7.3 Flashcards
Which of the following activities most likely would be considered a weakness in an entity’s internal control over payroll?
The employee who distributes payroll checks returns unclaimed payroll checks to the payroll department.
The payroll department assembles payroll information, which is a recording function. Custody of assets, such as unclaimed payroll checks, is incompatible with record keeping.
Each of the following is an appropriate control over securities and investments except
Custodian separate from treasury function.
The custody of cash and securities should be placed with the treasury function. Thus, the CFO should have custody of securities and investments.
Which of the following controls would be most effective in assuring that the proper custody of assets in the investing cycle is maintained?
The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safe deposit box by independent personnel.
Custody of securities should be segregated from the accounting responsibility. Ideally, the CFO should have custody of investment securities, accounting should maintain the related records (establish accountability), and, periodically, assets should be independently reconciled with the records.
An audit team has concluded that inventory is highly susceptible to misappropriation and that a potential misstatement would be material to the financial statements. How should the audit team address the audit procedures to the increased risk?
Review the client’s control procedures over the safeguarding of inventory and perform a physical inventory count on the last day of the current year.
In general, the segregation of duties for acquisition of inventory should be maintained so that the appropriate functions authorize transactions, record transactions, and have custody of assets. If inventory is purchased, purchases are based on approved requisitions and the receiving department should not accept goods without a blind copy of the approved purchase order. The warehouse then acknowledges receipt and safekeeping by signing the receiving report. The warehouse releases inventory to shipping when it receives an approved sales order, and shipping ships the goods after it receives the appropriate documents and prepares the bill of lading. Moreover, periodic counts of inventory, independently reconciled with perpetual records, provide assurance that physical controls over inventory are effective.
Internal verification of inventory is independent if performed by an individual who is not responsible for custody of assets or the authorization and recording of transactions. Counts at period end are more effective procedures than counts at interim dates.
For several years a client’s physical inventory count has been lower than what was shown on the books at the time of the count, and downward adjustments of the inventory account have been required. Contributing to the inventory problem could be material weaknesses in internal control that led to the failure to record some
Purchases returned to vendors.
Purchases returned to the vendor but not recorded overstate inventory records. The goods are reflected in inventory but are not on hand.
Which of the following constitutes the best evidence of the transfer of accountability for incoming material from the receiving department to other departments or activities?
An authorized signature on the prescribed transfer form.
Internal control should maintain effective accountability for assets. The signature on a prescribed form documents the transfer of accountability for assets and permits the recorded accountability to be compared with the existing assets when necessary.
Appropriate control over obsolete materials requires that they be
Determined by an approved authority to be unusable for their normal purposes.
Because auditors, storekeepers, etc., may not have the expertise to determine whether materials are usable, that decision often is 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.
Which of the following procedures represents a weakness in internal control for payroll?
The payroll clerk distributes signed payroll checks. Undistributed checks are returned to the payroll department.
Separating paycheck preparation from distribution makes it more difficult for fictitious employees to receive payment. In principle, the payroll function should be divided into its authorization, recording, and custody functions. Authorization of hiring, wage rates, and deductions is provided by personnel. Authorization of hours worked is provided by production. Based upon these authorizations, accounting (the payroll department) calculates and records the payroll and prepares checks. The CFO signs and distributes payroll checks. Consistent with its asset custody function (possession of checks, cash, or electronic transfer codes), the CFO should distribute paychecks or cash in a manual system (or make EFTs in a computerized system) so as to prevent payments to fictitious employees. Furthermore, the CFO rather than the payroll department should receive unclaimed paychecks (or cash) for safeguarding. Moreover, incomplete EFTs should not be returned to any of the other functions.
Which of the following activities most likely would detect whether payroll data were altered during processing?
Using test data to verify the performance of edit routines.
The test data approach uses the computer to test the processing logic and controls within the system and the records produced. The auditor prepares a set of dummy transactions specifically designed to test the control activities that management claims to have incorporated into the processing programs. The auditor can expect the controls to be applied to the transactions in the prescribed manner. Thus, the auditor is testing the effectiveness of the controls over the payroll data.
Matthews Corp. has changed from a system of recording time worked on time clock cards to a computerized payroll system in which employees record time in and out with magnetic cards. The computer system automatically updates all payroll records. Because of this change
Part of the audit trail is altered.
In a manual payroll system, a paper trail of documents would be created to provide audit evidence that controls over each step in processing were operating effectively. One element of a computer system that differentiates it from a manual system is that a transaction trail useful for auditing purposes might exist only for a brief time or only in computer-readable form.
In auditing an entity’s computerized payroll transactions, an auditor would be least likely to use test data to test controls concerning
Control and distribution of unclaimed checks.
If wages are not directly deposited into employees’ bank accounts, paper checks must be physically distributed by the cash disbursements function. Any unclaimed checks should be turned over to an appropriate custodian for safe storage. Accordingly, the test data approach does not apply to the control and distribution of unclaimed checks. It is a method of testing computerized controls by processing dummy transactions, some of which should result in error listings.
Which of the following internal control activities most likely would be used to maintain accurate inventory records?
Periodic inventory counts are used to adjust the perpetual inventory records.
The recorded accountability for assets should be compared with existing assets at reasonable intervals. If assets are susceptible to loss through fraud or error, the comparison should be made independently. Thus, periodic inventory accounts reconciled to the perpetual inventory records provides assurance that the inventory records properly reflect the inventory on hand.
An auditor will ordinarily ascertain whether payroll checks are properly endorsed during the audit of
The payroll register.
Ordinarily, the auditor examines the endorsements on payroll checks while obtaining an understanding of and testing the payroll cycle, which includes consideration of the payroll register.
Effective controls relevant to the efficiency of purchases will result in proper evaluation of the time for ordering merchandise. When making this evaluation, the purchasing company should give primary consideration to
The trade-off between the cost of owning and storing excess merchandise and the risk of loss by not having merchandise on hand.
Effective purchasing departments should use the basic economic order quantity (EOQ) calculation that minimizes both the cost of owning and storing excess merchandise and the cost of ordering merchandise (and thus the timing of ordering). This model assumes the demand is constant and does not consider the cost of stockouts. Probabilistic models have been developed to incorporate the risk of loss (cost) by not having merchandise on hand.
Which of the following questions is appropriate for an internal control questionnaire concerning securities?
Do the internal auditors periodically test controls over securities?
Is there a record of all identification numbers of securities, and are securities held in the name of the company?
Is there a periodic reconciliation of the detail of securities with the security control account?
All are correct.
