SU 7: Internal Control -- Purchases, Payroll, and Other Cycles

Question 1

Responsible Party, M or A - Obtain Understanding of internal control over payroll transactions

Answer 1

A, Auditor. The auditor is responsible for obtaining an understanding of internal control over payroll transaction

Question 2

Responsible Party, M or A -Authorize the payroll

Answer 2

M, Management. Management is responsible for authorizing transactions

Question 3

Responsible Party, M or A -Calculate proper amount of payroll

Answer 3

M, Management. Management is responsible for calculating the proper amount for the payroll

Question 4

Responsible Party, M or A - Safeguard Assets associated with payment of payroll

Answer 4

M, Management. Management is responsible for safeguarding assets

Question 5

Responsible Party, M or A - Determine that the controls described in the payroll procedures manual have been implemented

Answer 5

A, Auditor. The auditor is responsible for determining that the controls described in the payroll procedures manual have been implemented

Question 6

Responsible Party, M or A - Assess risk of material misstatement related to payroll

Answer 6

A, Auditor. The auditor is responsible for assessing RMM of payroll.

Question 7

Responsible Party, M or A - Distribute the payroll

Answer 7

M, Management. Management is responsible for distributing payroll

Question 8

Responsible Party, M or A - Account for payroll transactions

Answer 8

M, Management. Management is responsible for accounting for payroll transactions.

Question 9

Payroll Duties: Authorization A, Recording R, Asset Custody AC. 1. Appropriate Responsibility - Human Resources

Answer 9

A, Authorization. The human resource subunit is responsible for authorization

Question 10

Payroll Duties: Authorization A, Recording R, Asset Custody AC. 1. Appropriate Responsibility - Payroll

Answer 10

B, Recording. The payroll subunit is responsible for recording.

Question 11

Payroll Duties: Authorization A, Recording R, Asset Custody AC. 1. Appropriate Responsibility - Shop Supervisor

Answer 11

A, Authorization. The shops subunit is responsible for approving time tickets

Question 12

Payroll Duties: Authorization A, Recording R, Asset Custody AC. 1. Appropriate Responsibility - Cost Accounting

Answer 12

B, Recording. The cost accounting subunit is responsible for recording

Question 13

Payroll Duties: Authorization A, Recording R, Asset Custody AC. 1. Appropriate Responsibility - Accounts Payable

Answer 13

B, Recording. A/R is responsible for recording

Question 14

Payroll Duties: Authorization A, Recording R, Asset Custody AC. 1. Appropriate Responsibility - Cash Disbursements

Answer 14

C, Asset Custody. The cash disbursements subunit is responsible for cash disbursement

Question 15

An EDI system is often used to support the production system of_____

Answer 15

I, just-in-time. Just-in-time is a delivery concept where goods or services are delivered only as needed. It is often supported by an EDI system

Question 16

An advantage of EDI included_____

Answer 16

A, reduction of errors. EDI reduces data entry and typically results in reduction of errors

Question 17

One piece of evidence that the auditor should inspect to assure proper agreements with trading partners is_____

Answer 17

G, written contract. The written contract provides the auditor with an understanding of the duties and responsibilities of the parties

Question 18

EDI often uses______ as a third party service provider

Answer 18

D, Value-added-network. An entity using EDI often uses a VAN as a third-party service provider, and controls are provided by the VAN may be critical

Question 19

Auditing an EDI application requires the consideration of ______

Answer 19

F, an audit trail. The audit trail allows the auditor to trace a transaction from initiation to disposition

Question 20

______ provides information about users who have accessed the EDI system

Answer 20

J, Activity log. An activity log provides information about a) users who have accessed the system b) the files accessed c) the processes accomplished d) the time of access e) the amount of time the processing required

Question 21

EDI eliminates _______ both internal and external.

Answer 21

H, paper documents. The use of EDI eliminates the need for paper documents, as transactions are digitally processed.

Question 22

EDI messages should be_____ to insure privacy

Answer 22

E, encrypted. To ensure privacy, messages should be encrypted before they are transmitted

Question 23

Rules on how each “package of information” is structured is referred to as

Answer 23

C, transmission protocols. Transmission protocols are rules on how each envelope or package of information is structured and processed by the communications devices so that messages are kept seperate.

Question 24

An open environment would be created when EDI is conducted on_____

Answer 24

B, the Internet. EDI can use private networks or be conducted on the Internet.

Question 25

Personnel Responsibility - Inventory Control

Answer 25

Provides authorization for the purchase of goods and performs an accountability function

Question 26

Personnel Responsibility - Purchasing Agent

Answer 26

issues purchase orders for required goods and negotiate terms

Question 27

Personnel Responsibility - Receiving

Answer 27

accepts goods for approved purchases, counts and inspects goods, and prepares receiving reports

Question 28

Personnel Responsibility - AP

Answer 28

(vouchers payable) assembles the proper documentation to support payment voucher (and disbursement) and records AP

Question 29

Personnel Responsibility - Cash Disbursements

Answer 29

evaluates the documentation to support a payment voucher and signs and mails the check. Department cancels the documentation to prevent duplicate payment

Question 30

Personnel Responsibility - GL

Answer 30

maintains AP control account and other related GL accounts.

Question 31

AP - R&O

Answer 31

Management asserts that the company is obligated to pay accounts payable

Question 32

AP R&O - Testing

Answer 32

• Compare amounts showing as payable to vendors’ invoices, receiving reports, and purchase orders to verify that payables are for goods ordered and received • Examine vendors’ invoices, receiving reports, and purchase orders

Question 33

AP A&V - Testing

Answer 33

• Confirm amounts reported as payables with vendors • Compare amounts reported as payables to vendors’ invoices, receiving reports, and purchase orders • Compare amount on schedule of accounts payable to amount reported on financial statements • Recalculate totals of accounts payable schedule • Apply analytical procedures to determine if relationships between accounts payable and purchases, inventory, cost of goods sold, and other items are reasonable

Question 34

AP - A&V

Answer 34

Management asserts that accounts payable is reported at the amount that the company is obligated to pay

Question 35

AP - Cutoff and Completeness

Answer 35

Management asserts that all amounts owed to vendors for purchases on account are included in accounts payable and that all transactions related to accounts payable and purchases are reported in the appropriate period

Question 36

AP C&C - Testing

Answer 36

• Confirm with vendors that balances are complete • Confirm with vendors with zero balances to determine if amounts are owed • Compare receiving reports to vendors’ invoices and amounts recorded in accounts payable • Examine payments made shortly after year-end to determine if goods or services were received before year-end

Question 37

AP - E or O

Answer 37

Management asserts that the obligation to pay accounts payable exists and that all purchase transactions did occur

Question 38

AP E or O - Testing

Answer 38

• Confirm accounts payable with vendors • Compare amounts reported in accounts payable to vendors’ invoices, receiving reports, and purchase orders • Examine payments after year-end to verify obligation existing at year-end

Question 39

AP - P&D

Answer 39

Management asserts that amounts reported as accounts payable are properly classified on the financial statements and any pertinent information is adequately disclosed

Question 40

AP P&D - Testing

Answer 40

• Examine financial statements and disclosures to make certain that accounts receivable is properly presented and disclosed • Ascertain whether payables to related parties are identified for disclosure purposes

Question 41

Auditing Investments and Investment Income

Answer 41

1) Verify account’s beginning balance from prior-year information 2) Test transactions occurring during the current period through the use of substantive procedures 3) Verify resulting ending balance in account 4) Determine if ending balance is in need of adjustment due to impairment, change in market value, or other factor 5) Perform other procedures for management assertions not already addressed

Question 42

1) Verify account’s beginning balance from prior-year information - Testing Invest

Answer 42

• Compare beginning balance in property, plant, and equipment accounts to amounts reported on previous period’s balance sheet (V)

Question 43

2) Test transactions occurring during the current period through the use of substantive procedures - Testing Invest

Answer 43

• Inquire of management about acquisitions and disposals of property, plant, and equipment during period (R & O, C, E or O) • Inquire of management about methods, lives, and salvage values used to calculate depreciation (V) • Confirm purchases or sales where documents are not in evidence (R & O, C, E or O) • Compare amount recorded as cost of property, plant, and equipment to purchase documents and cancelled checks (V) • Recalculate costs to be capitalized for delivery, installation, or preparation of property, plant, and equipment for use (V, C)

Question 44

3) Verify resulting ending balance in account - Testing Invest

Answer 44

• Recalculate ending balance based on beginning balance and transactions during the period (V)

Question 45

4) Determine if ending balance is in need of adjustment due to impairment, change in market value, or other factor - Testing Invest

Answer 45

• Inquire of management if any long-term investments or investments in marketable securities classified as available for sale have experienced a nontemporary decline in value (V, P & D) • Confirm investments held by brokers or other outside parties to verify they are still in existence and owned by the company (R & O, C, E or O) • Compare carrying value of investments to market values to verify that investments are carried at lower of cost or market when appropriate (V, P & D) • Examine stock certificates, bonds, partnership agreements, or joint venture agreements to verify that investments exist (E or O)

Question 46

5) Perform other procedures for management assertions not already addressed

Answer 46

• Inquire of management as to its intention for holding investments to verify classification (P & D) • Examine financial statements and disclosures to make certain that investments are properly presented and disclosed (P & D)

Question 47

Auditing - PP&E

Answer 47

1) Verify account’s beginning balance from prior-year information 2) Test transactions occurring during the current period through the use of substantive procedures 3) Verify resulting ending balance in account 4) Determine if ending balance is in need of adjustment due to impairment, change in market value, or other factor 5) Perform other procedures for management assertions not already addressed

Question 48

1) Verify account’s beginning balance from prior-year information - Testing PPE

Answer 48

• Compare beginning balance in property, plant, and equipment accounts to amounts reported on previous period’s balance sheet (V)

Question 49

2) Test transactions occurring during the current period through the use of substantive procedures - Testing PPE

Answer 49

• Inquire of management about acquisitions and disposals of property, plant, and equipment during period (R & O, C, E or O) • Inquire of management about methods, lives, and salvage values used to calculate depreciation (V) • Confirm purchases or sales where documents are not in evidence (R & O, C, E or O) • Compare amount recorded as cost of property, plant, and equipment to purchase documents and cancelled checks (V) • Recalculate costs to be capitalized for delivery, installation, or preparation of property, plant, and equipment for use (V, C)

Question 50

3) Verify resulting ending balance in account - Testing PPE

Answer 50

• Recalculate ending balance based on beginning balance and transactions during the period (V)

Question 51

4) Determine if ending balance is in need of adjustment due to impairment, change in market value, or other factor - Testing PPE

Answer 51

• Inquire of management if any impairments have occurred affecting property, plant, and equipment (V, P & D) • Examine property, plant, and equipment to verify that they exist (E or O)

Question 52

5) Perform other procedures for management assertions not already addressed - Testing PPE

Answer 52

• Examine financial statements and disclosures to make certain that property, plant, and equipment is properly presented and disclosed, that methods used for determining depreciation are disclosed, and that amount of depreciation recognized for the period is disclosed (P & D)

Question 53

Auditing LT Debt & Int Exp

Answer 53

1) Verify account’s beginning balance from prior-year information 2) Test transactions occurring during the current period through the use of substantive procedures 3) Verify resulting ending balance in account 4) Determine if ending balance is in need of adjustment due to impairment, change in market value, or other factor 5) Perform other procedures for management assertions not already addressed

Question 54

1) Verify account’s beginning balance from prior-year information - Test LT debt and int exp

Answer 54

• Compare beginning balance in long-term debt accounts to amounts reported on previous period’s balance sheet (V)

Question 55

2) Test transactions occurring during the current period through the use of substantive procedures - Test LT debt and int exp

Answer 55

• Inquire of management about issuance and retirements of long-term debt during period (R & O, C, E or O) • Compare amounts reported as interest expense to amounts disbursed (V, E or O) • Compare amount recorded as proceeds from issuance to confirmations from underwriters and amounts deposited (V, E or O) • Compare amounts reported in cash receipts journal to amounts recorded as initial carrying value of long-term debt (V, C) • Recalculate amortization of discount or premium and verify proper recording (V) • Recalculate gains and losses on early retirements (A & V) • Apply analytical procedures to verify reasonableness of amount reported as interest expense (V, C)

Question 56

3) Verify resulting ending balance in account - Test LT debt and int exp

Answer 56

• Recalculate ending balance based on beginning balance and transactions during the period (V)

Question 57

4) Determine if ending balance is in need of adjustment due to impairment, change in market value, or other factor - Test LT debt and int exp

Answer 57

• Confirm obligations with trustees or other outside parties to verify there are no unrecorded liabilities (R & O, C, E or O) • Examine bond agreements and long-term notes to verify that long-term liabilities exist (E or O) • Examine documents relating to renewal or refinancing of debt after balance date to support classification as long-term (P & D)

Question 58

5) Perform other procedures for management assertions not already addressed - Test LT debt and int exp

Answer 58

• Inquire of management as to its intention for retiring debt prior to maturity (P & D) • Examine financial statements and disclosures to make certain that long-term debt is properly presented and disclosed and that gains and losses on early retirement are reported as extraordinary items (P & D) • Examine documents to verify that company is complying with debt covenants (P & D)

Question 59

Auditing Equity

Answer 59

1) Verify account’s beginning balance from prior-year information 2) Test transactions occurring during the current period through the use of substantive procedures 3) Verify resulting ending balance in account 4) Determine if ending balance is in need of adjustment due to impairment, change in market value, or other factor 5) Perform other procedures for management assertions not already addressed

Question 60

1) Verify account’s beginning balance from prior-year information - Equity Testing

Answer 60

• Compare beginning balance in long-term debt accounts to amounts reported on previous period’s balance sheet (V)

Question 61

2) Test transactions occurring during the current period through the use of substantive procedures - Equity Testing

Answer 61

• Inquire of management about issuance and retirements of equity securities during period (R & O, C, E or O) • Compare amounts reported as dividends to amounts disbursed (V, E or O) • Compare amount recorded as proceeds from issuance to confirmations from underwriters and deposits (V, E or O) • Compare amounts reported in cash receipts journal to amounts recorded as proceeds from issuance of debt securities (V, C) • Verify changes in Accumulated Other Comprehensive Income amounts (V, P & D) • Examine minutes of directors meetings for indications of authorization of dividends and issuances and retirements of equity securities (C)

Question 62

3) Verify resulting ending balance in account - Equity Testing

Answer 62

• Recalculate ending balance based on beginning balance and transactions during the period (V)

Question 63

5) Perform other procedures for management assertions not already addressed - Equity Testing

Answer 63

• Inquire of management as to its intention for retiring debt prior to maturity (P & D) • Examine financial statements and disclosures to make certain that long-term debt is properly presented and disclosed and that gains and losses on early retirement are reported as extraordinary items (P & D) • Examine employee stock purchase plans to analyze terms (P & D) • Examine appropriate laws to determine if there are restrictions on retained earnings (P & D) • Examine documents to verify that company is complying with debt covenants

Question 64

Purchase Controls - Frequently Missing

Answer 64

(1) Prenumbered purchase orders used (2) Separate purchasing department makes purchases (3) Purchasing personnel independent of receiving and recordkeeping (4) Suppliers’ monthly statements compared with recorded payables

Question 65

Accounts Payable - Controls Frequently Missing

Answer 65

(1) Accounts payable personnel independent of purchasing, receiving, and disbursements (2) Clerical accuracy of vendors’ invoices tested (3) Purchase order, receiving report, and vendor’s invoice matched

Question 66

Cash Disbursements - Controls Frequently Missing

Answer 66

(1) Prenumbered checks with a mechanical check protector used (2) Two signatures on large check amounts (3) Checks signed only with appropriate support (purchase order, receiving report, vendor’s invoice). Treasurer signs checks and mails them (4) Support for checks canceled after payment (5) Voided checks mutilated, retained, and accounted for (6) Bank reconciliations prepared by individual independent of cash disbursements recordkeeping (7) Physical control of unused checks

Question 67

Prior to sending or receiving EDI messages a company should? Trading partner Agreement

Answer 67

Enter into a EDI Trading partner Agreement Parties should understand: 1.) their responsibilities 2.) Messages each will initiate 3.) How they will interpret messages 4.) means of verification of complete messages 5.) moment when the contract for parties is effective 6.) level of security required.