When considering internal control over securities, the auditor is especially concerned about
Answer (A) is correct.
Access to stock certificates by the controller is a breakdown of the
fundamental segregation of duties needed for effective internal control.
The controller, who performs the accounting function, should not have
access to the assets.
In a retail cash sales environment, which of the following controls is often absent?
Answer (B) is correct.
In the usual retail cash sales situation, the sales clerk authorizes and
records the transactions and takes custody of assets. However,
management ordinarily employs other compensating controls to
minimize the effects of the failure to segregate functions. The cash
receipts function is closely supervised, cash registers provide limited
access to assets, and an internal recording function maintains control
over cash receipts.
The procedure that would best discourage the resubmission of vendor invoices after they
have been paid is
Answer (C) is correct.
Canceling vouchers and supporting papers (with perforations, ink, etc.)
upon payment prevents the payment of a duplicate voucher. If the person
signing the check does the canceling, the documents cannot be recycled
for duplicate payments. Securing the paid-voucher file from access by the accounts payable clerk is another effective control.
Organizational independence in the processing of payroll is achieved by functional
separations that are built into the system. Which one of the following functional separations
is not required for internal control purposes?
Answer (D) is correct.
Most companies have their payrolls prepared by the same individuals
who maintain the year-to-date records. There is no need for this
functional separation because both duties involve record keeping.
An employee should not be able to visit the corporate safe-deposit box containing
investment securities without being accompanied by another corporate employee. What
would be a possible consequence of an employee being able to visit the safe-deposit box
Answer (A) is correct.
The bank should maintain a record, which can be inspected by company
personnel, of all safe-deposit box visits. Access should be limited to
authorized officers. Firms typically require the presence of two
authorized persons for access to the box. This precaution provides
supervisory control over, for example, the temporary removal of the
securities to serve as a pledge for a loan (hypothecation of securities).
Which control is not appropriate for property, plant, and equipment?
Answer (A) is correct.
No control should require disposal of fully depreciated assets. They may
still be productive and used in the business and should remain on the
books until disposal.
Internal control should follow certain basic principles to achieve its objectives. One of these principles is the segregation of functions. Which one of the following examples does not violate the principle of segregation of functions?
Answer (A) is correct. Control procedures include segregation of duties to reduce the risk that any person may be able to perpetrate and conceal errors or fraud in the normal course of his or her duties. Different persons should authorize transactions, record transactions, and maintain custody of assets. The treasurer’s department should have custody of assets but should not authorize or record transactions. Because the assistant treasurer reports to the treasurer, the treasurer is merely delegating an assigned duty related to asset custody. The use of the check-signing machine does not conflict with any other duty of the assistant treasurer and does not involve authorization or recording of transactions.
If internal control is well designed, two tasks that should be performed by different persons are
Answer (D) is correct. Recording of cash establishes accountability for assets. The bank reconciliation compares that recorded accountability with actual assets. The recording of cash receipts and preparation of bank reconciliations should therefore be performed by different individuals since the preparer of a reconciliation could conceal a cash shortage. For example, if a cashier both prepares the bank deposit and performs the reconciliation, (s)he could embezzle cash and conceal the theft by falsifying the reconciliation.
Which one of the following situations represents an internal control weakness in the payroll department?
Answer (B) is correct. Paychecks should not be distributed by supervisors because an unscrupulous person could terminate an employee and fail to report the termination. The supervisor could then clock in and out for the employee and keep the paycheck. A person unrelated to either payroll record keeping or the operating department should distribute checks.
Which of the following activities represents both an appropriate personnel department function and a deterrent to payroll fraud?
Answer (C) is correct. The payroll department is responsible for assembling payroll information (record keeping). The personnel department is responsible for authorizing employee transactions such as hiring, firing, and changes in pay rates and deductions. Segregating the recording and authorization functions helps prevent fraud.