Test bank auditing and assurance principles ch06 internal control concepts

Of the following control environment characteristics, identify the one that contributes most to effective internal control a.. During the review of a small business client's internal con

Internal Control: Concepts MULTIPLE CHOICE:

1 The basic concept of internal control which recognizes that

the cost of internal control should not exceed the benefits

expected to be derived is known as

a Management by exception

b Management responsibility

c Limited liability

d Reasonable assurance

ANSWER: D 2 Of the following control environment characteristics, identify the one that contributes most to effective internal control a The audit committee consists of the president, two vice- presidents, and the corporate controller b The company does not have a centralized human resources function c The company has an effective internal audit staff that monitors controls on a continuous basis d The company routinely transacts business with related parties ANSWER: C 3 It would be appropriate for the payroll accounting department to be responsible for which of the following functions?

a Approval of employee time records

b Maintenance of records of employment, discharges, and pay increases

c Preparation of periodic governmental reports as to

employees' earnings and withholding taxes

d Temporary retention of unclaimed employee paychecks ANSWER: C

4 The most effective control to prevent unbilled and

unrecorded shipments of finished goods is to

a Require all outgoing shipments to be accompanied by a

prenumbered shipping order and bill of lading (signed

by the carrier) Forward a copy of these documents to accounting, to be placed in an open file awaiting

receipt of the customer invoice copy

b Forward a copy of the shipping order and bill of lading

to billing

c Implement a policy that prevents sales invoices from

being mailed to customers in the absence of a properly approved shipping order and bill of lading signed by the carrier

d Forward a copy a the signed bill of lading to the

stores manager

ANSWER: A

5 Apex Manufacturing Corporation mass produces eight different

products The controller, who is interested in strengthening internal controls over the accounting for materials used in

production, would be most likely to implement

a An economic order quantity (EOQ) system

b A job order cost accounting system

c A perpetual inventory system

d A separation of duties among production personnel

ANSWER: C 6 Which of the following activities represents both an appropriate human resources function and a deterrent to payroll fraud? a Distribution of paychecks

b Authorization of overtime

c Authorization of additions to and deletions from the payroll

d Collection and retention of unclaimed paychecks

ANSWER: C 7 Alpha Company uses its sales invoices for posting perpetual inventory records Inadequate internal control procedures 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 ANSWER: C

8 The human resources department receives an edit listing of

payroll changes processed at every payroll cycle If they

do not verify the changes processed, this could result in:

a Undetected errors in payroll rates for new employees

b Inaccurate social security deductions

c Labor hours charged to the wrong account in the cost

reporting system

d Employees not being asked if they want to contribute to

the company pension plan ANSWER: A

9 Property acquisitions that are misclassified as maintenance

expense would most likely be detected by internal control procedures that provide for

a Investigation of variances within a formal budgeting

system

b Review and approval of the monthly depreciation entry

by the plant supervisor

c Segregation of duties of employees in the accounts

payable department

d Examination by the internal auditor of vendor invoices

and canceled checks for property acquisitions ANSWER: A

10 During the review of a small business client's internal

control system, 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 theledger ANSWER: C

11 Which of the following, if material, would be considered

fraud?

a Mistakes in the application of accounting principles

b Clerical mistakes in the accounting data underlying the

financial statements

c Misappropriation of an asset or groups of assets

d Misinterpretations of facts that existed when the

financial statements were prepared ANSWER: C

12 Competence of personnel is necessary to proper recording of

transactions and supports financial statements that are fairly presented In reviewing the organization for

necessary competence, which of the following job types would

be of least interest to the auditor?

b Vice-president for marketing

c Manager of electronic data processing

ANSWER: B

13 An auditor would consider internal control procedures

relating to a client's payroll procedures to be ineffective

if the payroll department supervisor is responsible for

a Hiring subordinate payroll department employees

b Having custody over unclaimed paychecks

c Updating employee earnings records

d Applying pay rates to time tickets ANSWER: B

14 Which of the following is the most effective control

procedure to detect vouchers that were prepared for the payment of goods that were not received?

a Count goods upon receipt in storeroom

b Match purchase order, receiving report, and vendor's

invoice for each voucher in accounts payable department

c Compare goods received with goods requisitioned in

receiving department

d Verify vouchers for accuracy and approval in internal

audit department ANSWER: B

15 For effective internal control purposes, which of the

following individuals should be responsible for mailing signed checks?

a Receptionist

b Treasurer

c Accounts payable clerk

d Payroll clerk

ANSWER: B 16 Evidence of proper authorization, approval and review of transactions may appear on the face of documents supporting the transactions Which of the following techniques does not provide evidence of proper authorization, approval or review a Purchase orders are signed by the purchasing agent b Receiving reports are signed by persons inspecting and counting incoming goods c Vouchers are signed or initialed by the person comparing vendors' invoices, purchase orders, and receiving reports for prices, quantities, and stock description d Several checks are signed in advance whenever the treasurer is scheduled to be out of town for an extended period ANSWER: D 17 In general, material irregularities perpetrated by which of the following are most difficult to detect?

a Internal auditor

b Keypunch operator

c Cashier

d Controller

ANSWER: D 18 Which of the following is not an element of an entity's internal control?

a Control risk

b Control activities

c The information system

d The control environment

ANSWER: A 19 Which of the following would not be considered an internal control feature?

a Prenumbered documents

b Limited access to documents

c Competent personnel

d A comparison-shopping staff

ANSWER: D 20 A system of internal control, regardless of how carefully designed and implemented, contains certain inherent limitations Which of the following errors or irregularities is not caused by an inherent limitation a The president and chief executive officer, with the assistance of the corporate controller, inflated earnings by recording fictitious sales at year-end b A newly-installed electronic data processing system failed to provide for a comparison of sales order amount with prior customer balance and credit limit This resulted in numerous sales to customers who had already exceeded their credit limits c Numerous recording errors occurred because persons analyzing and recording transactions did not have the necessary accounting background d A computer programmer and a computer operator conspired to divert funds from the company to an account controlled by the dishonest employees ANSWER: C 21 A company policy should clearly indicate that defective

merchandise returned by customers is to be delivered to the a Sales clerk

b Receiving clerk

c Inventory control clerk

d Accounts receivable clerk ANSWER: B

22 Controls that enhance the reliability of the financial

statements may be classified as prevention controls and detection controls Which of the following is primarily a

detection control?

a Separation of duties between recording cash receipts

and depositing cash

b Bank accounts are reconciled monthly by persons

independent of cash recording and cash custody

c The human resources department authorizes the hiring of

only those persons for accounting positions that meet

the written job requirements specified by the corporate controller

d An accounting manual, accompanied by a detailed chart

of accounts, carefully and clearly describes each type

of transaction affecting the entity

ANSWER: B

23 Internal control procedures are 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

ANSWER: B 24 Which of the following observations, made during the preliminary survey of a local department store's disbursement cycle, reflects a control strength?

a Individual department managers use pre-numbered forms to order merchandise from vendors

b The receiving department is given a copy of the purchase order complete with a description of goods, quantity ordered, and extended price for all merchandise ordered c The treasurer's office prepares checks for suppliers based on vouchers prepared by the accounts payable department

d Individual department managers are responsible for the movement of merchandise from the receiving dock to storage or sales areas as appropriate

ANSWER: C 25 In a properly designed set of internal control procedures, the same employee should not be permitted to

a Sign checks and cancel supporting documents

b Receive merchandise and prepare a receiving report c Prepare disbursement vouchers and sign checks

d Initiate a request to order merchandise and approve merchandise received

ANSWER: C

26 A means of ensuring that payroll checks are drawn for

properly authorized amounts is to:

a Conduct periodic floor verification of employees on the

payroll

b Require that undelivered checks be returned to the

cashier

c Require supervisory approval of employee time cards

d Witness the distribution of payroll checks ANSWER: C

27 Effective internal control requires organizational

independence of departments Organizational independence would be impaired in which of the following situations?

a The internal auditors report to the audit committee of

the board of directors

b The controller reports to the vice president of

28 External forces can serve to either strengthen or weaken an

entity's internal control Which of the following

conditions supports strong internal control?

a Threat of an Internal Revenue Service audit

b The existence of related parties and related party

29 Proper segregation of functional responsibilities calls for

the separation of the

a Authorization, recording, and custodial functions

b Authorization, execution, and payment functions

c Receiving, shipping, and custodial functions

d Authorization, approval, and execution functions ANSWER: A

30 A set of control procedures referred to as "periodic

inventories and comparisons," provides effective monitoring

of accountability Although the term "inventories" is

broadly defined for this purpose, which of the following does not fit the definition of periodic inventories and comparisons?

a Bank accounts are reconciled monthly by persons

independent of cash custody and cash recording

b Cash receipts are deposited intact daily and the

receipted deposit ticket is obtained directly from the bank and compared with the recorded cash receipts by a person independent of cash custody and cash recording

c Perpetual inventory records are maintained for major

classes of materials and finished goods and monthly counts and comparisons are made on a test basis

d The treasurer reviews all documentation before signing

disbursement checks The checks are then mailed directly to the vendors and the documents are effectively canceled

ANSWER: D

31 When considering the effectiveness of internal control, the

auditor should recognize that inherent limitations do exist.Which of the following is an example of an inherent

limitation in a client's internal control?

a The effectiveness of procedures depends on the

segregation of employee duties

b Procedures are designed to assure the execution and

recording of transactions in accordance withmanagement's authorization

c In the performance of most control procedures, there

are possibilities of errors arising from mistakes in judgment

d Procedures for handling large numbers of transactions

are processed by electronic data processing equipment ANSWER: C

32 The most effective control for ensuring that customers are

billed only for goods shipped is to

a Require that carriers sign properly completed bills of

lading

b Implement a policy that prevents the mailing of sales

invoices to customers in the absence of a properly approved shipping order and a bill of lading signed by the carrier

c Require that all shipments be approved by accounting

d Prohibit goods from leaving the warehouse without being

accompanied by a signed bill of lading and a properly approved shipping order

ANSWER: B

33 In a properly designed accounts payable system, a voucher is

prepared after the invoice, purchase order, requisition, and receiving report are verified The next step in the system

is to

a Cancel the supporting documents

b Enter the check amount in the check register

c Approve the voucher for payment

d Post the voucher amount to the expense ledger

ANSWER: C 34 In general, a material internal control weakness may be defined as a condition in which material errors or fraud would ordinarily not be detected within a timely period by a An auditor during the normal study and evaluation of the system of internal control

b A controller when reconciling accounts in the general ledger

c Employees in the normal course of performing their

assigned functions

d The chief financial officer when reviewing interim

financial statements ANSWER: C

35 The most effective control for insuring that incoming

materials are received by stores is to

a Establish a separate receiving function independent of

purchasing and stores

b Require that a prenumbered copy of the receiving

report, that accompanies the materials to stores, be signed by the stores manager, as evidence of receipt, and forwarded to accounting

c Compare the receiving report with the vendor's invoice

before approving payment

d Provide for a review and comparison of all documents

accompanying an approved voucher before signing disbursement checks

ANSWER: B