III. Inrernal Control: Transaction Cycles - Expenditures/Disbursements

Question 1

Internal control is strengthened when the quantity of merchandise ordered is omitted from the copy of the purchase order sent to the

Answer 1

Receiving department.

If the receiving department personnel are unaware of the quantities ordered, they will provide an independent count of quantities received.

Question 2

What is a example of existence and occurence on test of controls?

Answer 2

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.

Question 3

How would you prevent a a paid disbursement voucher from being presented for payment a second time?

Answer 3

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.

Question 4

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?

Answer 4

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.

Question 5

Most effective control to detect vouchers that were prepared for the payment of goods that were not received?

Answer 5

Match purchase order, receiving report, and vendor’s invoice for each voucher in accounts payable department.

Question 6

Most likely be included in an internal control questionnaire concerning the completeness assertion for purchases?

Answer 6

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.

Question 7

An effective control that protects against the preparation of improper or inaccurate disbursements would be to require that all checks be

Answer 7

Signed by officer in order to see supporting evidence documentation is a very effective internal control measure.

Question 8

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?

Answer 8

No, because recordkeeping responsibility over payments and custody of signed checks should be segregated.

Question 9

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?

Answer 9

Reconciling the vendors’ monthly statements with the subsidiary ledger for payables should disclose a difference in the month following the error.

Question 10

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?

Answer 10

Perform the test several times during the year, rather than only at year-end.

Question 11

What exactly does a treasurer do?

Answer 11

They have custody of the checks after s/he signs them and may mail them most efficiently.

Question 12

In order to have effective internal control what should the account payable department do?

Answer 12

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.

Question 13

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?

Answer 13

To make sure that no discrepancies exist between the data on checks and data in the journal.

Question 14

Operating control over check signing normally should be the responsibility of the

Answer 14

Treasurer.

Question 15

What is the requirement to identify the population from which items should be selected to determine whether checks are being issued for unauthorized expenditures?

Answer 15

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.

Question 16

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

Answer 16

Observation and inquiry.

Question 17

Effective control that encourages receiving department personnel to count and inspect all merchandise received?

Answer 17

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.

Question 18

What are some of the responsibility of the account payable department when they receive the purchase order form?

Answer 18

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.

• 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.

Question 19

An auditor’s primary objective in reviewing this cycle is to

Answer 19

Evaluate the reliability of information generated as a result of the purchasing process.

Question 20

An auditor usually examines receiving reports to support entries in the

Answer 20

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

Question 21

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?

Answer 21

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

Question 22

With well-designed internal control, employees in the same department most likely would approve purchase orders, and also

Answer 22

Negotiate terms with vendors.

Why?

Because the department that normally approve purchases would often negotiate term of purchase with the vendors.

Question 23

What would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases?

Answer 23

Prenumbering and accounting for purchase orders, receiving reports, and vouchers will allow a company to determine that purchases are completely recorded.

Question 24

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

Answer 24

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

Question 25

Propex Corporation uses a voucher register and does not record invoices in a subsidiary ledger. Propex will probably benefit most from the additional cost of maintaining an accounts payable subsidiary ledger if

Answer 25

Partial payments are continuously made to vendors, an accounts payable subsidiary ledger would be very beneficial to the corporation

Note:

The subsidiary ledger would be used to keep track of the amounts still outstanding after partial payments.

Question 26

What type of controls is usually performed in the voucher payable department?

Answer 26

• Matching the vendor’s invoice with the related receiving report.
• Approving vouchers for payment by having an authorized employee sign the vouchers.
• Indicating the asset and expense accounts to be debited.

Question 27

An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet without recording the purchase or receipt of the merchandise. When vendors’ invoices arrive, one of the employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all

Answer 27

Cash disbursements.

Why?

Because the disbursement will be recorded and the auditor may thus sample from that population

because the voucher was destroyed and also the the receiving report was not recorded

Question 28

To avoid potential errors and fraud a well-designed internal control in the accounts payable area should include a separation of which of the following functions?

Answer 28

The accounts payable function normally includes invoice verification. The important separation should be between authorization of payment and actual cash disbursements.

Question 29

To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is

Answer 29

Stamped “paid” by the check signer.

Thus, the stamped “paid” by the check signer, that support may not be submitted for payment a second time.

Question 30

Which of the following controls should prevent an invoice for the purchase of merchandise from being paid twice?

Answer 30

The check signer reviews and cancels the voucher packets.

Why?

Canceling of the voucher packets will make it impossible for a second payment to be processed since no uncanceled voucher packet will be present in support of the disbursement the second time.

Question 31

With properly designed internal control, the same employee most likely would match vendors’ invoices with receiving reports and also

Answer 31

Recompute the calculations on vendors’ invoices.

Why?

While matching invoices and receiving reports, the employee might effectively recompute the calculations on the vendors’ invoices to determine that the amounts are proper.

Question 32

Standard control for cash disbursements

Answer 32

Checks should be sequentially numbered, and the person preparing bank reconciliations should account for all checks. This provides control over unauthorized and unrecorded checks.

Question 33

In a properly designed accounts payable system, a voucher is prepared after the invoice, purchase order, requisition, and receiving report are verified. The next step in the system is to

Answer 33

note: a voucher is prepared after the invoice,

1. purchase order,
2. requisition, and
3. receiving report are verified.
4. Approve the voucher for payment
   
   1. Cancel the supporting document should be done at time of payment
5. Post the voucher to be recorded