18.1 Control Procedures Flashcards
A company’s accounts payable supervisor assigned a vendor code to a storage facility owned by the supervisor, then instructed the company’s accounting system to pay monthly rent for a storage unit allegedly leased from the storage facility. This situation is an example of a failure of controls due to the lack of
A. Commitment to competence in job skills and knowledge
B. An effective internal audit function
C. Appropriate segregation of duties
D. Appropriate physical controls
C. Appropriate segregation of duties
Internal controls may be preventive, detective, corrective, or directive. Which of the following is preventive?
A. Requiring two persons to open mail
B. Reconciling the accounts receivable subsidiary file with the control account
C. Using batch totals
D. Preparing reconciliation
A. Requiring two persons to open mail
Preventive controls are designed to prevent an error or an irregularity. Detective and corrective controls attempt to identify and correct errors or irregularities that have already occurred. Preventive controls are usually more cost beneficial than detective or corrective controls. Assigning two individuals to open mail is an attempt to prevent misstatement of cash receipts.
The procedure requiring preparation of a prelisting of incoming cash receipts, with copies of the prelist going to the cashier and to accounting, is an example of which type of control?
A. Preventive
B. Corrective
C. Detective
D. Directive
A. Preventive
A prelisting of cash receipts in the form of checks is a preventive control. It is intended to deter undesirable events from occurring. Because fraud involving cash is most likely to occur before receipts are recorded, either remittance advices or a prelisting of checks should be prepared in the mail room so as to establish recorded accountability for cash as soon as possible. A cash register tape is a form of prelisting for cash received over the counter. One copy of a prelisting will go to accounting for posting to the cash receipts journal, and another is sent to the cashier for reconciliation with checks and currency received.
In a well-designed internal control structure in which the cashier receives remittances from the mail room, the cashier should not
A. Endorse the checks
B. Prepare the bank deposit slips
C. Deposit remittances daily at a local bank
D. Post the receipts to the accounts receivable subsidiary ledger cards
D. Post the receipts to the accounts receivable subsidiary ledger cards
The cashier is an assistant to the treasurer and thus performs an asset custody function. Individuals with custodial functions should not have access to the accounting records. If the cashier were allowed to post the receipts to the accounts receivable subsidiary ledger, an opportunity for embezzlement would arise that could be concealed by falsifying the books.
Accounting controls are concerned with the safeguarding of assets and the reliability of financial records. Consequently, these controls are designed to provide reasonable assurance that all of the following take place except
A. Permitting access to assets in accordance with management’s authorization.
B. Executing transactions in accordance with management’s general or specific authorization.
C. Compliance with methods and procedures ensuring operational efficiency and adherence to managerial policies.
D. Comparing recorded assets with existing assets at periodic intervals and taking appropriate action with respect to differences.
C. Compliance with methods and procedures ensuring operational efficiency and adherence to managerial policies.
An accounting control is concerned with the safeguarding of assets and the reliability of financial records, whereas an operational or administrative control is concerned with operational efficiency and effectiveness. Thus, compliance with methods and procedures ensuring operational efficiency and adherence to managerial policies is an objective of an operational control.
Which one of the following situations represents an internal control weakness in the payroll department?
A. Payroll department personnel are rotated in their duties.
B. Paychecks are distributed by the employees’ immediate supervisor.
C. Payroll records are reconciled with quarterly tax reports.
D. The timekeeping function is independent of the payroll department.
B. Paychecks are distributed by the employees’ immediate supervisor.
Paychecks should not be distributed by supervisors because an unscrupulous person could terminate an employee and fail to report the termination. The supervisor could then clock in and out for the employee and keep the paycheck. A person unrelated to either payroll recordkeeping or the operating department should distribute checks.
Auditors document their understanding of internal control with questionnaires, flowcharts, and narrative descriptions. A questionnaire consists of a series of questions concerning controls that auditors consider necessary to prevent or detect errors and fraud. The most appropriate question designed to contribute to the auditors’ understanding of the completeness of the expenditure (purchases-payables) cycle concerns the
A. Internal verification of quantities, prices, and mathematical accuracy of sales invoices
B. Use and accountability of prenumbered checks
C. Disposition of cash receipts
D. Qualifications of accounting personnel
B. Use and accountability of prenumbered checks
A completeness assertion concerns whether all transactions and accounts that should be presented in the financial statements are so presented. The exclusive use of sequentially numbered documents facilitates control over expenditures. An unexplained gap in the sequence alerts the auditor to the possibility that not all transactions have been recorded. A failure to use prenumbered checks would therefore suggest a higher assessment of control risk. If a company uses prenumbered checks, it should be easy to determine exactly which checks were used during a period.
Which one of the following situations represents a strength of internal control for purchasing and accounts payable?
A. Prenumbered receiving reports are issued randomly.
B. Invoices are approved for payment by the purchasing department.
C. Unmatched receiving reports are reviewed on an annual basis.
D. Vendors’ invoices are matched against purchase orders and receiving reports before a liability is recorded.
D. Vendors’ invoices are matched against purchase orders and receiving reports before a liability is recorded.
A voucher should not be prepared for payment until the vendor’s invoice has been matched against the corresponding purchase order and receiving report. This procedure provides assurance that a valid transaction has occurred and that the parties have agreed on the terms, such as price and quantity.
________ controls alert the proper people after an unwanted event.
Detective controls. They are effective when detection occurs before material harm occurs.
The internal auditor recognizes that certain limitations are inherent in any internal control system. Which one of the following scenarios is the result of an inherent limitation of internal control?
A. A security guard allows one of the warehouse employees to remove company assets from the premises without authorization
B. The firm sells to customers on account, without credit approval
C. The comptroller both makes and records cash deposits
D. An employee, who is unable to read, is assigned custody of the firm’s computer tape library and run manuals that are used during the third shift.
A. A security guard allows one of the warehouse employees to remove company assets from the premises without authorization
Inherent limitations of internal control arise from faulty judgement in decision making, simple error or mistake, and the possibility of collusion and management override. Thus, a control (use of security guards) based on segregation of functions may be overcome by collusion among two or more employees.
Which one of the following duties assigned to the cashier exposes the organization to a control risk in terms of segregation of duties?
A. Signing the deposit slips
B. Comparing the check register with the bank statement
C. Depositing cash at the bank
D. Entering information in the accounts receivable subsidiary ledger
D. Entering information in the accounts receivable subsidiary ledger
Segregation of duties involves the separation of the functions of authorization, recordkeeping, and asset custody to minimize the opportunities for a person to be able to perpetrate and conceal errors or fraud in the normal course of his or her duties. A cashier who records information in the accounts receivable subsidiary ledger has both custody and recordkeeping duties, which violates segregation of duties.
Appropriate control over obsolete materials requires that they be
A. Carried at cost in the accounting records until the actual disposition takes place
B. Determined by an approved authority to be lacking in regular usability
C. Sorted, treated, and packaged before disposition takes place, in order to obtain the best selling price
D. Retained within the regular storage area
B. Determined by an approved authority to be lacking in regular usability
Since auditors, storekeepers, etc., may not have the requisite expertise to determine whether materials are usable, that decision must often be made by a designated independent authority. To provide effective control of materials, this determination, asset custody, and authorization for disposal are functions that should be segregated.
Internal control cannot be designed to provide reasonable assurance regarding the achievement of objectives related to
A. Elimination of all fraud
B. Reliability of financial reporting
C. Compliance with applicable laws and regulations
D. Effectiveness and efficiency of operations
A. Elimination of all fraud
Internal control is a process designed to provide reasonable assurance regarding the achievement of organizational objectives. Because of inherent limitations, however, no system can be designed to eliminate all fraud.
To test the adequacy of controls, a variety of methods may be used, including
A. Inspection and verification
B. Reperformance and observation
C. Comparison and confirmation
D. Inquiry and analytical procedures
B. Reperformance and observation
Inquiry should be done but is not sufficient by itself to test the adequacy of controls. A system of controls is only effective when properly designed and followed. Other testing methods performed in combination with inquiry may include inspection, recalculation, and reperformance of a relevant control.
