III. Inrernal Control: Transaction Cycles - Misc Cycles

Question 1

Effective internal control over the purchasing of raw materials should usually include

Answer 1

• Systematic reporting of product changes which will affect raw materials.
• Determining the need of the raw materials prior to preparing the purchase order.
• Obtaining financial approval prior to making a commitment.

Question 2

An auditor’s tests of controls over the issuance of raw materials to production would most likely include

Answer 2

Examining material requisitions and reperforming client controls designed to process and record issuances will provide evidence on operating effectiveness related to issuance of raw materials to production.

Question 3

Which of the following controls would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments?

Answer 3

The internal auditor compares the securities in the bank safe-deposit box with recorded investments.

Question 4

Which of the following is a question that the auditor would expect to find on the production cycle section of an internal control questionnaire?

Answer 4

Are all releases by storekeepers of raw materials from storage based on approved requisition documents?

Note:

Approved requisitions will help maintain control over raw materials released to be used in the production cycle.

Question 5

Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable?

Answer 5

Companies frequently require that direct borrowings on notes payable be authorized by the board of directors; accordingly, auditors will determine whether proper policy has been followed.

Question 6

Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate controls over the invoicing function allow goods to be shipped that are not invoiced. The inadequate controls could cause an

Answer 6

Note:

If goods are allowed to ship without invoicing, inventory will be overstated. Thus, this result in a understatement of revenues and receivable.

Question 7

What is the best control from safeguarding marketable securities when independent trust agent is not employed?

Answer 7

The best thing to do is to have two company officials have joint control of marketable securities, which are kept in a bank safe-deposit box.

• assures that, absent collusion, assets are safeguarded.

Question 8

The objectives of internal control for a production cycle are to provide assurance that transactions are properly executed and recorded, and that

Answer 8

Custody of work in process and of finished goods is properly maintained.

Question 9

An auditor who plans to assess control risk at a low level usually performs

Answer 9

Tests of controls and limited tests of current year property and equipment transactions.

Question 10

What are some control that is designed to protect investment securities?

Answer 10

• Securities should be properly controlled physically in order to prevent unauthorized usage.
• Access to securities should be vested in more than one individual.
• Securities should be registered in the name of the owner.

Question 11

What control activities could best prevent direct manufacturing labor from being charged to manufacturing overhead?

Answer 11

Comparison of daily journal entries with factory labor summary.

Question 12

Apex Manufacturing Corporation mass produces eight different products. The controller who is interested in strengthening controls over the accounting for materials used in production would be most likely to implement

Answer 12

A perpetual inventory system will show when and where materials are being used.

Question 13

Well-functioning internal control for the inventory/production functions would provide that finished goods are to be accepted for stock only after presentation of a completed production order and a(n)

Answer 13

Inspection report.

Question 14

In obtaining an understanding of a manufacturing entity’s internal control over inventory balances, an auditor most likely would

Answer 14

A review of the entity’s descriptions of inventory policies and procedures will help the auditor to obtain the necessary understanding about the design of relevant policies, procedures, and records, and whether they have been implemented by the entity.

Question 15

Which of the following controls would an entity most likely use in safeguarding against the loss of marketable securities?

Answer 15

An independent trust company that has no direct contact with the employees who have recordkeeping responsibilities has possession of the securities.

Why?

use of an independent trust company allows the effective separation of custody and recordkeeping for the securities.

Question 16

What would most likely would be used to maintain accurate inventory records?

Answer 16

Periodic inventory counts are used to adjust the perpetual inventory records.

Note:

periodic inventory counts will assure that perpetual inventory records are accurate and, because employees will know that inventory differences are investigated, they will be less likely to steal any inventory.