7.6 Flashcards
In assessing risks of material misstatement for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support?
Occurrence.
A voucher signifies a liability. Its issuance is recorded in the voucher register after comparison of the vendor’s invoice with the purchase requisition, purchase order, and receiving report. The direction of testing is an important consideration in determining the relevant assertion. Selecting a sample of recorded entries in the voucher register and vouching them to the supporting documentation provides evidence that the transactions occurred.
In obtaining an understanding of a manufacturing entity’s internal control concerning inventory balances, an auditor most likely would
Review the entity’s descriptions of inventory policies and procedures.
The auditor makes inquiries of personnel, observes activities and operations, and reviews an entity’s documentation of controls relevant to the management of inventories to obtain an understanding of internal control.
Each of the following is an appropriate control over securities and investments except
Custodian separate from the 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.
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.
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.
Which of the following payroll control activities would most effectively ensure that payment is made only for work performed?
Require employees to have their direct supervisors approve their time cards.
An employee’s supervisor is in the best position to determine that the employee was present and did the assigned work. Thus, the supervisor approves (authorizes) the work performed (executed) by the employee.
Which of the following payroll control activities would most effectively ensure that payment is made only for work performed?
Require employees to have their direct supervisors approve their time cards.
An employee’s supervisor is in the best position to determine that the employee was present and did the assigned work. Thus, the supervisor approves (authorizes) the work performed (executed) by the employee.
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.
In manufacturing environments, employees are often required to use time cards and job time tickets. Which is the false statement related to the use of these documents?
Payroll should be prepared from job time tickets.
The payroll should be prepared from the time cards, which are the official records of time worked. The allocation of direct labor to the various jobs and the identification of indirect labor that should be charged to overhead is determined from the job time tickets.
Which of the following statements is correct concerning internal control in an electronic data interchange (EDI) system?
Preventive controls generally are more important than detective controls in EDI systems.
In general, preventive controls are more important than detective controls because the benefits typically outweigh the costs. In electronic processing, once a transaction is accepted, the opportunity to apply detective controls is often limited. Thus, preventing fraud or error is important.
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.
The authority to accept incoming goods in receiving should be based on a(n)
Approved purchase orders.
A receiving department should accept merchandise only if a purchase order or approval granted by the purchasing department is on hand.
When the shipping department returns nonconforming goods to a vendor, the purchasing department should send to the accounting department the
Debit memo.
A debit memo indicates a reduction in the amount owed to a vendor because goods have been returned. The debit memo authorizes the accounting department to debit the appropriate payable.
In planning to assess control risk for purchasing and disbursement procedures, the auditor will be least influenced by
The strength or weakness of internal control in other areas, e.g., sales and accounts receivable.
If the auditor wishes to rely on controls, (s)he should identify controls relevant to specific financial statement assertions (such as those related to the purchases cycle) and perform tests of controls to evaluate their operating effectiveness. The auditor should obtain sufficient appropriate evidence about operating effectiveness and document the results of the audit procedures, including the conclusions if they are not clear (AU-C 330). The effectiveness of internal control in other areas of an organization, such as sales and accounts receivable, should not affect the risk assessment for purchasing and disbursement procedures. Each area should be judged separately.
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.
