III. Inrernal Control: Transaction Cycles - Specific Transaction Cycles

Question 1

What would cause Organizational impairment?

Answer 1

The controller reports to the vice president of production.

Why?

Controller, who is in charge of accounting, should be independent of the production function. Since the accounting function reports on the production function, there would be a conflict of interest if the controller reported to the vice president of production.

Question 2

Proper segregation of functional responsibilities requires what to be seperated?

Answer 2

Authorizing transactions, recording transactions, and maintaining custody of assets should be segregated.

Note:

Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both “Record and conceal fraudulent transactions in the normal course of assigned tasks.”

Question 3

What set of duties would ordinarily be considered basically incompatible in terms of good internal control?

Answer 3

Collection of receipts on account and maintaining accounts receivable records.

Why?

Collection of receipts on account and maintaining accounts receivable records combine both custody and recording of assets.

Remember:

Custody and recording of assets needs to be seperated, as well as authorization.

Question 4

Tracing bills of lading to sales invoices provides evidence that

Answer 4

Shipments to customers were invoiced.

In other words: auditor obtains evidence that merchandise which has been shipped (as evidenced by a bill of lading) has been invoiced.