#7 Internal Control: Transaction Cycles 2- Expenditures, Payroll, Misc

Question 1

What is the difference between an accounts payable system and a vouchers payable system?

Answer 1

An accounts payable system aggregates payable to identify the total owed to any individual vendor. A vouchers payable system keeps track of individual transactions for which payment is owed without summarizing the totals by vendors.

Question 2

List 2 access controls applicable to the expenditures/disbursements transaction cycle.

Answer 2

1. Cash disbursement employees should be bonded;

2. Access to cash disbursements or related documents should be limited to authorize personnel.

Question 3

Identify the objectives of internal control related to the expenditures/disbursements transaction cycle.

Answer 3

1. Disbursements are for authorized expenditures as approved by management
2. Disbursements are recorded at the proper amounts and classifications.
3. The supporting accounting records are agreed to the general ledger accounts.
4. Any adjusting journal entries are authorized by management.
5. Access to cash and disbursement records is limited to authorized personnel.

Question 4

Describe management’s role in the execution of transactions controls over cash disbursements in the expenditures/disbursements transaction cycle.

Answer 4

1. All adjusting journal entries approved by management;
2. Only authorized personnel should be able to place on order for goods and services on the entity’s behalf;
3. The department requesting the purchase should approve the goods or services received before payment is made.

Question 5

List some procedures used to ensure segregation of duties in the Expenditure business cycle.

Answer 5

1. Separate purchasing department
2. Purchasing personnel independent from receiving and recording
3. Bank reconciliations are prepared by someone not having other involvement handling cash receipts, disbursements, record-keeping.

Question 6

What comparison techniques can be used by the auditor to ensure appropriateness of transactions in the Expenditure business cycle?

Answer 6

1. Compare suppliers’ monthly statements with recorded payables
2. Compare purchase order to receiving document to vendor’s invoice.

Question 7

Identify 3 access controls applicable to the payroll transaction cycle.

Answer 7

1. Access to personnel files should be limited to authorized personnel.
2. Access to payroll checks should be limited to authorized personnel.
3. Personnel with access to payroll checks should be bonded.

Question 8

Describe managements role in the execution of transactions controls in the payroll transaction cycle.

Answer 8

1. Payroll should be reviewed and approved by a reasonable official.
2. Computations should be verified by and independent person.
3. Overtime payments should be approved by management.
4. Payroll for management should be appropriately reviewed and approved.

Question 9

What comparisons should be made within the entity to ensure the appropriateness of payroll transactions?

Answer 9

1. Payroll information should be periodically matched to information in personnel files;
2. Payroll checks should be compared to entries on the payroll register;
3. Amounts on the payroll register should agree to the applicable general ledger accounts.

Question 10

Identify the objectives of internal control in the investing/financing transaction cycle.

Answer 10

1. Transactions are recorded accurately in accordance with management’s authorization.
2. Investment assets should be reasonably secure from loss.
3. Supporting detailed records should be maintained and compared to general ledger.
4. Management should approve any adjusting journal entries.

Question 11

How should employee responsibilities be allocated to facilitate a proper segregation of duties in the production/manufacturing inventory transaction cycle?

Answer 11

1. Separate authorization, bookkeeping (recording), and custody of inventory
2. Sales returns should be counted by receiving clerk, who prepares and appropriate receiving document.

Question 12

Describe management’s role in the execution of transactions controls in the production/manufacturing inventory transaction cycle.

Answer 12

1. Acquisition and distribution of inventory should be in accordance with management’s authorization;
2. Should establish general approval of transactions with specified limits and require specific approval for amounts over those limits;
3. Management should approve any adjusting journal entries.

Question 13

Identify the objectives of internal control in the fixed assets transaction cycle.

Answer 13

1. transactions are recorded accurately in accordance with management’s authorization.
2. Estimates used to record depreciation, etc. are reasonable and consistent over time.
3. Assets are safeguarded with appropriate property insurance is in force.
4. Supporting details records are properly maintained.
5. Management should approve any adjusting journal entries.

Question 14

Identify the objectives of internal control related to the production/manufacturing inventory transaction cycle.

Answer 14

1. Resources obtained and used are accurately recorded timely
2. Transfers of finished goods are accurately recorded
3. Related expenditures are appropriately classified
4. Access to inventory is restricted to authorized personnel
5. Comparisons are made of actual inventory to recorded amounts.