Internal Control -- Purchases, Payroll, and Other Cycles

Question 1

What is an essential element of the audit trail in an EDI system?

Answer 1

Network and sender-recipient acknowledgments

E.g. Allows for the tracing of a transaction from initiation to conclusion

Question 2

How would I best detect if Equipment acquisitions were misclassified as a maintenance expense?

Answer 2

By investigating variances within a formal budgeting system

Why?: Because a formal planning and budgeting system that estimates maintenance expense at a certain level will:

• Report a significant variance if capital expenditures are charged to the account

Question 3

How could I best determine the effectiveness of an entity’s policies and procedures related to the “existence or occurrence” assertion for payroll transactions?

Answer 3

By inquiring about and observing the segregation of duties involving:

• human resource responsibilities (authorization); and
• payroll disbursement (custody)

Question 4

What should the auditor do in a review of an EDI application using a third-party service provider?

Answer 4

(1) Determine if an independent review of the service provider’s operation was conducted
(2) Verify that the service provider’s contracts includes necessary clauses (e.g. right to audit)

Question 5

What is the primary objective of a cash budget?

Answer 5

To:

• Ensure sufficient funds are available at all times to satisfy maturing liabilities

Note: The CFO is usually responsible for the planning tool