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Internal Control:

MULTIPLE CHOICE: 1.

Concepts

The basic concept of internal control which recognizes that the cost of internal control should not exceed the benefits expected to be derived is known as a. Management by exception. b. Management responsibility. c. Limited liability. d. Reasonable assurance. !"#$R% &

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(f the following control environment characteristics) identify the one that contributes most to effective internal control a. The audit committee consists of the president) two vice* presidents) and the corporate controller. b. The company does not have a centralized human resources function. c. The company has an effective internal audit staff that monitors controls on a continuous basis. d. The company routinely transacts business with related parties. !"#$R% +

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-t would be appropriate for the payroll accounting department to be responsible for which of the following functions. a. pproval of employee time records. b. Maintenance of records of employment) discharges) and pay increases. c. /reparation of periodic governmental reports as to employees0 earnings and withholding taxes. d. Temporary retention of unclaimed employee paychecks. !"#$R% +

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The most effective control to prevent unbilled and unrecorded shipments of finished goods is to a. Re2uire all outgoing shipments to be accompanied by a prenumbered shipping order and bill of lading 3signed by the carrier4. 5orward a copy of these documents to

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Chapter 6 Internal Control: Concepts accounting) to be placed in an open file awaiting receipt of the customer invoice copy. 5orward a copy of the shipping order and bill of lading to billing. -mplement a policy that prevents sales invoices from being mailed to customers in the absence of a properly approved shipping order and bill of lading signed by the carrier. 5orward a copy a the signed bill of lading to the stores manager.

b. c.

d.

!"#$R% 6. pex Manufacturing +orporation mass produces eight different products. The controller) who is interested in strengthening internal controls over the accounting for materials used in production) would be most likely to implement a. n economic order 2uantity 3$(74 system. b. 8ob order cost accounting system. c. perpetual inventory system. d. separation of duties among production personnel. !"#$R% 9. +

#hich of the following activities represents both an appropriate human resources function and a deterrent to payroll fraud. a. &istribution of paychecks. b. uthorization of overtime. c. uthorization of additions to and deletions from the payroll. d. +ollection and retention of unclaimed paychecks. !"#$R% +

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lpha +ompany uses its sales invoices for posting perpetual inventory records. -nade2uate internal control procedures over the invoicing function allow goods to be shipped that are not invoiced. The inade2uate controls could cause an a. ;nderstatement of revenues) receivables) and inventory. b. (verstatement of revenues and receivables) and an understatement of inventory. c. ;nderstatement of revenues and receivables) and an overstatement of inventory. d. (verstatement of revenues) receivables) and inventory.

Chapter 6 Internal Control: Concepts

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The human resources department receives an edit listing of payroll changes processed at every payroll cycle. -f they do not verify the changes processed) this could result in% a. ;ndetected errors in payroll rates for new employees. b. -naccurate social security deductions. c. Labor hours charged to the wrong account in the cost reporting system. d. $mployees not being asked if they want to contribute to the company pension plan. !"#$R%

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/roperty ac2uisitions that are misclassified as maintenance expense would most likely be detected by internal control procedures that provide for a. -nvestigation of variances within a formal budgeting system. b. Review and approval of the monthly depreciation entry by the plant supervisor. c. "egregation of duties of employees in the accounts payable department. d. $xamination by the internal auditor of vendor invoices and canceled checks for property ac2uisitions. !"#$R%

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&uring the review of a small business client0s internal control system) the auditor discovered that the accounts receivable clerk approves credit memos and has access to cash. #hich of the following controls would be most effective in offsetting this weakness. a. The owner reviews errors in billings to customers and postings to the subsidiary ledger. b. The controller receives the monthly bank statement directly and reconciles the checking accounts. c. The owner reviews credit memos after they are recorded. d. The controller reconciles the total of the detail accounts receivable accounts to the amount shown in the ledger. !"#$R% +

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#hich of the following) if material) would be considered fraud.

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Chapter 6 Internal Control: Concepts a. b. c. d. Mistakes in the application of accounting principles. +lerical mistakes in the accounting data underlying the financial statements. Misappropriation of an asset or groups of assets. Misinterpretations of facts that existed when the financial statements were prepared. +

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+ompetence of personnel is necessary to proper recording of transactions and supports financial statements that are fairly presented. -n reviewing the organization for necessary competence) which of the following 8ob types would be of least interest to the auditor. a. +orporate controller. b. ?ice*president for marketing. c. Manager of electronic data processing. d. +hief accountant. !"#$R% @

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n auditor would consider internal control procedures relating to a client0s payroll procedures to be ineffective if the payroll department supervisor is responsible for a. Airing subordinate payroll department employees. b. Aaving custody over unclaimed paychecks. c. ;pdating employee earnings records. d. pplying pay rates to time tickets. !"#$R% @

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#hich of the following is the most effective control procedure to detect vouchers that were prepared for the payment of goods that were not received. a. b. c. d. +ount goods upon receipt in storeroom. Match purchase order) receiving report) and vendor0s invoice for each voucher in accounts payable department. +ompare goods received with goods re2uisitioned in receiving department. ?erify vouchers for accuracy and approval in internal audit department. @

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Chapter 6 Internal Control: Concepts 16. 5or effective internal control purposes) which of the following individuals should be responsible for mailing signed checks. a. Receptionist. b. Treasurer. c. ccounts payable clerk. d. /ayroll clerk. !"#$R% 19. @

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$vidence of proper authorization) approval and review of transactions may appear on the face of documents supporting the transactions. #hich of the following techni2ues does not provide evidence of proper authorization) approval or review. a. /urchase orders are signed by the purchasing agent. b. Receiving reports are signed by persons inspecting and counting incoming goods. c. ?ouchers are signed or initialed by the person comparing vendors0 invoices) purchase orders) and receiving reports for prices) 2uantities) and stock description. d. "everal checks are signed in advance whenever the treasurer is scheduled to be out of town for an extended period. !"#$R% &

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-n general) material irregularities perpetrated by which of the following are most difficult to detect. a. -nternal auditor. b. Beypunch operator. c. +ashier. d. +ontroller. !"#$R% &

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#hich of the following is not an element of an entity0s internal control. a. +ontrol risk. b. +ontrol activities. c. The information system d. The control environment. !"#$R%

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Chapter 6 Internal Control: Concepts #hich of the following would not be considered an internal control feature. a. /renumbered documents. b. Limited access to documents. c. +ompetent personnel. d. comparison*shopping staff. !"#$R% &

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system of internal control) regardless of how carefully designed and implemented) contains certain inherent limitations. #hich of the following errors or irregularities is not caused by an inherent limitation. a. The president and chief executive officer) with the assistance of the corporate controller) inflated earnings by recording fictitious sales at year*end. b. newly*installed electronic data processing system failed to provide for a comparison of sales order amount with prior customer balance and credit limit. This resulted in numerous sales to customers who had already exceeded their credit limits. c. !umerous recording errors occurred because persons analyzing and recording transactions did not have the necessary accounting background. d. computer programmer and a computer operator conspired to divert funds from the company to an account controlled by the dishonest employees. !"#$R% +

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company policy should clearly indicate that defective merchandise returned by customers is to be delivered to the a. "ales clerk. b. Receiving clerk. c. -nventory control clerk. d. ccounts receivable clerk. !"#$R% @

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+ontrols that enhance the reliability of the financial statements may be classified as prevention controls and detection controls. #hich of the following is primarily a detection control. a. "eparation of duties between recording cash receipts and depositing cash. b. @ank accounts are reconciled monthly by persons independent of cash recording and cash custody.

Chapter 6 Internal Control: Concepts c.

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d.

The human resources department authorizes the hiring of only those persons for accounting positions that meet the written 8ob re2uirements specified by the corporate controller. n accounting manual) accompanied by a detailed chart of accounts) carefully and clearly describes each type of transaction affecting the entity. @

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-nternal control procedures are strengthened when the 2uantity of merchandise ordered is omitted from the copy of the purchase order sent to the a. &epartment that initiated the re2uisition b. Receiving department c. /urchasing agent d. ccounts payable department !"#$R% @

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#hich of the following observations) made during the preliminary survey of a local department store0s disbursement cycle) reflects a control strength. a. -ndividual department managers use pre*numbered forms to order merchandise from vendors. b. The receiving department is given a copy of the purchase order complete with a description of goods) 2uantity ordered) and extended price for all merchandise ordered. c. The treasurer0s office prepares checks for suppliers based on vouchers prepared by the accounts payable department. d. -ndividual department managers are responsible for the movement of merchandise from the receiving dock to storage or sales areas as appropriate. !"#$R% +

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-n a properly designed set of internal control procedures) the same employee should not be permitted to a. "ign checks and cancel supporting documents. b. Receive merchandise and prepare a receiving report. c. /repare disbursement vouchers and sign checks. d. -nitiate a re2uest to order merchandise and approve merchandise received. !"#$R% +

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Chapter 6 Internal Control: Concepts

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means of ensuring that payroll checks are drawn for properly authorized amounts is to% a. +onduct periodic floor verification of employees on the payroll. b. Re2uire that undelivered checks be returned to the cashier. c. Re2uire supervisory approval of employee time cards. d. #itness the distribution of payroll checks. !"#$R% +

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$ffective internal control re2uires organizational independence of departments. (rganizational independence would be impaired in which of the following situations. a. The internal auditors report to the audit committee of the board of directors. b. The controller reports to the vice president of production. c. The payroll accounting department reports to the chief accountant. d. The cashier reports to the treasurer. !"#$R% @

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$xternal forces can serve to either strengthen or weaken an entity0s internal control. #hich of the following conditions supports strong internal control. a. Threat of an -nternal Revenue "ervice audit. b. The existence of related parties and related party transactions. c. /ressure by the financial community to improve earnings performance. d. n economic downturn. !"#$R%

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/roper segregation of functional responsibilities calls for the separation of the a. uthorization) recording) and custodial functions. b. uthorization) execution) and payment functions. c. Receiving) shipping) and custodial functions. d. uthorization) approval) and execution functions. !"#$R%

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set of control procedures referred to as Cperiodic inventories and comparisons)C provides effective monitoring of accountability. lthough the term CinventoriesC is broadly defined for this purpose) which of the following does not fit the definition of periodic inventories and comparisons. a. @ank accounts are reconciled monthly by persons independent of cash custody and cash recording. b. +ash receipts are deposited intact daily and the receipted deposit ticket is obtained directly from the bank and compared with the recorded cash receipts by a person independent of cash custody and cash recording. c. /erpetual inventory records are maintained for ma8or classes of materials and finished goods and monthly counts and comparisons are made on a test basis. d. The treasurer reviews all documentation before signing disbursement checks. The checks are then mailed directly to the vendors and the documents are effectively canceled. !"#$R% &

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#hen considering the effectiveness of internal control) the auditor should recognize that inherent limitations do exist. #hich of the following is an example of an inherent limitation in a client0s internal control. a. The effectiveness of procedures depends on the segregation of employee duties. b. /rocedures are designed to assure the execution and recording of transactions in accordance with management0s authorization. c. -n the performance of most control procedures) there are possibilities of errors arising from mistakes in 8udgment. d. /rocedures for handling large numbers of transactions are processed by electronic data processing e2uipment. !"#$R% +

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The most effective control for ensuring that customers are billed only for goods shipped is to a. Re2uire that carriers sign properly completed bills of lading. b. -mplement a policy that prevents the mailing of sales invoices to customers in the absence of a properly approved shipping order and a bill of lading signed by the carrier.

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Chapter 6 Internal Control: Concepts c. d. Re2uire that all shipments be approved by accounting. /rohibit goods from leaving the warehouse without being accompanied by a signed bill of lading and a properly approved shipping order. @

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-n a properly designed accounts payable system) a voucher is prepared after the invoice) purchase order) re2uisition) and receiving report are verified. The next step in the system is to a. +ancel the supporting documents. b. $nter the check amount in the check register. c. pprove the voucher for payment. d. /ost the voucher amount to the expense ledger. !"#$R% +

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-n general) a material internal control weakness may be defined as a condition in which material errors or fraud would ordinarily not be detected within a timely period by a. n auditor during the normal study and evaluation of the system of internal control. b. controller when reconciling accounts in the general ledger. c. $mployees in the normal course of performing their assigned functions. d. The chief financial officer when reviewing interim financial statements. !"#$R% +

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The most effective control for insuring that incoming materials are received by stores is to a. $stablish a separate receiving function independent of purchasing and stores. b. Re2uire that a prenumbered copy of the receiving report) that accompanies the materials to stores) be signed by the stores manager) as evidence of receipt) and forwarded to accounting. c. +ompare the receiving report with the vendor0s invoice before approving payment. d. /rovide for a review and comparison of all documents accompanying an approved voucher before signing disbursement checks.

Chapter 6 Internal Control: Concepts !"#$R% ,9. @

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-nternal control is a function of management) and effective control is based upon the concept of charge and discharge of responsibility and duty. #hich of the following is an important feature of effective internal control. a. Responsibility for accounting and financial duties should be assigned to one responsible officer. b. Responsibility for the performance of each duty must be fixed. c. Responsibility for the accounting duties must be borne by the auditing committee of the company. d. Responsibility for accounting activities and duties must be assigned only to employees who are bonded. !"#$R% @

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The director of internal auditing of a manufacturing company is updating the long*range audit schedule. There are several possible audit assignments that can fill a given time spot. -nformation on potential dollar exposure and key internal controls have been gathered. @ased on perceived audit risk) select the assignment of greatest merit. a. /recious metals inventory * book value) D1)>>>)>>>E separately stored) but access not restricted. b. @ranch office petty cash * ledger amount) D6>)>>>E ten branch offices) e2ual amountsE replenishment of accounts re2uires three separate approvals. c. "ales force travel expenses * budget) D1)>>>)>>>E 6> sales peopleE all expenditures over D'6 must be receipted. d. $xpendable tools inventory * book value) D6>>)>>>E issued by tool crib attendant upon receipt of authorization form. !"#$R%

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#hich of the following is an effective internal accounting control over cash payments. a. "igned checks should be mailed under the supervision of the check signer. b. "poiled checks which have been voided should be disposed of immediately. c. +hecks should be prepared only by persons responsible for cash receipts and cash disbursements.

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Chapter 6 Internal Control: Concepts d. check signing machine with two signatures should be utilized.

!"#$R% ,=. /roper segregation of functional responsibilities in an effective system of internal control calls for separation of the functions of a. uthorization) execution) and payment. b. uthorization) recording) and custody. c. +ustody) execution) and reporting. d. uthorization) payment) and recording. !"#$R% 1>. @

5or good internal control) which of the following functions should not be the responsibility of the treasurer0s department. a. &ata processing. b. Aandling of cash. c. +ustody of securities. d. $stablishing credit policies. !"#$R%

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5or effective internal control) the accounts payable department should compare the information on each vendor0s invoice with the a. Receiving report and the purchase order. b. Receiving report and the voucher. c. ?endor0s packing slip and the purchase order. d. ?endor0s packing slip and the voucher. !"#$R%

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(f the following statements about internal control) which one is not valid. a. !o one person should be responsible for the custodial responsibility and the recording responsibility for an asset. b. Transactions must be properly authorized before such transactions are processed. c. @ecause of the costFbenefit relationship) a client may apply control procedures on a test basis. d. +ontrol procedures reasonably insure that collusion among employees cannot occur.

Chapter 6 Internal Control: Concepts !"#$R% 1,. &

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The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the a. dministrative controls from the internal accounting controls. b. Auman resources function from the controllership function. c. (perational responsibility from the record keeping responsibility. d. uthorization of transactions from the custody of dated assets. !"#$R% &

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#hich of the following is an internal control procedure that would prevent a paid disbursement voucher from being presented for payment a second time. a. ?ouchers should be prepared by individuals who are responsible for signing disbursement checks. b. &isbursement vouchers should be approved by at least two responsible management officials. c. The date on a disbursement voucher should be within a few days of the date the voucher is presented for payment. d. The official signing the check should cancel the paid voucher after examining the documentation supporting the disbursement. !"#$R% &

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#hich of the following control procedures would most likely be used to maintain accurate perpetual inventory records. a. -ndependent storeroom count of goods received. b. /eriodic independent reconciliation of control and subsidiary records. c. /eriodic independent comparison of records with goods on hand. d. -ndependent matching of purchase orders) receiving reports) and vendors0 invoices. !"#$R% +

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#hich of the following control procedures may prevent the failure to bill customers for some shipments. a. $ach shipment should be supported by a pre*numbered sales invoice that is accounted for.

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Chapter 6 Internal Control: Concepts b. c. d. $ach sales order should be approved by authorized personnel. "ales 8ournal entries should be reconciled to daily sales summaries. $ach sales invoice should be supported by a shipping document.

!"#$R% 1:. 5or maximum effectiveness) the organizational status of the internal audit department% a. "hould be sufficient to permit the accomplishment of its audit responsibilities. b. -s best when the reporting relationship is direct to the board of directors. c. Re2uires the board0s annual approval of the audit departmentGs) plans) and budgets. d. -s guaranteed when the charter specifically defines its independence. !"#$R% 1<. $ffective internal control over the payroll function should include which of the following. a. Total time recorded on time clock cards should be reconciled to 8ob reports by employees responsible for those specific 8obs. b. /ayroll department employees should be supervised by the management of the human resources department. c. /ayroll department employees should be responsible for maintaining employee personnel records. d. Total time spent on 8obs should be compared with total time indicated on time clock cards. !"#$R% 1=. &

+orporate directors) management) external auditors and internal auditors all play important roles in creating a proper control environment. Top management is primarily responsible for% a. $stablishing a proper environment and specifying an overall internal control structure. b. &esigning and operating a control system that provides reasonable assurance that established ob8ectives will be met. c. $nsuring that external and internal auditors ade2uately monitor the control environment.

Chapter 6 Internal Control: Concepts d. -mplementing and monitoring controls designed by the board of directors.

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!"#$R% 6>. #hich of the following is an internal control weakness related to factory e2uipment. a. policy exists re2uiring all purchases of factory e2uipment to be made by the department in need of the e2uipment. b. +hecks issued in payment of purchases of e2uipment are not signed by the controller. c. 5actory e2uipment replacements are generally made when estimated useful lives) as indicated in depreciation schedules) have expired. d. /roceeds from sales of fully depreciated e2uipment are credited to other income. !"#$R% 61. #hich of the following controls would be the most appropriate means to ensure that terminated employees had been removed from the payroll. a. Mailing checks to employees0 residences. b. $stablishing direct*deposit procedures with employees0 banks. c. Reconciling payroll and time*keeping records. d. $stablishing computerized limit checks on payroll rates. !"#$R% 6'. +

#hich of the following departments should have the responsibility for authorizing payroll rate changes. a. Auman Resources. b. /ayroll. c. Treasurer. d. Timekeeping. !"#$R%

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The director of internal auditing for a large retail organization reports to the controller and is responsible for designing and installing computer applications relating to inventory control. #hich of the following is the ma8or limitation of this arrangement.

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Chapter 6 Internal Control: Concepts a. b. c. d. -t prevents the audit organization from devoting full time to auditing. uditors generally do not have the re2uired expertise to design and implement such systems. -t potentially affects the director0s independence and thereby lessens the value of audit services. "uch arrangements are unlawful because the director participates in incompatible functions. +

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n internal auditor is examining inventory control in a merchandising division with annual sales of D,)>>>)>>> and a 1> percent gross profit rate. Tests show that ' percent of the dollar amount of purchases do not get into inventory due to breakage and employee theft. dding certain controls costing D,6)>>> annually could reduce these losses to .6 percent of purchases. "hould the control be recommended. a. Hes) because the pro8ected savings exceed the cost of the added controls. b. !o) because the cost of the added controls exceeds the pro8ected savings. c. Hes) because the ideal system of internal control is the most extensive one. d. Hes) regardless of cost*benefit considerations) because the situation involves employee theft. !"#$R% @

COMPLETION: 66. n overriding factor contributing to internal control effectiveness is toward internal control. !"#$R% 69. M ! I$M$!T TT-T;&$

chart of accounts) accounting manuals) and standard 8ournal entries promote proper of transactions. !"#$R% R$+(R&-!I .

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$vidence of proper approval) review) and recording of transactions is provided by a well*documented

Chapter 6 Internal Control: Concepts

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Limited access controls and accountability controls are subsets of . !"#$R% " 5$I; R& +(!TR(L"

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The independent auditor is interested only in those aspects of control that affect the . !"#$R% 5-! !+- L "T T$M$!T"

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n effective system of budgeting) standard costs) and performance reporting should highlight significant variances caused by failure to record transactions. This set of controls) therefore) assists in detecting material errors of . !"#$R% (M-""-(! is met) errors

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To the extent the assertion of of omission are minimized. !"#$R% +(M/L$T$!$""

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To assure proper control in a small business) the necessary approval and review procedures should be performed by the . !"#$R% (#!$RFM ! I$R

MATCHING: 9,. -ndicate by letter the internal control that best describes each of the listed control procedures. a. b. c. d. JJJJ1. JJJJ'. ccuracy control**prevention ccuracy control**detection "afeguard control**prevention "afeguard control**detection ll incoming checks are restrictively endorsed immediately upon receipt ccounting manuals are used to determine debit and credit

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Chapter 6 Internal Control: Concepts accounts for nonrecurring transactions

JJJJ,.

@ank accounts are reconciled monthly by persons not having access to either financial assets or accounting records

JJJJ1.

!ewly*hired accounting personnel undergo rigorous training before assuming responsibility for transaction processing JJJJ6. JJJJ9. Members of the internal audit staff perform a monthly review of all non routine 8ournal entries ll cash receipts are prelisted and deposited intact daily

JJJJ:. member of the controllerGs staff compares the receipted bank deposit ticket with the cash prelisting JJJJ<. set of standard 8ournal entries is used to record such monthly 8ournal entries as depreciation) amortization) accrued payroll) accrued interest) and bad debts expense ll revenue and expense budget variances in excess of predetermined levels are investigated for cause on a monthly basis

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JJJJ1>. @efore signing checks) the treasurer reviews all documentation "(L;T-(!% 1. '. ,. 1. 6. 9. :. <. =. 1>. c a d a b c d a b b

PROBLEM/ESSA :

Chapter 6 Internal Control: Concepts

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91. n important component of internal control monitoring is the periodic examination of substance and comparison with its recorded accountability. Iive three examples of this form of monitoring and) for each example) identify the account and the underlying substance. "(L;T-(!% 1. '. ,. all exceptions reported by customers "ubstance% customer responses to statements ccount% accounts receivable subsidiary ledger and control account +ount cash in cash register 3substance4 and compare with locked*in tape 3account4 +ompare brokersG monthly statement 3substance4 with investment ledger 3account4 +ompare vendorsG statements 3substance4 with accounts payable ledger 3account4 +ompare receipted bank deposit slip 3substance4 with cash receipts entry and prelisting 3account4 -nspect plant assets 3substance4 and compare with plant assets ledger 3account4 +ompare inventories 3substance4 with perpetual inventory records 3account4 Reconcile bank accounts "ubstance% bank statements ccount% general ledger cash account gree accounts receivable subsidiary ledger with control) mail statements to customers) and clear

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96. sset safeguard controls may be classified as access controls and accountability controls. Iive two examples of each. "(L;T-(!% ccess controls% 1. '. ,. 1. 6. 9. "ecure areas for merchandise) small tools) supplies) securities) etc. +ash registers with locked*in tapes Limited access to unused documents &aily intact deposits of cash receipts "ystem of passwords to limit access to computer data bases &ual access to negotiable securities

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Chapter 6 Internal Control: Concepts

ccountability controls% 1. '. ,. 1. 5ixing responsibility over prenumbered documents /eriodic accounting for numeric se2uence of used documents $stablishing imprest funds for petty cash and fixing responsibility for custodianship @onding of employees in positions of trust

99. 5or each of the cases described below) identify the principal control activities that would have prevented or detected the misstatement. 1. The shipping clerk of &uvinski $nterprises was able to remove goods from the companyGs warehouse by fabricating shipping orders and bills of lading. n accomplice with a trucking company was able to pick up the goods during normal business hours and transport them to warehouse space rented by the duo. The fraud was detected when the one of the trucking company dispatchers discovered that the truck was being used for unscheduled runs. 5urther investigation by the firm revealed the delivery destination) whereupon the driver confessed to the thefts. '. -n conducting the annual audit for @evis Rod and Reel) -nc.) the auditors noted that several monthly and year*end ad8ustments had not been recorded by the company. mong the omissions were depreciation) interest accruals) and employer payroll taxes. ,. lthough the auditors) by drafting the necessary audit ad8ustments) provide reasonable assurance as to the fairness of the annual financial statements) +omptronix $xploration and &evelopment +ompanyGs monthly statements fre2uently contained material errors due to improper recording of uni2ue and often complex transactions. 1. ;nrecorded customer remittances were misappropriated accounts receivable clerk. The affected accounts were by a combination of fictitious sales returns) inflated discounts) and write*off of the overstated balances to allowance for doubtful accounts. "(L;T-(!% by an reduced sales the

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1. ;se of prenumbered documents) restricted access to unused documents) fixing of responsibility over document custody) and periodic accounting for) and cancellation of) used documents would have prevented the clerk from gaining access to the documents and using them to effect the fraudulent transfer. lso) as part of the accounting for used documents) shipping orders and bills of lading should be matched with sales invoices to determine that all shipments have been billed to customers. -n the present case) the shipments were never billed. '. set of standard 8ournal entries for all recurring ad8ustments would have ensured proper recording of monthly depreciation) interest) and payroll taxes. Monthly review of the general ledger trial balance by responsible accounting personnel provides further assurance that both recurring and nonrecurring ad8ustments are not overlooked. ,. detailed chart of accounts and accounting manuals describing the various accounts and related transactions) together with ade2uate hiring and training policies for accounting personnel) should provide reasonable assurance of correct recording of non routine transactions. 1. /roper separation of duties should have prevented the accounts receivable clerk from having access to customer remittances. +ustomer accounts should be posted from cash prelistings and remittance advices**not from the checks themselves. lso) effective internal control should re2uire proper approval of all accounts receivable write*offs. 5inally) sales returns should be supported by proper documentation) including receiving reports evidencing receipt of the returned goods.