III. Inrernal Control: Transaction Cycles - Expenditures/Disbursements Flashcards
Internal control is strengthened when the quantity of merchandise ordered is omitted from the copy of the purchase order sent to the
Receiving department.
If the receiving department personnel are unaware of the quantities ordered, they will provide an independent count of quantities received.
What is a example of existence and occurence on test of controls?
Control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents.
it addresses whether recorded entries are valid and the direction of this test is from the recorded entry in the voucher register to the supporting documents.
How would you prevent a a paid disbursement voucher from being presented for payment a second time?
The official signing the check should compare the check with the voucher and should deface the voucher documents.
Note:
the person signing the check should deface or otherwise effectively cancel the voucher package, thereby reducing the risk of duplicate payment.
An internal control narrative indicates that an approved voucher is required to support every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively?
Select and examine canceled checks and ascertain that the related vouchers are dated no later than the checks.
Why?
Vouchers should have been prepared and approved prior to issuance of the check (otherwise the voucher was not present when the check was issued)
In addition, the auditor must begin his/her test with the canceled checks to determine whether all checks are supported by an approved voucher.
Most effective control to detect vouchers that were prepared for the payment of goods that were not received?
Match purchase order, receiving report, and vendor’s invoice for each voucher in accounts payable department.
Most likely be included in an internal control questionnaire concerning the completeness assertion for purchases?
Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?
Note:
Prenumbering and accounting for purchase orders, receiving reports, and vouchers will allow a company to determine that purchases are completely recorded.
An effective control that protects against the preparation of improper or inaccurate disbursements would be to require that all checks be
Signed by officer in order to see supporting evidence documentation is a very effective internal control measure.
Would an accounting clerk who enters invoices to account payable ledger for payment and mail check be able to remittances after they have been signed?
No, because recordkeeping responsibility over payments and custody of signed checks should be segregated.
If a client erroneously recorded a large purchase twice what should be done to detect this kind of error in a timely and efficient manner?
Reconciling the vendors’ monthly statements with the subsidiary ledger for payables should disclose a difference in the month following the error.
If the auditor recognizes that the documentation of details of the transaction is only retained for only a short amount of time, what should they do to compensate for this limitation?
Perform the test several times during the year, rather than only at year-end.
What exactly does a treasurer do?
They have custody of the checks after s/he signs them and may mail them most efficiently.
In order to have effective internal control what should the account payable department do?
should establish the agreement of the vendor’s invoice with the purchase order and receiving report to provide assurance that the item was both ordered and received.
An auditor compares information on canceled checks with information contained in the cash disbursement journal.
Why did they do this, what is the purpose of this?
To make sure that no discrepancies exist between the data on checks and data in the journal.
Operating control over check signing normally should be the responsibility of the
Treasurer.
What is the requirement to identify the population from which items should be selected to determine whether checks are being issued for unauthorized expenditures?
Canceled checks should be selected and compared with the approved vouchers, a prenumbered purchase order and prenumbered receiving reports. A canceled check that does not have such support may have been unauthorized.
An auditor wishes to perform tests of controls on a client’s cash disbursements procedures. If the control leaves no audit trail of documentary evidence, the auditor most likely will test the control by
Observation and inquiry.
Effective control that encourages receiving department personnel to count and inspect all merchandise received?
Quantities ordered are excluded from the receiving department copy of the purchase order.
Why?
If the quantities ordered are not known to the receiving department personnel, they will have to count and inspect the incoming merchandise to indicate the quantity received.
What are some of the responsibility of the account payable department when they receive the purchase order form?
Compare invoice price to purchase order price.
Ensure the purchase had been properly authorized.
Compare quantity ordered to quantity purchased.
Note:
They would not Ensure the goods had been received by the party requesting the goods.
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Why?
- although various parties may requisition goods, the goods are normally received and placed in stores. Therefore, accounts payable will be unable to determine whether the requisitioner actually received the goods.
An auditor’s primary objective in reviewing this cycle is to
Evaluate the reliability of information generated as a result of the purchasing process.
An auditor usually examines receiving reports to support entries in the
Voucher register and sales returns journal and check register
Why?
Receiving reports will be prepared when goods are received through purchase (as recorded in the voucher register) and when goods are received through sales returns (as recorded in the sales returns journal).
Check register results from transactions related to the receipt of goods.
Note:
A “sales journal” is not because it is recorded as a shipment
An internal control narrative indicates that an approved voucher is required to support every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively?
Select and examine canceled checks and ascertain that the related vouchers are dated no later than the checks.
Note:
The voucher must be created before the check is issued
With well-designed internal control, employees in the same department most likely would approve purchase orders, and also
Negotiate terms with vendors.
Why?
Because the department that normally approve purchases would often negotiate term of purchase with the vendors.
What would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases?
Prenumbering and accounting for purchase orders, receiving reports, and vouchers will allow a company to determine that purchases are completely recorded.
Jackson, the purchasing agent of Judd Hardware Wholesalers, has a relative who owns a retail hardware store. Jackson arranged for hardware to be delivered by manufacturers to the retail store on a COD basis thereby enabling his relative to buy at Judd’s wholesale prices. Jackson was probably able to accomplish this because of Judd’s poor internal control over
Proper control over purchases would require that ordered goods only be shipped to authorized locations; proper control would also determine that all ordered goods had been received by the firm. If purchase orders are issued by Judd and the purchases are never received, there is an internal control condition over the purchase orders.
- All purchase orders should be accounted for (prenumbered) and followed up to assure receipt of orders that are issued.
Note:
COD Basis is when you pay for goods that are shipped to its destination
