while controls over the reliability of financial reporting may also be relevant.

d. All controls are ordinarily relevant to an audit.

b. Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit, but other controls may also be relevant.

In an audit of financial statements in accordance with generally accepted auditing standards, an auditor is required to

a. Document the auditor's understanding of the entity's internal control.

b. Search for significant deficiencies in the operation of internal control.

c. Perform tests of controls to evaluate the effectiveness of the entity's internal control.

d. Determine whether controls are suitably designed to prevent or detect material misstatements.

a. Document the auditor's understanding of the entity's internal control.

In obtaining an understanding of an entity's internal control relevant to audit planning, an auditor is required to obtain knowledge about the

a. Design of the controls pertaining to internal control components.

b. Effectiveness of controls that have been implemented.

c. Consistency with which controls are currently being applied.

d. Controls related to each principal transaction class and account balance.

a. Design of the controls pertaining to internal control components.

An auditor should obtain suffi cient knowledge of an entity's information system to understand the

a. Safeguards used to limit access to computer facilities.

b. Process used to prepare significant accounting estimates.

c. Controls used to assure proper authorization of transactions.

d. Controls used to detect the concealment of fraud

b. Process used to prepare significant accounting estimates.

When obtaining an understanding of an entity's internal control, an auditor should concentrate on the substance of controls rather than their form because

a. The controls may be operating effectively but may not be documented.

b. Management may establish appropriate controls but not enforce compliance with them.

c. The controls may be so inappropriate that no reliance is contemplated by the auditor.

d. Management may implement controls whose costs exceed their benefits.

b. Management may establish appropriate controls but not enforce compliance with them.

Decision tables differ from program flowcharts in that decision tables emphasize

a. Ease of manageability for complex programs.

b. Logical relationships among conditions and actions.

c. Cost benefit factors justifying the program.

d. The sequence in which operations are performed

b. Logical relationships among conditions and actions.

During the consideration of internal control in a fi nancial statement audit, an auditor is not obligated to

a. Search for significant deficiencies in the operation of the internal control.

b. Understand the internal control and the information system.

c. Determine whether the control activities relevant to audit planning have been implemented.

d. Perform procedures to understand the design of internal control.

a. Search for significant deficiencies in the operation of the internal control.

A primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with

a. Knowledge necessary to assess the risks of material misstatements.

b. Evidence to use in assessing inherent risk.

c. A basis for modifying tests of controls.

d. An evaluation of the consistency of application of management's policies.

a. Knowledge necessary to assess the risks of material misstatements.

Which of the following statements regarding auditor documentation of the client's internal control is correct?

a. Documentation must include flowcharts.

b. Documentation must include procedural write-ups.

c. No documentation is necessary although it is desirable.

d. No one particular form of documentation is necessary, and the extent of documentation may vary.

d. No one particular form of documentation is necessary, and the extent of documentation may vary.

In obtaining an understanding of an entity's internal control, an auditor is required to obtain knowledge about the

-Operating effectiveness of controls

-Design of controls

a. Yes Yes

b. No Yes

c. Yes No

d. No No

b. No Yes

Which of the following may not be required on a particular audit of a nonissuer (nonpublic) company?

a. Risk assessment procedures.

b. Tests of controls.

c. Substantive procedures.

d. Analytical procedures.

b. Tests of controls.

Control risk should be assessed in terms of

a. Specific controls.

b. Types of potential fraud.

c. Financial statement assertions.

d. Control environment factors.

c. Financial statement assertions.

After assessing control risk, an auditor desires to seek a further reduction in the assessed level of control risk. At this time, the auditor would consider whether

a. It would be efficient to obtain an understanding of the entity's information system.

b. The entity's controls have been implemented.

c. The entity's controls pertain to any financial statement assertions.

d. Additional audit evidence sufficient to support a further reduction is likely to be available.

d. Additional audit evidence sufficient to support a further reduction is likely to be available.

Assessing control risk at a low level most likely would involve

a. Performing more extensive substantive tests with larger sample sizes than originally planned.

b. Reducing inherent risk for most of the assertions relevant to significant account balances.

c. Changing the timing of substantive tests by omitting interim-date testing and performing the tests at year-end.

d. Identifying specific controls relevant to specific assertions.

d. Identifying specific controls relevant to specific assertions.

An auditor assesses control risk because it

a. Is relevant to the auditor's understanding of the control environment.

b. Provides assurance that the auditor's materiality levels are appropriate.

c. Indicates to the auditor where inherent risk may be the greatest.

d. Affects the level of detection risk that the auditor may accept.

d. Affects the level of detection risk that the auditor may accept.

When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the

a. Extent of tests of controls.

b. Level of detection risk.

c. Extent of tests of details.

d. Level of inherent risk.

c. Extent of tests of details.

An auditor uses the knowledge provided by the understanding of internal control and the assessed level of the risk of material misstatement primarily to

a. Determine whether procedures and records concerning the safeguarding of assets are reliable.

b. Ascertain whether the opportunities to allow any person to both perpetrate and conceal fraud are minimized.

c. Modify the initial assessments of inherent risk and preliminary judgments about materiality levels.

d. Determine the nature, timing, and extent of substantive tests for financial statement assertions.

d. Determine the nature, timing, and extent of substantive tests for financial statement assertions.

An auditor may compensate for a weakness in internal control by increasing the

a. Level of detection risk.

b. Extent of tests of controls.

c. Preliminary judgment about audit risk.

d. Extent of analytical procedures.

d. Extent of analytical procedures.

Which of the following statements is correct concerning an auditor's assessment of control risk?

a. Assessing control risk may be performed concurrently during an audit with obtaining an understanding of the entity's internal control.

b. Evidence about the operation of internal control in prior audits may not be considered during the current year's assessment of control risk.

c. The basis for an auditor's conclusions about the assessed level of control risk need not be documented unless control risk is assessed at the maximum level.

d. The lower the assessed level of control risk, the less assurance the evidence must provide that the control procedures are operating effectively

a. Assessing control risk may be performed concurrently during an audit with obtaining an understanding of the entity's internal control.

Regardless of the assessed level of control risk, an auditor would perform some

a. Tests of controls to determine the effectiveness of internal control policies.

b. Analytical procedures to verify the design of internal control.

c. Substantive tests to restrict detection risk for significant transaction classes.

d. Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk

c. Substantive tests to restrict detection risk for significant transaction classes.

How frequently must an auditor test operating effectiveness of controls that appear to function as they have in past years and on which the auditor wishes to rely in the current year?

a. Monthly.

b. Each audit.

c. At least every second audit.

d. At least every third audit.

d. At least every third audit.

Before assessing control risk at a level lower than the maximum, the auditor obtains reasonable assurance that controls are in use and operating effectively. This assurance is most likely obtained in part by

a. Preparing flowcharts.

b. Performing substantive tests.

c. Analyzing tests of trends and ratios.

d. Inspection of documents.

d. Inspection of documents.

An auditor generally tests the segregation of duties related to inventory by

a. Personal inquiry and observation.

b. Test counts and cutoff procedures.

c. Analytical procedures and invoice recomputation.

d. Document inspection and reconciliation.

a. Personal inquiry and observation.

The objective of tests of details of transactions performed as tests of controls is to

a. Monitor the design and use of entity documents such as prenumbered shipping forms.

b. Determine whether controls have been implemented.

c. Detect material misstatements in the account balances of the financial statements.

d. Evaluate whether controls operated effectively.

d. Evaluate whether controls operated effectively.

After obtaining an understanding of internal control and assessing the risk of material misstatement, an auditor decided to perform tests of controls. The auditor most likely decided that

a. It would be efficient to perform tests of controls that would result in a reduction in planned substantive tests.

b. Additional evidence to support a further reduction in the risk of material misstatement is not available.

c. An increase in the assessed level of the risk of material misstatement is justified for certain financial statement assertions.

d. There were many internal control weaknesses that could allow misstatements to enter the accounting system

a. It would be efficient to perform tests of controls that would result in a reduction in planned substantive tests.

In assessing control risk, an auditor ordinarily selects from a variety of techniques, including

a. Inquiry and analytical procedures.

b. Reperformance and observation.

c. Comparison and confirmation.

d. Inspection and verification.

b. Reperformance and observation.

Which of the following types of evidence would an auditor most likely examine to determine whether controls are operating as designed?

a. Confirmations of receivables verifying account balances.

b. Letters of representations corroborating inventory pricing.

c. Attorneys' responses to the auditor's inquiries.

d. Client records documenting the use of computer programs.

d. Client records documenting the use of computer programs.

Which of the following is not a step in an auditor's assessment of control risk?

a. Evaluate the effectiveness of internal control with tests of controls.

b. Obtain an understanding of the entity's information system and control environment.

c. Perform tests of details of transactions to detect material misstatements in the financial statements.

d. Consider whether controls can have a pervasive effect on financial statement assertions

c. Perform tests of details of transactions to detect material misstatements in the financial statements.

To obtain audit evidence about control risk, an auditor selects tests from a variety of techniques including

a. Inquiry.

b. Analytical procedures.

c. Calculation.

d. Confirmation.

a. Inquiry.

Which of the following is least likely to be evidence the auditor examines to determine whether controls are operating effectively?

a. Records documenting usage of computer programs.

b. Canceled supporting documents.

c. Confirmations of accounts receivable.

d. Signatures on authorization forms.

c. Confirmations of accounts receivable.

Which of the following procedures concerning accounts receivable would an auditor most likely perform to obtain evidence in support of an assessed level of control risk below the maximum?

a. Observing an entity's employee prepare the schedule of past due accounts receivable.

b. Sending confirmation requests to an entity's principal customers to verify the existence of accounts receivable.

c. Inspecting an entity's analysis of accounts receivable for unusual balances.

d. Comparing an entity's uncollectible accounts expense to actual uncollectible accounts receivable.

a. Observing an entity's employee prepare the schedule of past due accounts receivable.

Which of the following procedures would an auditor most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet?

a. Observe the consistency of the employees' use of cash registers and tapes.

b. Inquire about employees' access to recorded but undeposited cash.

c. Trace deposits in the cash receipts journal to the cash balance in the general ledger.

d. Compare the cash balance in the general ledger with the bank confi rmation request.

a. Observe the consistency of the employees' use of cash registers and tapes.

Sound internal control dictates that immediately upon receiving checks from customers by mail, a responsible employee should

a. Add the checks to the daily cash summary.

b. Verify that each check is supported by a prenumbered sales invoice.

c. Prepare a duplicate listing of checks received.

d. Record the checks in the cash receipts journal.

c. Prepare a duplicate listing of checks received.

Tracing shipping documents to prenumbered sales invoices provides evidence that

a. No duplicate shipments or billings occurred.

b. Shipments to customers were properly invoiced.

c. All goods ordered by customers were shipped.

d. All prenumbered sales invoices were accounted for

b. Shipments to customers were properly invoiced.

Which of the following controls most likely would reduce the risk of diversion of customer receipts by an entity's employees?

a. A bank lockbox system.

b. Prenumbered remittance advices.

c. Monthly bank reconciliations.

d. Daily deposit of cash receipts.

a. A bank lockbox system.

An auditor suspects that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the

a. Dates checks are deposited per bank statements with the dates remittance credits are recorded.

b. Daily cash summaries with the sums of the cash receipts journal entries.

c. Individual bank deposit slips with the details of the monthly bank statements.

d. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually recorded.

a. Dates checks are deposited per bank statements with the dates remittance credits are recorded.

Upon receipt of customers' checks in the mailroom, a responsible employee should prepare a remittance listing that is forwarded to the cashier. A copy of the listing should be sent to the

a. Internal auditor to investigate the listing for unusual transactions.

b. Treasurer to compare the listing with the monthly bank statement.

c. Accounts receivable bookkeeper to update the subsidiary accounts receivable records.

d. Entity's bank to compare the listing with the cashier's deposit slip.

c. Accounts receivable bookkeeper to update the subsidiary accounts receivable records.

Which of the following procedures most likely would not be a control designed to reduce the risk of misstatements in the billing process?

a. Comparing control totals for shipping documents with corresponding totals for sales invoices.

b. Using computer programmed controls on the pricing and mathematical accuracy of sales invoices.

c. Matching shipping documents with approved sales orders before invoice preparation.

d. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.

d. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.

Which of the following audit procedures would an auditor most likely perform to test controls relating to management's assertion concerning the completeness of sales transactions?

a. Verify that extensions and footings on the entity's sales invoices and monthly customer statements have been recomputed.

b. Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal.

c. Compare the invoiced prices on prenumbered sales invoices to the entity's authorized price list.

d. Inquire about the entity's credit granting policies and the consistent application of credit checks.

b. Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal.

Which of the following controls most likely would assure that all billed sales are correctly posted to the accounts receivable ledger?

a. Daily sales summaries are compared to daily postings to the accounts receivable ledger.

b. Each sales invoice is supported by a prenumbered shipping document.

c. The accounts receivable ledger is reconciled daily to the control account in the general ledger.

d. Each shipment on credit is supported by a prenumbered sales invoice.

a. Daily sales summaries are compared to daily postings to the accounts receivable ledger.

An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion of

a. Valuation or allocation.

b. Completeness.

c. Existence or occurrence.

d. Rights and obligations.

a. Valuation or allocation.

Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded?

a. The billing department supervisor sends copies of approved sales orders to the credit department for comparison to authorized credit limits and current customer account balances.

b. The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account monthly.

c. The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers.

d. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

d. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs?

a. Employees responsible for authorizing sales and bad debt write-offs are denied access to cash.

b. Shipping documents and sales invoices are matched by an employee who does not have authority to write off bad debts.

c. Employees involved in the credit-granting function are separated from the sales function.

d. Subsidiary accounts receivable records are reconciled to the control account by an employee independent of the authorization of credit

c. Employees involved in the credit-granting function are separated from the sales function.

Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments?

a. Accounts receivable.

b. Credit.

c. Accounts payable.

d. Treasurer

d. Treasurer

Employers bond employees who handle cash receipts because fidelity bonds reduce the possibility of employing dishonest individuals and

a. Protect employees who make unintentional misstatements from possible monetary damages resulting from their misstatements.

b. Deter dishonesty by making employees aware that insurance companies may investigate and prosecute dishonest acts.

c. Facilitate an independent monitoring of the receiving and depositing of cash receipts.

d. Force employees in positions of trust to take periodic vacations and rotate their assigned duties.

b. Deter dishonesty by making employees aware that insurance companies may investigate and prosecute dishonest acts.

During the consideration of a small business client's internal control, the auditor discovered that the accounts receivable clerk approves credit memos and has access to cash. Which of the following controls would be most effective in offsetting this weakness?

a. The owner reviews errors in billings to customers and postings to the subsidiary ledger.

b. The controller receives the monthly bank statement directly and reconciles the checking accounts.

c. The owner reviews credit memos after they are recorded.

d. The controller reconciles the total of the detail accounts receivable accounts to the amount shown in the ledger.

c. The owner reviews credit memos after they are recorded.

When a customer fails to include a remittance advice with a payment, it is common practice for the person opening the mail to prepare one. Consequently, mail should be opened by which of the following four company employees?

a. Credit manager.

b. Receptionist.

c. Sales manager.

d. Accounts receivable clerk

b. Receptionist.

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.

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

a. Reviews the monthly bank reconciliation.

b. Returns the checks to accounts payable.

c. Is denied access to the supporting documents.

d. Is responsible for mailing the checks.

d. Is responsible for mailing the checks.

In assessing control risk 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?

a. Completeness.

b. Existence or occurrence.

c. Valuation or allocation.

d. Rights and obligations.

b. Existence or occurrence.

Which of the following controls is not usually performed in the vouchers payable department?

a. Matching the vendor's invoice with the related receiving report.

b. Approving vouchers for payment by having an authorized employee sign the vouchers.

c. Indicating the asset and expense accounts to be debited.

d. Accounting for unused prenumbered purchase orders and receiving reports.

d. Accounting for unused prenumbered purchase orders and receiving reports.

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

a. Post the detailed accounts payable records.

b. Recompute the calculations on vendors' invoices.

c. Reconcile the accounts payable ledger.

d. Cancel vendors' invoices after payment.

b. Recompute the calculations on vendors' invoices.

An entity's internal control requires for every check request that there be an approved voucher, supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all

a. Purchase orders.

b. Canceled checks.

c. Receiving reports.

d. Approved vouchers.

b. Canceled checks.

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

a. Is an authorized purchase order required before the receiving department can accept a shipment or the vouchers payable department can record a voucher?

b. Are purchase requisitions prenumbered and independently matched with vendor invoices?

c. Is the unpaid voucher file periodically reconciled with inventory records by an employee who does not have access to purchase requisitions?

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

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

For effective internal control, the accounts payable department generally should

a. Stamp, perforate, or otherwise cancel supporting documentation after payment is mailed.

b. Ascertain that each requisition is approved as to price, quantity, and quality by an authorized employee.

c. Obliterate the quantity ordered on the receiving department copy of the purchase order.

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

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

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

a. Department that initiated the requisition.

b. Receiving department.

c. Purchasing agent.

d. Accounts payable department.

b. Receiving department.

A client erroneously recorded a large purchase twice. Which of the following internal control measures would be most likely to detect this error in a timely and effi cient 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. Reconciling vendors' monthly statements with subsidiary payable ledger accounts.

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

a. Reconcile the open invoice fi le.

b. Inspect goods upon receipt.

c. Authorize requisitions of goods.

d. Negotiate terms with vendors.

d. Negotiate terms with vendors.

In obtaining an understanding of a manufacturing entity's internal control over 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 controls 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.

A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably

a. Insist that the client perform physical counts of inventory items several times during the year.

b. Apply gross profit tests to ascertain the reasonableness of the physical counts.

c. Increase the extent of tests of controls of the inventory cycle.

d. Request the client to schedule the physical inventory count at the end of the year.

d. Request the client to schedule the physical inventory count at the end of the year.

Which of the following controls most likely addresses the completeness assertion for inventory?

a. Work in process account is periodically reconciled with subsidiary records.

b. Employees responsible for custody of fi nished goods do not perform the receiving function.

c. Receiving reports are prenumbered and periodically reconciled.

d. There is a separation of duties between payroll department and inventory accounting personnel.

c. Receiving reports are prenumbered and periodically reconciled.

Sound internal control dictates that defective merchandise returned by customers should be presented initially to the

a. Salesclerk.

b. Purchasing clerk.

c. Receiving clerk.

d. Inventory control clerk.

c. Receiving clerk.

Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate controls over the invoicing function allow goods to be shipped that are not invoiced. The inadequate controls could cause an

a. Understatement of revenues, receivables, and inventory.

b. Overstatement of revenues and receivables, and an understatement of inventory.

c. Understatement of revenues and receivables, and an overstatement of inventory.

d. Overstatement of revenues, receivables, and inventory

c. Understatement of revenues and receivables, and an overstatement of inventory.

Which of the following is a question that the auditor would expect to find on the production cycle section of an internal control questionnaire?

a. Are vendors' invoices for raw materials approved for payment by an employee who is independent of the cash disbursements function?

b. Are signed checks for the purchase of raw materials mailed directly after signing without being returned to the person who authorized the invoice processing?

c. Are all releases by storekeepers of raw materials from storage based on approved requisition documents?

d. Are details of individual disbursements for raw materials balanced with the total to be posted to the appropriate general ledger account?

c. Are all releases by storekeepers of raw materials from storage based on approved requisition documents?

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

a. Production orders are prenumbered and signed by a supervisor.

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

c. Independent internal verification of activity reports is established.

d. Transfers to finished goods are documented by a completed production report and a quality control report.

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

An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that

a. Payments to employees are computed at authorized rates.

b. Employees work the number of hours for which they are paid.

c. Segregation of duties exist between the preparation and distribution of the payroll.

d. Controls relating to unclaimed payroll checks are operating effectively.

b. Employees work the number of hours for which they are paid.

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

a. The personnel 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 personnel department promptly sends employee termination notices to the payroll supervisor.

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

a. Observe the segregation of duties concerning personnel responsibilities and payroll disbursement.

b. Inspect evidence of accounting for prenumbered 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 personnel responsibilities and payroll disbursement.

An auditor most likely would assess control risk at a high level if the payroll department supervisor is responsible for

a. Examining authorization forms for new employees.

b. Comparing payroll registers with original batch transmittal data.

c. Authorizing payroll rate changes for all employees.

d. Hiring all subordinate payroll department employees.

c. Authorizing payroll rate changes for all employees.

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

a. Periodic independent counts of work in process for comparison to recorded amounts.

b. Comparison of daily journal entries with approved production orders.

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

d. Reconciliation of work-in-process inventory with periodic cost budgets.

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

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

-Distribution of paychecks

-Custody of unclaimed paychecks

a. Treasurer Treasurer

b. Payroll Treasurer

c. Treasurer Payroll

d. Payroll Payroll

a. Treasurer Treasurer

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

a. The payroll clerk should fill the envelopes with cash and a computation of the net wages.

b. Unclaimed pay envelopes should be retained by the paymaster.

c. Each employee should be asked to sign a receipt.

d. A separate checking account for payroll be maintained.

c. Each employee should be asked to sign a receipt.

The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the

a. Authorization of transactions from the custody of related assets.

b. Operational responsibility from the recordkeeping 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.

To minimize the opportunities for fraud, unclaimed cash payroll should be

a. Deposited in a safe-deposit box.

b. Held by the payroll custodian.

c. Deposited in a special bank account.

d. Held by the controller.

c. Deposited in a special bank account.

The auditor may observe the distribution of paychecks to ascertain whether

a. Pay rate authorization is properly separated from the operating function.

b. Deductions from gross pay are calculated correctly and are properly authorized.

c. Employees of record actually exist and are employed by the client.

d. Paychecks agree with the payroll register and the time cards.

c. Employees of record actually exist and are employed by the client.

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

a. Personnel.

b. Treasurer.

c. Controller.

d. Payroll

a. Personnel.

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 noncurrent 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?

The primary responsibility of a bank acting as registrar of capital stock is to

a. Ascertain that dividends declared do not exceed the statutory amount allowable in the state of incorporation.

b. Account for stock certificates by comparing the total shares outstanding to the total in the shareholders subsidiary ledger.

c. Act as an independent third party between the board of directors and outside investors concerning mergers, acquisitions, and the sale of treasury stock.

d. Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation.

d. Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation.

Where no independent stock transfer agents are employed and the corporation issues its own stocks and maintains stock records, canceled stock certificates should

a. Be defaced to prevent reissuance and attached to their corresponding stubs.

b. Not be defaced but segregated from other stock certificates and retained in a canceled certificates file.

c. Be destroyed to prevent fraudulent reissuance.

d. Be defaced and sent to the secretary of state.

a. Be defaced to prevent reissuance and attached to their corresponding stubs.

Which of the following is not a control that is designed to protect investment securities?

a. Custody over securities should be limited to individuals who have recordkeeping responsibility over the securities.

b. Securities should be properly controlled physically in order to prevent unauthorized usage.

c. Access to securities should be vested in more than one individual.

d. Securities should be registered in the name of the owner

a. Custody over securities should be limited to individuals who have recordkeeping responsibility over the securities.

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 treasurer.

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 verifi es 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.

A weakness in internal control over recording retirements of equipment may cause an auditor to

a. Inspect certain items of equipment in the plant and trace those items to the accounting records.

b. Review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year.

c. Trace additions to the "other assets" account to search for equipment that is still on hand but no longer being used.

d. Select certain items of equipment from the accounting records and locate them in the plant.

d. Select certain items of equipment from the accounting records and locate them in the plant.

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

a. Are requests for major repairs approved at a higher level than the department initiating the request?

b. Are prenumbered purchase orders used for equipment and periodically accounted for?

c. Are requests for purchases of equipment reviewed for consideration of soliciting competitive bids?

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

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

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

a. Direct access to securities in the safe-deposit box is limited to only one corporate officer.

b. Personnel who post investment transactions to the general ledger are not permitted to update the investment subsidiary ledger.

c. The purchase and sale of investments are executed on the specific authorization of the board of directors.

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

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

A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and submission of coupons for periodic interest collections probably should be delegated to the

a. Chief Accountant.

b. Internal Auditor.

c. Cashier.

d. Treasurer.

d. Treasurer.

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

a. An independent trust company that has no direct contact with the employees who have recordkeeping responsibilities has possession of the securities.

b. The internal auditor verifies the marketable securities in the entity's safe each year on the balance sheet date.

c. The independent auditor traces all purchases and sales of marketable 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 recordkeeping responsibilities has possession of the securities.

When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs

a. Tests of controls and extensive tests of property and equipment balances at the end of the year.

b. Analytical procedures for current year property and equipment transactions.

c. Tests of controls and limited tests of current year property and equipment transactions.

d. Analytical procedures for property and equipment balances at the end of the year.

c. Tests of controls and limited tests of current year property and equipment transactions.