7.1 Flashcards
Which of the following is an essential element of the audit trail in an electronic data interchange (EDI) system?
Activity logs that indicate failed transactions.
Because an audit trail allows for the tracing of a transaction from initiation to its disposition, an activity log provides a key link in the process. Such a log provides information about users who have accessed the system, the files accessed, the processing accomplished, the time of access, and the amount of time the processing required.
Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity’s financial statements?
Significant differences between the physical inventory count and the accounting records are not investigated.
If a significant amount of inventory is missing, the inventory and the statements are materially misstated. If the physical inventory is significantly greater than the accounting records indicate, the entity may not have sold as much inventory as it claimed. The result is overstated revenues, financial statements that are materially misstated, and an increased risk of fraud.
Which of the following controls will most likely allow for a reduction in the scope of the auditor’s tests of depreciation expense?
Review and approval of the periodic equipment depreciation entry by a supervisor who does not actively participate in its preparation.
A reduction in control risk and the consequent increase in the acceptable level of detection risk may permit the auditor to alter the nature, timing, or extent of substantive tests. An independent check on the validity and accuracy of depreciation expense clearly enhances the effectiveness of internal control and is thus likely to reduce the external auditor’s assessment of control risk.
Fraudulent use of corporate credit cards will be minimized by which of the following controls?
Subjecting credit card charges to the same expense controls as those used on regular company expense forms.
Credit card charges should be controlled in much the same manner as expense accounts and other expense reports, including use of limitations on specific kinds of expenditures. These charges should be compared with supporting documentation, such as receiving reports and invoices.
A client’s program that recorded receiving report information entered directly by the receiving department on vendor shipment receipt included a reasonableness or limit test. Which of the following errors would this test likely detect?
The receiving department clerk entered the quantity of the product received as 0.
Reasonableness or limit tests are used to test quantities received to determine if they are within acceptable limits. Entry of a product number with 0 received is identified as probable error.
Which control is most likely to give the greatest assurance that securities held as investments are safeguarded?
Access to securities requires the signatures and presence of two designated officials.
The presence of two authorized individuals is usually required for access to securities, especially those held in safe-deposit boxes. This precaution provides supervisory control.
Which of the following observations made during the preliminary survey of a local department store’s disbursement cycle reflects a control strength?
The CFO’s office prepares checks for suppliers based on vouchers prepared by the accounts payable department.
Accounting for payables is a recording function. The matching of the supplier’s invoice, the purchase order, and the receiving report (and usually the purchase requisition) should be the responsibility of the accounting department. These are the primary supporting documents for the payment voucher prepared by the accounts payable section that will be relied upon by the CFO in making payment.
An auditor notes year-to-year increases of over $200,000 for small tool expense at a manufacturing facility that has produced the same amount of identical product for the last 3 years. Production inventory is kept in a controlled staging area adjacent to the receiving dock, but the supply of small tools is kept in an unsupervised area near the exit to the plant employees’ parking lot. After determining that all of the following alternatives are equal in cost and are also feasible for local management, the auditor can best address the security issue by recommending that plant management
Move the small tools inventory to the custody of the production inventory staging superintendent and implement the use of a special requisition to issue small tools.
Physical control of assets is a preventive control that reduces the likelihood of theft or other loss. Giving responsibility for custody of small tools to one individual establishes accountability. Requiring that requisitions be submitted ensures that tool use is properly authorized.
Which of the following organizational controls related to the processing of scrap would you recommend?
Segregate the responsibility for processing scrap materials from the operational activities that produce the scrap materials.
Organizational controls address the segregation of functional responsibilities: custodianship, recordkeeping, authorization, and execution. Thus, those who generate the scrap should not subsequently process it.
When an entity uses a trust company as custodian of its trading securities, the possibility of concealing fraud most likely will be reduced if the
Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records.
To conceal fraud related to trading securities, collusion between those responsible for record keeping and custody is required. The possibility of collusion is reduced if no direct contact between responsible parties exists.
To strengthen internal control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic
Inspection of equipment and reconciliation with accounting records.
To strengthen control over the custody of equipment, the client should conduct periodic physical inventories (inspections) and compare them with the equipment subsidiary ledgers. A basic control is to compare the recorded accountability with existing assets at reasonable intervals. This physical inspection is especially appropriate when the client is, for example, a construction firm that owns expensive mobile equipment and permits field supervisors to authorize disposals.
Which of the following activities performed by a department supervisor most likely would help in the prevention or detection of a payroll fraud?
Approving a summary of hours each employee worked during the pay period.
The department supervisor is in the best position to determine that employees are present and performing the assigned functions.
What information would the auditor expect to find in the data dictionary that would assist in a payroll application audit?
Programs that access the data.
The data dictionary is a file (possibly manual but usually computerized) in which the records relate to specified data items. It contains definitions of data records and files and the list of programs used to process them. Only certain persons or entities are permitted to retrieve data or to modify data items. Accordingly, these access limitations are also found in the data dictionary.
In the accounting system of Apogee Company, the quantities counted by the receiving department and entered at a terminal are transmitted to the computer, which immediately transmits the amounts back to the terminal for display on the terminal screen. This display enables the operator to
Verify that the amount was entered accurately.
The display of the amounts entered is an input control that permits visual verification of the accuracy of the input by the operator. This is termed closed-loop verification.
Each Friday afternoon, payroll checks are distributed by the shift superintendent. The plant is so large and the turnover is so great that the superintendent does not know many of the workers. Undelivered checks are returned to the payroll clerk, from whom the workers can obtain them at some later time. The payroll clerk routinely continues the payroll record for workers one week after their departure from the firm, ultimately cashes the unclaimed checks, and keeps the money. Which of the following is a control designed to prevent this misappropriation?
Require the CFO’s office to prepare checks only on the basis of supporting documentation from both the timekeeper and payroll office.
The payroll should be prepared from the time cards, which are the official records of time worked, and the authorized pay rates and deductions. After the payroll is prepared, it should be independently verified. Also, the payroll department has a recording function and should not be charged with custody of related assets (undelivered paychecks) even temporarily. Undelivered checks should be sent to the CFO for deposit in a bank account after a reasonable period of time.
