Week 7 Quiz Flashcards
The owner of a convenience store suspects that one of her employees is stealing from the store. Which one of the following employee actions could go undetected if the owner does NOT intervene?
a)
Only take small amounts of cash from the cash register.
b)
Ask customers if they want a receipt before entering the sale in the cash register.
c)
Shortchange customers by small amounts; if a customer notices, claim it was honest error.
C is correct.
Which of the following should be regarded as a sign that fraud may be occurring?
a) The corporate controller drives an expensive luxury automobile.
Correct Response
b) An accounts receivable clerk never takes vacations.
c) The staff turnover rate for part-time cashiers is very high.
d) A petty cash fund is replenished on a frequent basis.
Answer B is correct because an accounts receivable clerk who never takes vacations may be “lapping,” i.e. keeping amounts received and later making up shortages by using new cash receipts. This type of fraud often goes undetected for long periods of time until the clerk has an unexpected absence, requiring someone else to assume the clerk’s duties.
Effective internal control in a small company that has an insufficient number of employees to permit proper division of responsibilities can best be enhanced by which of the following actions:
a) Employment of temporary personnel to aid the separation of duties.
b) The continuous review of all aspects of the business by the owner of the business, including the output of the accounting system.
c) Engaging an outside accountant to perform the monthly accounting duties.
d) Delegation of a full, clear-cut responsibility to each employee for the functions assigned to each.
Answer B is correct.
John works for a small company and is responsible for making disbursements by cheque and also to reconcile the monthly bank statements. Which of the following best describes the control impact of this arrangement?
a) This arrangement improves the companies control over the cash account.
b) John is in a position to make and conceal unauthorized payments.
c) John is able to make unauthorized adjustments to the cash account.
d) There is no negative impact since this is best practice for small companies.
Answer B is correct because independent reconciliation of bank accounts is necessary for effective internal control. Persons involved in making disbursements or receiving payments should not reconcile the bank statements with the accounting records. Segregating these functions reduce the opportunity for perpetrating and concealing an irregularity.
Capri Flowers is a small, owner-managed business with three employees. One employee acts as the receptionist and takes orders, receives cash payments, handles all the mail, and keeps the daily listing of all activities. The second employee fills orders and takes care of recording the activity from the daily summary in the accounts. She does this from her home after hours, as her days are busy making up flower orders. The third employee fills and ships orders and refuses to take any further responsibility for other tasks. The owner also fills out the odd order but spends her time taking care of the customer relations and inspecting all orders before they go out. The owner is concerned that the segregation of duties may not be appropriate in this small business. Which of the following poses the greatest threat to Capri Flowers?
a) The second employee records the daily activity sheets from home.
b) The owner fills orders and reviews them.
c) The receptionist takes all cash and records the daily summary sheet.
d) The third employee fills and ships orders.
nswer C is correct because the receptionist has access to cash and accounting records. She could take cash receipts and adjust the sales activities to cover the theft.
Rick Riteon owns a lumber yard, Rick’s Build It Ltd. Rick and his General Manager, George, do all the ordering of product through the use of purchase orders. Last month, the company was put on hold by several suppliers. Supplier invoices are received by the AP clerk who forwards them to Rick or George for approval. When Rick or George reviews the invoices, they often discover they are billed for items that were not received or for incorrect shipments so they put the invoices aside to follow up. As a result, invoices are not paid on a timely basis and hence the company was put on hold. What internal control procedure would assist in identifying the problem of incorrect shipments sooner in the process?
a) The receiver compares the shipment to the packing slip and the purchase order and follows up on discrepancies.
b) The AP clerk tests the footing and extensions of the invoice.
c) The receiver checks the invoice to the packing slip to ensure they are consistent.
d) The invoices are paid right away and problems are followed up on after the fact.
Answer A is correct because this procedure allows for problems to be identified at the point of receipt and followed up right away so issues with invoices are resolved far more quickly.
Businesses are concerned with safeguarding of assets and as a result, they want to ensure they do not pay an invoice twice. Which of the following would NOT
prevent a company from paying an invoice twice?
a) Computer system is set to flag that an invoice number for a supplier has already been entered.
b) Invoices are stamped “Entered” when input into the system and “Paid” when the invoice is paid.
c) The company will only process original invoices – any exception must be approved by the Controller evidenced by a signature.
d) AP clerk ensures there is a proper signature of departmental approval before paying
Answer D is correct because the AP clerk may ensure there is proper approval but there may be so many invoices that the department manager may not realize they have already approved the invoice.
The primary responsibility for preventing fraud in an organization lies with:
a) Management
b) The internal auditor
c) The audit committee of the board of directors
d) The external auditor
Answer A is correct because the principal mechanism for preventing fraud is control. Primary responsibility for establishing and maintaining control rests with management. Such prevention is ultimately a matter of policies and procedures established by management.
Bill Smith CPA, a sole practitioner based in Vancouver, is considering accepting Golden Minerals Inc. as a new audit client. Golden Minerals is a small, private company engaged in the exploration of gold and other minerals in Alaska. The Company’s office and staff are located in Vancouver. The most significant factor that Bill must consider in whether he accepts the client is:
a) Whether he has an office in Alaska
b) Why the company requires audited financial statements
c) Whether he has other clients in the same industry
d) The quality of the client’s internal controls
Answer B is correct because if Bill cannot meet the needs of the users or the intended use of the financial statements, and any deadlines imposed, then the engagement should not be accepted.
Which of the following types of documentary evidence should the auditor consider to be the most reliable?
a) A sales invoice issued by the client and supported by delivery receipts from an outside trucker
b) Confirmation of an accounts payable balance mailed by and returned directly to the auditor
c) A cheque issued by the company and returned to the client with the bank statement
d) A working paper prepared by the client’s controller and reviewed by the client’s treasurer
Answer A is incorrect because the sales invoice is a document that originated inside the client. Evidence of delivery by the trucker does not add credibility to the internal document because the trucker would have no knowledge of the document contents.
On January 1, Year 1, ABC Inc. bought and received equipment from a U.S. supplier for $100,000 USD payable on March 1, Year 1. On January 1, immediately after receiving the supplier’s invoice, ABC entered into a 60-day forward exchange contract to purchase $100,000 USD for $105,000 CAD for delivery on March 1.
Spot exchange rates:
January 1
$1 USD = $1.04 CAD
March 1
$1 USD = $1.06 CAD
60-day forward rates:
January 1
$1 USD = $1.05 CAD
March 1
$1 USD = $1.09 CAD
Assume that no depreciation had been taken on the equipment. The March 1 book value of the equipment would be
a) $104,000 CAD
b) $106,000 CAD
c) $105,000 CAD
d) $109,000 CAD
Answer A is correct because the equipment is non-monetary. Therefore it should be valued at its historical cost, which would be $1 US = $1.04 CAD = $104,000.
ABC Inc. (ABC) plans to purchase inventories from a foreign supplier for 500,000 FC to be received on January 15, 20X2. It is now October 15, 20X1 and the spot rate is 1 FC = 1.07 CAD. In order to cover the foreign exchange risk on its planned purchase, ABC arranges a forward contract with a bank to buy 500,000 FC at the forward rate of 1 FC = 1.10 CAD in 90 days.
ABC has designated, at its inception, the forward contract as a hedging instrument and has met all other conditions to apply hedge accounting. Under IFRS, how would ABC report changes in the fair value of the forward contract in its financial statements for year ended December 31st 20X1?
a) In profit and loss
b) There is nothing to record because this is simply a plan to purchase inventories.
c) In other comprehensive income (OCI)
d) No adjustment is necessary as hedge accounting is used
Answer C is correct because this type of hedge would be classified as a cash flow hedge. The gain or loss would be “parked” in OCI until the hedged item is recognized (when inventories are received) and then gain or loss is applied against the purchase price of the inventories.
Which of the following statements best represent some of the requirements under National Instrument 52-109 annual certification filing made by the CEO and CFO of a publicly-listed company?
a) Certification that the financial statement present fairly, in all material respects, the financial statements of the issuer in accordance with GAAP.
b) Certification of the design and effectiveness of disclosure controls and procedures.
c) Certification that all environmental liabilities have been adequately identified and disclosed in the MD&A.
d) Certification that the management has made all the required representations to the auditors of all matters of interest.
B is correct
You, the internal auditor of McKenzie Manufacturing, are reviewing the payroll system, which works as follows:
· All manufacturing employees are assigned their duties by the shop foreman.
· Manufacturing employees use a time clock to record their arrival and departure times.
· Timesheets are submitted weekly to the receptionist who checks to ensure she has accounted for all employees.
· Timesheets are then forwarded to a payroll clerk who checks the mathematical accuracy of the timesheets and then enters them into the payroll system in a batch using a control total for the number of hours.
· A report is printed and sent to the payroll department supervisor for approval.
· New employees are entered in the system by the personnel department after ensuring that the person exists, the shop foreman authorized the hiring, the shop foreman was authorized to hire the person, and the appropriate rate is assigned.
Based upon the above information, how could you improve control over the payroll system?
a) Timesheets should be authorized by the shop foreman.
b) Timesheets should be re-added by the payroll clerk.
c) The payroll department should add new employees to the system, not the personnel department.
d) The batch report should be reviewed by the shop foreman, not the payroll supervisor.
Answer A is correct because the shop foreman’s authorization prevents employees from being paid for hours not worked. Otherwise, an employee could punch a timesheet for an absent employee.
An entity’s system of internal controls is designed to prevent or detect material misstatements in the financial statements caused by:
a) Collusion between parties performing segregated functions.
b) Transactions of an unusual nature.
c) Employee error and unauthorized actions.
d) Management’s ability to override internal controls.
Answer C is correct because internal controls are designed to provide reasonable assurance that errors are prevented or detected. It is costly to implement an ideal system, and impossible to design a system that is not subject to human error, management override, or collusion.
