1.

The authority to accept incoming goods in

receiving should be based on a(n)
Bill of lading

Question 4
Of the following statements about internal controls,
which one is not valid?
Transactions must be properly authorized

Vendor's invoice
Approved purchase order
Materials requisition

4.1 Auditing - 3. Internal Control (Easy)

2. Which of the following is not a valid concept
of internal control?
When one person is responsible for all phases
of a transaction, there should be a clear designation
of that person's responsibility.
The recorded accountability for assets should
be compared with the existing assets at reasonable
intervals and appropriate action should be taken if
there are differences.
Accounting control procedures may
appropriately be applied on a test basis in some
circumstances.
Procedures designed to detect errors and
irregularities should be performed by persons other
than those in a position to perpetrate irregularities.
4.1 Auditing - 3. Internal Control (Average)
Question 3
In order to determine whether the internal controls
operated effectively to minimize instances of failure
to invoice a shipment, the auditor would select a
sample from transactions from the population
represented by the
Bill of lading file
Customer's accounts receivable master file
Customer order file
Sales invoice file

before such transactions are processed

Because of the cost-benefit relationship, a
client may apply controls on a test basis
No one person should be responsible for the
custodial responsibility and the recording
responsibility for an asset
Control procedures reasonably ensure that
collusion among employees cannot occur
4.1 Auditing - 3. Internal Control (Average)
Question 5
A means of ensuring that payroll checks are drawn
for properly authorized amounts is to
Witness the distribution of payroll checks
Conduct periodic floor verification of employees
on the payroll
Require supervisory approval of employee time
cards
Require that undelivered checks be returned to
the cashier
4.1 Auditing - 3. Internal Control (Average)
Question 6
The primary purpose for obtaining an understanding
of an audit client's internal control structure is to:
Obtain sufficient, appropriate evidential matter
to afford a reasonable basis for an opinion on the
financial statements under examination.
Provide a basis for making constructive
suggestions in a management letter.
Determine the nature, timing and extent of tests
to be performed in the audit.
Provide information for a communication of

4.1 Auditing - 3. Internal Control (Average)

internal control structure-related matters to

management.
4.1 Auditing - 3. Internal Control (Average)
Question 7
Internal control is strengthened when the quantity of
merchandise ordered is omitted from the copy of the
purchase order sent to the:
accounts payable department
purchasing agent
receiving department
department that initiated the requisition

4.1 Auditing - 3. Internal Control (Average)

Question 8
Smaller public companies face challenges
implementing effective internal control due to
______.
Limited resources
A lack of expertise
Reduced importance

Which of the following questions would not be

appropriate for an internal control questionnaire
concerning inventory?
Is access to the storeroom limited to authorized
personnel?
Are disbursement vouchers approved before
payment?
Are there independent, periodic comparisons of
inventory records with good on hand?
Are goods stored in locked storage areas?

4.1 Auditing - 3. Internal Control (Average)

Question 11
Which of the following is not an inherent limitation of
internal controls?
Internal controls are generally only instituted for
recurring transactions.
Management generally has the authority to
override internal controls.
Control procedures can frequently be
circumvented through collusion.
Segregation of duties is not possible when

Limited available guidance

there are only a few employees.
4.1 Auditing - 3. Internal Control (Average)

4.1 Auditing - 3. Internal Control (Average)

Question 9
The auditor considers internal control in order to
determine:
inherent risk in an account balance

Question 12
A(n) _______ deficiency exists if a necessary
control is missing or not properly formulated.
Significant

both B and C.

Design

the nature, timing and extent of substantive

Operating

testing to perform
.
an acceptable level of control risk for an
account balance.
4.1 Auditing - 3. Internal Control (Average)
Question 10

Control

4.1 Auditing - 3. Internal Control (Average)

Question 13

Significant deficiencies are matters that come to an

auditors attention and should be communicated to
an entitys audit committee because they represent:
Intentional attempts by client personnel to limit

customers' purchase orders.

All sales invoices are checked as to all details

the scope of the auditors field work

Material frauds perpetrated by high-level

after their preparation.

Statistical sales data are compiled and

management
Flagrant violations of the entitys documented

reconciled with recorded sales.

Differences reported by customers are

conflict-of-interest policies
Internal control deficiencies that could

satisfactorily investigated.

adversely affect a companys ability to initiate,

record, process, or report external financial
statements reliably
4.1 Auditing - 3. Internal Control (Average)
Question 14
Fraudulent financial reporting is often called
Employee fraud
Defalcation
Theft of
assets

All sales invoices are compared with the

4.1 Auditing - 3. Internal Control (Average)

Question 17
Which of the following is the most effective control
procedure to detect vouchers that were prepared for
the payment of goods that were not received?
Match purchase order, receiving report, and
vendor's invoice for each voucher in accounts
payable department
Verify vouchers for accuracy and approval in

Management fraud

4.1 Auditing - 3. Internal Control (Average)

Question 15
Which of the following is an internal control
weakness related to factory equipment?
Factory equipment replacements are generally
made when estimated useful lives, as indicated in
depreciation schedules, have expired
Checks

internal audit department

Count goods upon receipt in storeroom
Compare goods received with goods
requisitioned in receiving department
4.1 Auditing - 3. Internal Control (Average)

issued in payment of purchases of equipment are

not signed by the controller
Proceeds from sales

Question 18
Internal controls are designed to provide reasonable
assurance that
Management's planning, organizing, and

of fully depreciated equipment are credited to other

income
A policy exists requiring all purchases of

directing processes are properly evaluated.

Material errors or fraud will be prevented or

factory equipment to be made by the department in

need of the equipment
4.1 Auditing - 3. Internal Control (Average)

detected and corrected within a timely period by

employees in the course of performing their
assigned duties.
Management's plans have not been

Question 16
Copies of sales invoices show different unit prices
for apparently identical items.

circumvented by worker collusion.

The internal auditing department's guidance
and oversight of management's performance is

accomplished economically and efficiently.

4.1 Auditing - 3. Internal Control (Average)

4.1 Auditing - 3. Internal Control (Average)

Question 22
Which of the following is not an element of an
entity's internal control?
The information system

Question 19
A process implemented by management to assess
the effectiveness of internal control performance
over time.
Quality control system
Monitoring of controls
Risk assessment procedures.
Tests of controls
4.1 Auditing - 3. Internal Control (Average)
Question 20
An objective of a walk-through is to:
Replace tests of controls
Verify that the structure has been placed in
operation
Evaluate the major strengths and weaknesses
in the client's structure
Identify weaknesses to be communicated to

The control environment

Control risk
Control activities

4.1 Auditing - 3. Internal Control (Average)

Question 23
Of the following control environment characteristics,
identify the one that contributes most to effective
internal control
The company does not have a centralized
human resources function
The company has an effective internal audit
staff that monitors controls on a continuous basis
The audit committee consists of the president,
two vice- presidents, and the corporate controller
The company routinely transacts business with

management in the management letter

related parties
4.1 Auditing - 3. Internal Control (Average)
Question 21
Which of the following would contribute most to the
safeguarding of assets?
Blank stock of all purchase orders and sales
invoices are pre-numbered.
Access to computer facilities and records is
limited to authorized personnel on an "as needed"
basis.
Training programs are conducted to develop
competence of newly hired personnel.
Control and subsidiary accounts are reconciled
on a regularly, scheduled basis.

4.1 Auditing - 3. Internal Control (Average)

Question 24
A set of control procedures referred to as "periodic
inventories and comparisons," provides effective
monitoring of accountability. Although the term
"inventories" is broadly defined for this purpose,
which of the following does not fit the definition of
periodic inventories and comparisons?
Perpetual inventory records are maintained for
major classes of materials and finished goods and
monthly counts and comparisons are made on a
test basis
Cash 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
The treasurer reviews all documentation before

control

signing disbursement checks. The checks are then

mailed directly to the vendors and the documents
are effectively canceled
Bank accounts are reconciled monthly by

Question 27
The most important output control is:
Logic tests, which verify that no mistakes were

persons independent of cash custody and cash

recording
4.1 Auditing - 3. Internal Control (Average)
Question 25
Which of the following would be the best protection
for a company that wishes to prevent the "lapping"
of trade accounts receivable?
Request that customer's payment checks be
made payable to the company and addressed to the
treasurer.
Have customers send payments directly to the
company's depositary bank.
Segregate duties so that the bookkeeper in
charge of the general ledger has no access to
incoming mail.
Segregate duties so that no employee has
access to both checks from customers and currency
from daily cash receipts.

4.1 Auditing - 3. Internal Control (Average)

made in processing.
Review of the data for reasonableness by
someone who knows what the output should look
like.
Control totals, which are used to verify that the
computer's results are correct.
A distribution control, which assures that only
authorized personnel receive the reports generated
by the system.
4.1 Auditing - 3. Internal Control (Average)
Question 28
Which of the following most likely would not be
considered an inherent limitation of internal control?
Management override
Collusion among employees
Mistakes in judgment
Incompatible functions

4.1 Auditing - 3. Internal Control (Average)

Question 26
It is important for the CPA to consider the
competence of the clients personnel because their
competence bears directly and importantly upon
the:
Timing of the tests to be performed
Comparison of recorded accountability with
assets
Cost/benefit relationship of the system of
internal control
Achievement of the objectives of internal

SOLUTION:
Incompatible functions The performance of
incompatible functions is not an inherent limitation of
internal control but a failure to segregate functional
responsibilities properly.
4.1 Auditing - 3. Internal Control (Easy)
Question 29
The appropriate test of controls for separation of
duties is
Documentation
Confirmation

Examination

Discussing matters that may affect the audit

Observation
with firm personnel responsible for nonaudit
4.1 Auditing - 3. Internal Control (Average)
Question 30

services to the entity.

Selecting a sample vendor's invoices for

Which of the following procedures would an auditor

least likely perform while obtaining an

comparison to receiving reports.

Reading the current year's interim financial

understanding of a client in a financial statement

audit?
Coordinating the assistance of entity personnel

in date preparation.

statements.