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TESTS OF CONTROLS
Answer:
Answer:
The internal auditors should, through periodic checks, ensure that the
control account is periodically reconciled to the customer subsidiary
accounts, bank statements are reconciled and that all prenumbered
documents, especially invoices, have all numbers accounted for. Some
internal auditors also confirm accounts receivable. Internal auditors also
might review and evaluate customer complaints for signs of weaknesses in
the procedures leading to errors in accounts receivable.
5. What feature (s) of cash receipts internal control system would be expected
to prevent (a) an employee’s absconding with company funds and replacing
the funds during an audit engagements with cash from the employee
pension fund, an (b) the cash receipts journal and recorded cash sales from
reflecting more than the amount shown on the daily deposit slip?
Answer:
To prevent the cash receipts journal and recorded cash sales from
reflecting more than the amount shown on the daily deposit slip, the
internal control system should provide that receipts be recorded daily and
intact. A careful bank reconciliation by an independent person could detect
such errors.
6. Why is it necessary to evaluate the controls after the test of controls audit
of the revenue and collection cycle when an evaluation was already made
after the understanding phase?
Answer:
The evaluation after the review phase was to determine which controls
appeared adequate as a basis for justifying a low control risk assessment.
19-4 Solutions Manual – Public Accountancy Profession
The final assessment after test of controls auditing is to determine if the
controls are actually operating as well as they appeared to be.
Answer:
Answer:
If the credit limits are set and entered incorrectly, the credit approval
process will be systematically deficient.
9. What are the primary functions that should be segregated in the acquisition
and expenditure cycle?
Answer:
Answer:
19-6 Solutions Manual – Public Accountancy Profession
The “walk through” of a purchase transaction would begin with the
preparation of the requisition by the Stores department, through the bidding
process and preparation of the purchase order by the purchasing agent, to
receipt of vendor’s invoices and receiving report by the purchasing agent
and finally to accounts payable voucher preparation. Procedures would be
observed and notations made on document samples of procedures followed.
Answer:
Answer:
Tests of Controls 19-7
Authorization for vouchers payable recording mainly consist of an approved
purchase order, a receiving report, and an accurate vendor invoice.
Auditors should look for purchase approval signatures, receiving approval
signatures, and approval of the vendor invoice – checks by client for proper
quantity, price, and discount.
Answwr:
14.Describe the purpose and give examples of audit procedures in the “search
for unrecorded liabilities.”
Answer:
19-8 Solutions Manual – Public Accountancy Profession
Answer:
16.Why are weaknesses (lack of desired control procedures) not tested for
compliance? Describe how weaknesses may not be detected during the
review phase but discoed during the test of controls audit.
Answer:
Answer:
Answer:
The surprise observation enables the auditor to see how the distribution
system really works and increases his chances of detecting fraud. Such an
observation involves taking control of paychecks, then accompanying a
client representative as the distribution takes place. The auditor checks to
see that each employee is identified and that only one check is given to
Tests of Controls 19-13
each individual. Unclaimed checks are controlled and examined to detect
any fictitious persons on the payroll.
Answer:
If the payroll is processed by computer, the clock cards and job time tickets
would be traced to batch control in the timekeeping and production
departments, to data preparation (keying to machine sensible form), to edit
and validation error reports and other computer output indicating control
and finally to computer prepared checks, labor distribution reports and
summary general ledger entries.
1. c 5. a 9. d 13. b 17. d
2. c 6. c 10. b 14. a 18. d
3. b 7. c 11. a 15. c 19. c
4. c 8. b 12. a 16. d 20. b
Cases
2. The discussion could take several directions, including some or all of the
following:
1. Material Weakness. The facts seem to suggest “a condition in which
specific control features (few or none are described) or the degree of
compliance with them do not reduce to a relatively low level the risk that
errors or irregularities in amounts that could be material to the financial
statements may occur and not be detected within a timely period by
employees in the normal course of performing their assigned functions.”
Castro has authority and influence over too many interrelated activities.
Nothing he does seems to be subject to review or supervision. He even is
able to exclude the internal auditor.
3. The purpose of this question is to get the student to consider where the
functions that are considered incompatible in a manual system occur in a
computer system.
4. If the credit limits are set and entered incorrectly, the credit approval
process will be systematically deficient.
5. Memorandum
Weakness: Cash receipts are not promptly deposited. Cash should not be
left undeposited for a week.
Recommendation: Cash should be deposited at least once each day.