AUD 07 Internal Control Purchases Payroll
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 Which of the following controls would be most effective in assuring that recorded purchases are free of
A. Receiving reports require the signature of the individual who authorized the purchase.
. Vendors' invoices are compared with purchase orders by an employee who is independent of the receiving
C. Purchase orders, receiving reports, and vendors' invoices are independently matched in preparing
D. The receiving department compares the quantity ordered on purchase orders with the quantity received
on receiving reports.
 Which of the following situations most likely could lead to an embezzlement scheme?
A. The accounts receivable bookkeeper receives a list of payments prepared by the cashier and personally
makes entries in the customers' accounts receivable subsidiary ledger.
. Each vendor invoice is matched with the related purchase order and receiving report by the vouchers payable
clerk who personally approves the voucher for payment.
C. Vouchers and supporting documentation are examined and then canceled by the CF* who personally
mails the checks to vendors.
D. Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who
personally reconciles the monthly bank statement.
 Which of the following controls most likely would assist in reducing the risk of material misstatement
related to the existence or occurrence of manufacturing transactions?
A. Finished goods are stored in locked limited-access warehouses.
B. . Forms used for direct materials requisitions are prenumbered and accounted for.
C. Subsidiary ledgers are periodically reconciled with inventory control accounts.
D. Perpetual inventory records are independently compared with goods on hand.
 Mailing disbursement checks and remittance advices should be controlled by the employee who
A. Matches the receiving reports, purchase orders, and vendors' invoices.
B. . Prepares the daily voucher summary.
C. Signs the checks last.
D. Agrees the check register to the daily check summary.
 In planning to assess control risk for purchasing and disbursement procedures, the auditor will be least influenced by
A. The scope and results of audit work by the company's internal auditor.
B. The availability of a company manual describing purchasing and disbursement procedures.
C. The strength or weakness of internal control in other areas, e.g., sales and accounts receivable.
D. The existence within the purchasing and disbursement area of internal control strengths that offset weaknesses.
 Effective controls relevant to the efficiency of purchases will result in proper evaluation of the time for
ordering merchandise. When making this evaluation, the purchasing company should give primary
A. The borrowing cost of money (interest) that the company must incur as a consequence of acquiring the
B. . The flow of funds within the company that indicates when money is available to pay for merchandise.
C. The price differences that exist among various vendors who can supply the merchandise at the required
D. The trade-off between the cost of owning and storing excess merchandise and the risk of loss by not
having merchandise on hand.
 Which of the following is a standard control over cash disbursements?
A. Checks and supporting documents should be marked "Paid" immediately after the check is returned with
the bank statement.
B. . Checks should be sequentially numbered and the numerical sequence should be accounted for by the
person preparing bank reconciliations.
C. Checks should be sent directly to the payee by the employee who prepares documents that authorize
D. Checks should be signed by the controller and at least one other employee of the company.
[ 8] The primary audit objective regarding the purchasing of materials by the client is to
A. Determine the reliability of financial reporting by the purchasing function. .
B. observe the annual physical count.
C. Investigate the recording of unusual transactions regarding materials.
D. Ascertain that materials paid for are on hand.
 To minimize the risk that agents in the purchasing department will use their positions for personal gain, the
A. Request internal auditors to confirm selected purchases and accounts payable.
B. . Specify that all items purchased must pass value-per-unit-of-cost reviews.
C. Direct the purchasing department to maintain records on purchase prices paid, with review of such
records required every 6 months.
D. Require competitive bidding.
 A university does not have a centralized receiving function for departmental purchases of books, supplies,
and equipment. Which of the following controls will most effectively prevent payment for goods not received,
if performed prior to invoice payment?
A. Vendor invoices should be approved by a departmental supervisor other than the employee ordering the
B. . Invoices over a specified amount should be approved by the vice president of finance.
C. Names and addresses on vendor invoices should be compared to a list of department-authorized vendors.
D. Vendor invoices should be matched with department purchase orders.
 The procedure that best discourages the resubmission of vendor invoices after they have been paid is
A. The cancelation of vouchers by CFO personnel.
B. The mailing of payments directly to payees by accounting personnel.
C. The cancelation of vouchers by accounting personnel.
D. A requirement for double endorsement of checks.
 Which of the following questions should not appear in an internal control questionnaire relating to cash
A. Are all disbursements except for petty cash made by check?
B. Is each check supported by an approved voucher?
C. Are imprinted and prenumbered checks used and is a check protection device used in printing the check
D. Are prelistings made of all cash receipts?
 An essential procedural control to ensure the accuracy of the recorded inventory quantities is
A. Calculating unit costs and valuing obsolete or damaged inventory items in accordance with inventory
B. Performing a gross profit test.
C. Establishing a cutoff for goods received and shipped.
D. Testing inventory extensions.
 An audit of the electronic data interchange (EDI) area of a purchasing department revealed the facts listed
below. Which one indicates the need for improved internal control?
A. The system employs message sequencing as a way to monitor data transmissions.
B. . Employees may access the computer system only via an ID and an encrypted password.
C. Branch office employees may access the server with a single call via modem.
D. Certain types of transactions may be made only at specific terminals.
 Which of the following statements is correct concerning internal control in an electronic data interchange
A. Preventive controls generally are more important than detective controls in EDI systems.
B . Internal controls in EDI systems rarely permit the risk of material misstatement to be assessed at an
acceptably low level.
C. Internal controls related to the separation of duties generally are the most important controls in EDI
D. Control objectives for EDI systems generally are different from the objectives for other information
 Which of the following is usually a benefit of using electronic funds transfer for international cash
A. Creation of self-monitoring access controls.
B. . Off-site storage of source documents for cash transactions.
C. Improvement of the audit trail for cash receipts and disbursements.
D. Reduction of the frequency of data entry errors.
 Which of the following would an auditor ordinarily consider the greatest risk regarding an entity's use of
electronic data interchange (EDI)?
A. Improper distribution of EDI transactions.
B Authorization of EDI transactions.
C. Duplication of EDI transmissions.
D. Elimination of paper documents.
[1 8] Before sending or receiving EDI messages, a company should
A. Demand that all its suppliers implement EDI capabilities.
B. Execute a trading partner agreement with each of its customers and suppliers.
C. Reduce inventory levels in anticipation of receiving shipments.
D. Evaluate the effectiveness of its use of EDI transmissions.
 Organizations that move to implement EDI often use value-added networks (VANs). Which of the
following would not normally be performed by a VAN?
A. Provide common interfaces across organizations thereby eliminating the need for one organization to
establish direct computer communication with a trading partner.
B. Store electronic purchase orders of one organization to be accessed by another organization.
C. Maintain a log of all transactions of an organization with its trading partner.
D. Provide translations from clients' computer applications to a standard protocol used for EDI
 Effective internal control activities over the payroll function may include
A. Custody of rate authorization records by the supervisor of the payroll department.
B. Preparation of payroll transaction journal entries by an employee who reports to the supervisor of the
human resources department.
C. Verification of agreement of job time tickets with employee clock card hours by a timekeeping
D. Reconciliation of totals on job time tickets with job reports by employees responsible for those specific
 In manufacturing environments, employees are often required to use time cards and job time tickets. Which
is the false statement related to the use of these documents?
A. Job time tickets are completed by employees for each job worked on, and an employee may have one or
many job time tickets in a day.
B. Only one time card should exist for each employee.
C. Payroll should be prepared from job time tickets.
D. Time reported on job time tickets should be reconciled to time cards.
 Matthews Corp. has changed from a system of recording time worked on clock cards to a computerized
payroll system in which employees record time in and out with magnetic cards. The computer system
automatically updates all payroll records. Because of this change
A. Transactions must be processed in batches.
B. The potential for payroll-related fraud is diminished.
C. A generalized computer audit program must be used.
D. Part of the audit trail is altered.
 In auditing an entity's computerized payroll transactions, an auditor would be least likely to use test data to
test controls concerning
A. Overpayment of employees for hours not worked. .
B. Missing employee identification numbers.
C. Withholding of taxes and Social Security contributions.
D. Control and distribution of unclaimed checks.
 What information would the auditor expect to find in the data dictionary that would assist in a payroll
A. Online user identification. .
B. Type of operating system.
C. Programs that access the data.
D. System network architecture and flowcharts.
 Which of the following questions would an auditor least likely include on an internal control questionnaire
concerning the initiation and execution of equipment transactions?
A. Are competitive bids solicited for purchases of equipment?
B. . Are prenumbered purchase orders used for equipment and periodically accounted for?
C. Are procedures in place to monitor and properly restrict access to equipment?
D. Are requests for major repairs approved at a higher level than the department initiating the request?
 Which of the following controls will most likely allow for a reduction in the scope of the auditor's tests of
A. Review and approval of the periodic equipment depreciation entry by a supervisor who does not actively
participate in its preparation.
B. . Review of the miscellaneous income account for salvage credits and scrap sales of partially depreciated
C. Authorization of payment of vendors' invoices by a designated employee who is independent of the
equipment receiving function.
D. Comparison of equipment account balances for the current year with the current-year budget and prior-
year actual balances.
 When an entity uses a trust company as custodian of its trading securities, the possibility of concealing
fraud most likely will be reduced if the
A. Trust company has no direct contact with the entity employees responsible for maintaining investment
B. . Interest and dividend checks are mailed directly to an entity employee who is authorized to sell
C. Securities are registered in the name of the trust company rather than the entity itself.
D. Trust company places the securities in a bank safe-deposit vault under the custodian's exclusive control.
[2 8] Apex Manufacturing Corporation mass produces eight different products. The controller who is interested
in strengthening internal control over the accounting for materials used in production is most likely to
A. Perpetual inventory system.
B. . Economic order quantity (E*Q) system.
C. Job-order cost accounting system.
D. Separation of duties among production personnel.
 A firm's inventory consisted of 1,000 different items, 20 of which accounted for 70% of the dollar value.
The most recent regular quarterly manual count revealed an unnecessary 2 years' supply of several of the more
expensive items. The control that would best help to correct this oversupply problem is
A. Perpetual inventory of the larger dollar value items in the inventory. .
B. Use of a control total over the number of unique inventory items.
C. Use of authorizing signatures on requisitions for inventory requested by production.
D. Limit check on the total dollar value of the inventory.
 To strengthen internal control over the custody of heavy mobile equipment, the client would most likely
institute a policy requiring a periodic
A. Inspection of equipment and reconciliation with accounting records. .
B. Verification of liens, pledges, and collateralizations.
C. Increase in insurance coverage.
D. Accounting for work orders.