6.3 Flashcards
An employee in the receiving department keyed in a shipment from a remote terminal and inadvertently omitted the purchase order number. The best systems control to detect this error is
Completeness test.
A completeness test checks that all data elements are entered before processing. An interactive system can be programmed to notify the user to enter the number before accepting the receiving report.
A wholesaling firm has a computerized billing system. Because of a clerical error while entering information from the sales order, one of its customers was billed for only three of the four items ordered and received. Which of the following controls could have prevented, or resulted in prompt detection and correction, of this situation?
Matching line control counts produced by the computer with predetermined line control counts.
Detective controls, such as a line control count, identify undesirable events as they occur. A line control count counts individual line items on documents. These counts are compared to predetermined line control counts for each document to detect missing lines.
Evidence concerning the proper segregation of duties for receiving and depositing cash receipts ordinarily is obtained by
Observing the employees who are performing the control activities.
Observation is a risk assessment procedure performed to obtain an understanding of the entity and its environment, including its controls. It is also a test of controls. Observation of entity activities and operations supports inquiries of management and provides information about the entity and its environment.
Cash receipts should be deposited on the day of receipt or the following business day. What is the most appropriate audit procedure to determine that cash is promptly deposited?
Compare the daily cash receipts totals with the bank deposits.
A standard control over the cash receipts function is to require that daily cash receipts be deposited promptly and intact. Thus, the total of cash receipts for a day should equal the bank deposit because no cash disbursements are made from the daily receipts. To determine whether cash receipts are promptly deposited, the auditor should compare the daily cash receipts totals with bank deposits.
An online sales order processing system most likely would have an advantage over a batch sales order processing system by
Enabling shipment of customer orders to be initiated as soon as the orders are received.
An online processing system can handle transactions as they are entered because of its direct connection to a computer network. Thus, shipment of customer orders may be initiated instantaneously as they are received. Batch processing is the accumulation and grouping of transactions for processing on a delayed basis.
An entity with a large volume of customer remittances by mail most likely can reduce the risk of employee misappropriation of cash by using
A bank lock box system.
A lockbox system assures that cash receipts are not stolen by mail clerks or other employees. This system provides for customer payments to be sent to a post office box and collected directly by the bank.
For effective internal control, employees maintaining the accounts receivable subsidiary ledger should not also approve
Write-offs of customer accounts.
An employee who authorizes a transaction, such as the write-off of a receivable, ordinarily should not be responsible for recording the same transaction. Segregating the functions of authorization, recordkeeping, and custody of assets reduces the possibility that an employee may be able to perpetrate and conceal fraud or error in the normal course of his or her duties.
Sound internal control principles dictate that, immediately upon receiving checks from customers by mail, a responsible employee should
Prepare a duplicate listing of checks received.
The mail room receives all customer receipts, opens the mail, separates the checks from the remittance advices, and prepares a daily listing of checks received. This daily remittance list ordinarily is prepared in duplicate.
Which of the following internal control activities most likely would deter lapping of collections from customers?
Separation of duties between receiving cash and posting the accounts receivable ledger.
Lapping is the delayed recording of cash receipts to cover a cash shortage. Current receipts are posted to the accounts of customers who paid one or two days previously to avoid complaints (and discovery) when monthly statements are mailed. The best protection is for the customers to send payments directly to the company’s depository bank. The next best procedure is to ensure that the accounts receivable clerk has no access to cash received by the mail room. Thus, the duties of receiving cash and posting the accounts receivable ledger are separated.
Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments?
CFO.
The write-off of uncollectible accounts requires effective controls. The initiation of the write-off is performed by the credit manager. However, authorization should be by an independent party, typically the CFO. The credit manager is evaluated, in part, on the amount of bad debt written off and should require significant evidence before initiating a write-off.
Which of the following best represents a key control for ensuring sales are properly authorized when assessing risks of material misstatement for sales?
Sales orders are sent to the credit department for approval.
The credit department should investigate potential customers and approve sales orders.
A mail-order retailer has just modified its processing programs to charge each customer the appropriate sales tax. The best approach for detecting whether sales taxes are applied correctly is to
Add the program code that will sort orders by area, compute taxes in the aggregate, and compare the amount with the sum of individual taxes charged for each area.
Sales taxes vary from one jurisdiction to another. Thus, the program should sort orders by area. Verification of the accuracy of the tax charges then can be obtained by calculating the total taxes for each area in two ways: applying the tax rate to total sales or adding the taxes charged on individual sales.
Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor?
Understating the sales journal.
Not recording sales on account in the books of original entry is the most effective way to conceal a subsequent theft of cash receipts. The accounts will be incomplete but balanced, and procedures applied to the accounting records will not detect the defalcation.
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?
The owner reviews credit memos after they are recorded.
The clerk can both perpetrate and conceal a fraud in the normal course of his or her duties. The clerk has custody of cash, performs the recordkeeping function for accounts receivable, and authorizes credit memos. Thus, the clerk could conceal a theft of cash collected from customers on account by authorizing sales returns. In a small business, cost-benefit considerations ordinarily preclude establishment of formal control activities. In this situation, effective owner-management involvement may compensate for the absence of certain control activities. Accordingly, the owner should determine that credit memos are genuine.
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?
Employees involved in the credit-granting function are separated from the sales function.
Salespeople should be responsible for generating sales and providing service to customers. For effective control, the credit department should be responsible for monitoring the financial condition of prospective and continuing customers in the credit approval process and should report to the CFO.
