Which one of the following would not be considered an internal control structure policy or procedure relevant to a financial statement audit?
Answer (D) is correct. Policies and procedures relevant to a financial statement audit pertain to the entity’s ability to record, process, summarize, and report financial data consistent with the assertions in the financial statements. Other policies and procedures may not be relevant to a financial statement audit, e.g., those concerning the effectiveness, economy, and efficiency of certain management decision-making processes (AU 319). Production controls, such as quality control reports, may fall in the latter category.
Appropriate control over obsolete materials requires that they be
Answer (C) is correct Since auditors, storekeepers, etc., may not have the requisite expertise to determine whether materials are usable, that decision must often be made by a designated independent authority. To provide effective control of materials, this determination, asset custody, and authorization for disposal are functions that should be segregated.
A company has computerized sales and cash receipts journals. The computer programs for these journals have been properly debugged. The auditor discovered that the total of the accounts receivable subsidiary accounts differs materially from the accounts receivable control account. This could indicate
Answer (A) is correct. Sales returns and allowances require the crediting of accounts receivable. The recording of unauthorized credit memoranda is thus one explanation for the discrepancy if sales and cash receipts are properly recorded.
An auditor noted that the accounts receivable department is separate from other accounting activities. Credit is approved by a separate credit department. Control accounts and subsidiary ledgers are balanced monthly. Similarly, accounts are aged monthly. The accounts receivable manager writes off delinquent accounts after 1 year, or sooner if a bankruptcy or other unusual circumstances are involved. Credit memoranda are prenumbered and must correlate with receiving reports. Which of the following areas could be viewed as an internal control weakness of the above organization?
Answer (A) is correct. The accounts receivable manager has the ability to perpetrate irregularities because (s)he performs incompatible functions. Authorization and recording of transactions should be separate. Thus, someone outside the accounts receivable department should authorize write-offs.
One control objective of the financing/treasury cycle is the proper authorization of company transactions dealing with debt and equity instruments. Which of the following controls would best meet this objective?
Answer (B) is correct. The control objective of authorization concerns the proper execution of transactions in accordance with management’s wishes. One means of achieving this control objective is the establishment of policies as guides to action. When a decision affects the capitalization of the entity, a policy should be in force requiring review at the highest level.
The cash receipts function should be separated from the related record keeping in an organization to
Answer (D) is correct. Separating cash receipts and recordkeeping prevents an employee from misappropriating cash and altering the records to conceal the irregularity.
In an audit of a purchasing department, which of the following ordinarily would be considered a risk factor?
Answer (C) is correct. Purchasing from parties related to buyers or other company officials is a risk factor because it suggests the possibility of fraud. Such conflicts of interest may result in transactions unfavorable to the company.
Management wishes to include in its internal controls over factory payroll a procedure to ensure that employees are paid only for work actually performed. To meet this objective, which of the following internal control actions would be most appropriate?
Answer (A) is correct. Piecework is production that is compensated at a set amount per unit of output rather than time spent on the job. Comparing production amounts (inventory additions) with payments (piecework records) is therefore an appropriate control over payroll.
Which of the following credit approval procedures would be the basis for developing a deficiency finding for a wholesaler?
Answer (C) is correct. Salespeople should be responsible for generating sales and providing service to customers. For effective control purposes, the finance department should be responsible for monitoring the financial condition of prospective and continuing customers in the credit approval process.
A means of ensuring that payroll checks are drawn for properly authorized amounts is to
Answer (C) is correct. Review and approval of time cards by line supervisors is appropriate because they should know whether work has been performed. Also, because they do not distribute paychecks, they are not in a position to divert falsely authorized checks.