3.04 - SOX AND BASIC CONCEPTS Flashcards
3.04 - SOX AND BASIC CONCEPTS
An auditor is concerned about a policy of Management override as a limitation of internal control. Which of the following tests would best assess the validity of the auditor’s concern?
A) Verifying that approved spending limits are notexceeded.
B) Matching purchase orders to accounts payable.
C) Reviewing minutes of board meetings.
D) Tracing sales orders to the revenue account.
A) Verifying that approved spending limits are notexceeded.
Management override of internal control would involve management initiating or executing transactions that are not
authorized by the board of directors, such as by exceeding approved spending limits.
Matching purchase orders to accounts payable will provide evidence that goods for which the entity is billed were ordered.
Tracing sales orders to the revenue account will provide evidence that all sales orders have been recorded.
Minutes of board meetings will provide evidence as to what is authorized but not whether the authority has been exceeded.
3.04 - SOX AND BASIC CONCEPTS
Which of the following situations represents a limitation, rather than a failure, of internal control?
A) A bank teller embezzles several hundred dollars from the cash drawer.
B) A jewelry store employee steals a small necklace from a display cabinet.
C) A purchasing employee and an outside vendor participate in a kickback scheme.
D) A movie theater cashier sells reduced-price tickets to full-paying customers and pockets the difference.
C) A purchasing employee and an outside vendor participate in a kickback scheme.
One limitation of internal control is that even well designed and implemented controls can be overridden by management and may be circumvented by collusion, such as a kickback
scheme involving a purchasing employee and a vendor.
Theft of a necklace by a jewelry store employee could be prevented by effective controls over valuable inventory.
Embezzlement
from a cash drawer by a bank teller can be detected by internal controls through
reconciliations, as would the sale of movie theater tickets at reduced prices.
