Test bank auditing and assurance principles ch06 internal control concepts

Chapter 6 Internal Control: Concepts 76

Internal Control:

Concepts

MULTIPLE CHOICE:
1.

The basic concept of internal control which recognizes that
the cost of internal control should not exceed the benefits
expected to be derived is known as
a.
Management by exception.
b.
Management responsibility.
c.
Limited liability.
d.
Reasonable assurance.
ANSWER:

2.

Of the following control environment characteristics,
identify the one that contributes most to effective internal
control
a.
The audit committee consists of the president, two
vice- presidents, and the corporate controller.
b.

The company does not have a centralized human resources
function.
c.
The company has an effective internal audit staff that
monitors controls on a continuous basis.
d.
The company routinely transacts business with related
parties.
ANSWER:

3.

C

It would be appropriate for the payroll accounting
department to be responsible for which of the following
functions?
a.
Approval of employee time records.
b.
Maintenance of records of employment, discharges, and
pay increases.
c.
Preparation of periodic governmental reports as to
employees' earnings and withholding taxes.
d.
Temporary retention of unclaimed employee paychecks.
ANSWER:

4.

D

C

The most effective control to prevent unbilled and
unrecorded shipments of finished goods is to
a.
Require all outgoing shipments to be accompanied by a
prenumbered shipping order and bill of lading (signed
by the carrier). Forward a copy of these documents to
accounting, to be placed in an open file awaiting
receipt of the customer invoice copy.


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Chapter 6 Internal Control: Concepts
b.
c.

d.

Forward a copy of the shipping order and bill of lading
to billing.
Implement a policy that prevents sales invoices from
being mailed to customers in the absence of a properly
approved shipping order and bill of lading signed by
the carrier.
Forward a copy a the signed bill of lading to the

stores manager.

ANSWER:
5.

Apex Manufacturing Corporation mass produces eight different
products. The controller, who is interested in strengthening
internal controls over the accounting for materials used in
production, would be most likely to implement
a.
An economic order quantity (EOQ) system.
b.
A job order cost accounting system.
c.
A perpetual inventory system.
d.
A separation of duties among production personnel.
ANSWER:

6.

C

Which of the following activities represents both an
appropriate human resources function and a deterrent to
payroll fraud?
a.
Distribution of paychecks.
b.
Authorization of overtime.

c.
Authorization of additions to and deletions from the
payroll.
d.
Collection and retention of unclaimed paychecks.
ANSWER:

7.

A

C

Alpha Company uses its sales invoices for posting perpetual
inventory records. Inadequate internal control procedures
over the invoicing function allow goods to be shipped that
are not invoiced. The inadequate controls could cause an
a.
Understatement of revenues, receivables, and inventory.
b.
Overstatement of revenues and receivables, and an
understatement of inventory.
c.
Understatement of revenues and receivables, and an
overstatement of inventory.
d.
Overstatement of revenues, receivables, and inventory.
ANSWER:

C

Chapter 6 Internal Control: Concepts
8.

The human resources department receives an edit listing of
payroll changes processed at every payroll cycle. If they
do not verify the changes processed, this could result in:
a.
Undetected errors in payroll rates for new employees.
b.
Inaccurate social security deductions.
c.
Labor hours charged to the wrong account in the cost
reporting system.
d.
Employees not being asked if they want to contribute to
the company pension plan.
ANSWER:

9.

A

During the review of a small business client's internal
control system, the auditor discovered that the accounts
receivable clerk approves credit memos and has access to
cash. Which of the following controls would be most
effective in offsetting this weakness?
a.

The owner reviews errors in billings to customers and
postings to the subsidiary ledger.
b.
The controller receives the monthly bank statement
directly and reconciles the checking accounts.
c.
The owner reviews credit memos after they are recorded.
d.
The controller reconciles the total of the detail
accounts receivable accounts to the amount shown in the
ledger.
ANSWER:

11.

A

Property acquisitions that are misclassified as maintenance
expense would most likely be detected by internal control
procedures that provide for
a.
Investigation of variances within a formal budgeting
system.
b.
Review and approval of the monthly depreciation entry
by the plant supervisor.
c.
Segregation of duties of employees in the accounts
payable department.
d.

Examination by the internal auditor of vendor invoices
and canceled checks for property acquisitions.
ANSWER:

10.

78

C

Which of the following, if material, would be considered
fraud?
a.
Mistakes in the application of accounting principles.
b.
Clerical mistakes in the accounting data underlying the
financial statements.


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Chapter 6 Internal Control: Concepts
c.
d.

Misappropriation of an asset or groups of assets.
Misinterpretations of facts that existed when the
financial statements were prepared.

ANSWER:

12.

Competence of personnel is necessary to proper recording of
transactions and supports financial statements that are
fairly presented. In reviewing the organization for
necessary competence, which of the following job types would
be of least interest to the auditor?
a.
Corporate controller.
b.
Vice-president for marketing.
c.
Manager of electronic data processing.
d.
Chief accountant.
ANSWER:

13.

B

Which of the following is the most effective control
procedure to detect vouchers that were prepared for the
payment of goods that were not received?
a.
b.
c.
d.

Count goods upon receipt in storeroom.

Match purchase order, receiving report, and vendor's
invoice for each voucher in accounts payable
department.
Compare goods received with goods requisitioned in
receiving department.
Verify vouchers for accuracy and approval in internal
audit department.

ANSWER:
15.

B

An auditor would consider internal control procedures
relating to a client's payroll procedures to be ineffective
if the payroll department supervisor is responsible for
a.
Hiring subordinate payroll department employees.
b.
Having custody over unclaimed paychecks.
c.
Updating employee earnings records.
d.
Applying pay rates to time tickets.
ANSWER:

14.

C

B

For effective internal control purposes, which of the
following individuals should be responsible for mailing
signed checks?


Chapter 6 Internal Control: Concepts
a.
b.
c.
d.

Receptionist.
Treasurer.
Accounts payable clerk.
Payroll clerk.

ANSWER:
16.

D

Which of the following is not an element of an entity's
internal control?
a.
Control risk.
b.
Control activities.
c.

The information system
d.
The control environment.
ANSWER:

19.

D

In general, material irregularities perpetrated by which of
the following are most difficult to detect?
a.
Internal auditor.
b.
Keypunch operator.
c.
Cashier.
d.
Controller.
ANSWER:

18.

B

Evidence of proper authorization, approval and review of
transactions may appear on the face of documents supporting
the transactions. Which of the following techniques does
not provide evidence of proper authorization, approval or
review.

a.
Purchase orders are signed by the purchasing agent.
b.
Receiving reports are signed by persons inspecting and
counting incoming goods.
c.
Vouchers are signed or initialed by the person
comparing vendors' invoices, purchase orders, and
receiving reports for prices, quantities, and stock
description.
d.
Several checks are signed in advance whenever the
treasurer is scheduled to be out of town for an
extended period.
ANSWER:

17.

80

A

Which of the following would not be considered an internal
control feature?
a.
Prenumbered documents.


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Chapter 6 Internal Control: Concepts
b.
c.
d.

Limited access to documents.
Competent personnel.
A comparison-shopping staff.

ANSWER:
20.

A system of internal control, regardless of how carefully
designed and implemented, contains certain inherent
limitations. Which of the following errors or
irregularities is not caused by an inherent limitation.
a.
The president and chief executive officer, with the
assistance of the corporate controller, inflated
earnings by recording fictitious sales at year-end.
b.
A newly-installed electronic data processing system
failed to provide for a comparison of sales order
amount with prior customer balance and credit limit.
This resulted in numerous sales to customers who had
already exceeded their credit limits.
c.
Numerous recording errors occurred because persons
analyzing and recording transactions did not have the
necessary accounting background.

d.
A computer programmer and a computer operator conspired
to divert funds from the company to an account
controlled by the dishonest employees.
ANSWER:

21.

C

A company policy should clearly indicate that defective
merchandise returned by customers is to be delivered to the
a.
Sales clerk.
b.
Receiving clerk.
c.
Inventory control clerk.
d.
Accounts receivable clerk.
ANSWER:

22.

D

B

Controls that enhance the reliability of the financial
statements may be classified as prevention controls and

detection controls. Which of the following is primarily a
detection control?
a.
Separation of duties between recording cash receipts
and depositing cash.
b.
Bank accounts are reconciled monthly by persons
independent of cash recording and cash custody.
c.
The human resources department authorizes the hiring of
only those persons for accounting positions that meet


Chapter 6 Internal Control: Concepts

d.

the written job requirements specified by the corporate
controller.
An accounting manual, accompanied by a detailed chart
of accounts, carefully and clearly describes each type
of transaction affecting the entity.

ANSWER:
23.

B

Which of the following observations, made during the
preliminary survey of a local department store's

disbursement cycle, reflects a control strength?
a.
Individual department managers use pre-numbered forms
to order merchandise from vendors.
b.
The receiving department is given a copy of the
purchase order complete with a description of goods,
quantity ordered, and extended price for all
merchandise ordered.
c.
The treasurer's office prepares checks for suppliers
based on vouchers prepared by the accounts payable
department.
d.
Individual department managers are responsible for the
movement of merchandise from the receiving dock to
storage or sales areas as appropriate.
ANSWER:

25.

B

Internal control procedures are strengthened when the
quantity of merchandise ordered is omitted from the copy of
the purchase order sent to the
a.
Department that initiated the requisition
b.
Receiving department

c.
Purchasing agent
d.
Accounts payable department
ANSWER:

24.

82

C

In a properly designed set of internal control procedures,
the same employee should not be permitted to
a.
Sign checks and cancel supporting documents.
b.
Receive merchandise and prepare a receiving report.
c.
Prepare disbursement vouchers and sign checks.
d.
Initiate a request to order merchandise and approve
merchandise received.
ANSWER:

C


83

26.

Chapter 6 Internal Control: Concepts
A means of ensuring that payroll checks are drawn for
properly authorized amounts is to:
a.
Conduct periodic floor verification of employees on the
payroll.
b.
Require that undelivered checks be returned to the
cashier.
c.
Require supervisory approval of employee time cards.
d.
Witness the distribution of payroll checks.
ANSWER:

27.

Effective internal control requires organizational
independence of departments. Organizational independence
would be impaired in which of the following situations?
a.
The internal auditors report to the audit committee of
the board of directors.
b.
The controller reports to the vice president of
production.
c.
The payroll accounting department reports to the chief

accountant.
d.
The cashier reports to the treasurer.
ANSWER:

28.

A

Proper segregation of functional responsibilities calls for
the separation of the
a.
Authorization, recording, and custodial functions.
b.
Authorization, execution, and payment functions.
c.
Receiving, shipping, and custodial functions.
d.
Authorization, approval, and execution functions.
ANSWER:

30.

B

External forces can serve to either strengthen or weaken an
entity's internal control. Which of the following
conditions supports strong internal control?
a.
Threat of an Internal Revenue Service audit.

b.
The existence of related parties and related party
transactions.
c.
Pressure by the financial community to improve earnings
performance.
d.
An economic downturn.
ANSWER:

29.

C

A

A set of control procedures referred to as "periodic
inventories and comparisons," provides effective monitoring


Chapter 6 Internal Control: Concepts

84

of accountability. Although the term "inventories" is
broadly defined for this purpose, which of the following
does not fit the definition of periodic inventories and
comparisons?
a.
Bank accounts are reconciled monthly by persons

independent of cash custody and cash recording.
b.
Cash receipts are deposited intact daily and the
receipted deposit ticket is obtained directly from the
bank and compared with the recorded cash receipts by a
person independent of cash custody and cash recording.
c.
Perpetual inventory records are maintained for major
classes of materials and finished goods and monthly
counts and comparisons are made on a test basis.
d.
The treasurer reviews all documentation before signing
disbursement checks. The checks are then mailed
directly to the vendors and the documents are
effectively canceled.
ANSWER:
31.

When considering the effectiveness of internal control, the
auditor should recognize that inherent limitations do exist.
Which of the following is an example of an inherent
limitation in a client's internal control?
a.
The effectiveness of procedures depends on the
segregation of employee duties.
b.
Procedures are designed to assure the execution and
recording of transactions in accordance with
management's authorization.
c.

In the performance of most control procedures, there
are possibilities of errors arising from mistakes in
judgment.
d.
Procedures for handling large numbers of transactions
are processed by electronic data processing equipment.
ANSWER:

32.

D

C

The most effective control for ensuring that customers are
billed only for goods shipped is to
a.
Require that carriers sign properly completed bills of
lading.
b.
Implement a policy that prevents the mailing of sales
invoices to customers in the absence of a properly
approved shipping order and a bill of lading signed by
the carrier.
c.
Require that all shipments be approved by accounting.


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Chapter 6 Internal Control: Concepts
d.

Prohibit goods from leaving the warehouse without being
accompanied by a signed bill of lading and a properly
approved shipping order.

ANSWER:
33.

In a properly designed accounts payable system, a voucher is
prepared after the invoice, purchase order, requisition, and
receiving report are verified. The next step in the system
is to
a.
Cancel the supporting documents.
b.
Enter the check amount in the check register.
c.
Approve the voucher for payment.
d.
Post the voucher amount to the expense ledger.
ANSWER:

34.

C

In general, a material internal control weakness may be
defined as a condition in which material errors or

fraud would ordinarily not be detected within a timely
period by
a.
An auditor during the normal study and evaluation of
the system of internal control.
b.
A controller when reconciling accounts in the general
ledger.
c.
Employees in the normal course of performing their
assigned functions.
d.
The chief financial officer when reviewing interim
financial statements.
ANSWER:

35.

B

C

The most effective control for insuring that incoming
materials are received by stores is to
a.
Establish a separate receiving function independent of
purchasing and stores.
b.
Require that a prenumbered copy of the receiving
report, that accompanies the materials to stores, be

signed by the stores manager, as evidence of receipt,
and forwarded to accounting.
c.
Compare the receiving report with the vendor's invoice
before approving payment.
d.
Provide for a review and comparison of all documents
accompanying an approved voucher before signing
disbursement checks.
ANSWER:

B


Chapter 6 Internal Control: Concepts

36.

Internal control is a function of management, and effective
control is based upon the concept of charge and discharge of
responsibility and duty. Which of the following is an
important feature of effective internal control?
a.
Responsibility for accounting and financial duties
should be assigned to one responsible officer.
b.
Responsibility for the performance of each duty must
be fixed.
c.
Responsibility for the accounting duties must be borne

by the auditing committee of the company.
d.
Responsibility for accounting activities and duties
must be assigned only to employees who are bonded.
ANSWER:

37.

B

The director of internal auditing of a manufacturing company
is updating the long-range audit schedule. There are
several possible audit assignments that can fill a given
time spot. Information on potential dollar exposure and key
internal controls have been gathered. Based on perceived
audit risk, select the assignment of greatest merit.
a.
Precious metals inventory - book value, $1,000,000;
separately stored, but access not restricted.
b.
Branch office petty cash - ledger amount, $50,000; ten
branch offices, equal amounts; replenishment of
accounts requires three separate approvals.
c.
Sales force travel expenses - budget, $1,000,000; 50
sales people; all expenditures over $25 must be
receipted.
d.
Expendable tools inventory - book value, $500,000;
issued by tool crib attendant upon receipt of

authorization form.
ANSWER:

38.

86

A

Which of the following is an effective internal accounting
control over cash payments?
a.
Signed checks should be mailed under the supervision of
the check signer.
b.
Spoiled checks which have been voided should be
disposed of immediately.
c.
Checks should be prepared only by persons responsible
for cash receipts and cash disbursements.
d.
A check signing machine with two signatures should be
utilized.


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Chapter 6 Internal Control: Concepts
ANSWER:

39.

Proper segregation of functional responsibilities in an
effective system of internal control calls for separation of
the functions of
a.
Authorization, execution, and payment.
b.
Authorization, recording, and custody.
c.
Custody, execution, and reporting.
d.
Authorization, payment, and recording.
ANSWER:

40.

A

For effective internal control, the accounts payable
department should compare the information on each vendor's
invoice with the
a.
Receiving report and the purchase order.
b.
Receiving report and the voucher.
c.
Vendor's packing slip and the purchase order.
d.
Vendor's packing slip and the voucher.

ANSWER:

42.

B

For good internal control, which of the following functions
should not be the responsibility of the treasurer's
department?
a.
Data processing.
b.
Handling of cash.
c.
Custody of securities.
d.
Establishing credit policies.
ANSWER:

41.

A

A

Of the following statements about internal control, which
one is not valid?
a.
No one person should be responsible for the custodial
responsibility and the recording responsibility for an

asset.
b.
Transactions must be properly authorized before such
transactions are processed.
c.
Because of the cost/benefit relationship, a client may
apply control procedures on a test basis.
d.
Control procedures reasonably insure that collusion
among employees cannot occur.
ANSWER:

D


Chapter 6 Internal Control: Concepts
43.

The purpose of segregating the duties of hiring personnel
and distributing payroll checks is to separate the
a.
Administrative controls from the internal accounting
controls.
b.
Human resources function from the controllership
function.
c.
Operational responsibility from the record keeping
responsibility.
d.

Authorization of transactions from the custody of dated
assets.
ANSWER:

44.

D

Which of the following control procedures would most likely
be used to maintain accurate perpetual inventory records?
a.
Independent storeroom count of goods received.
b.
Periodic independent reconciliation of control and
subsidiary records.
c.
Periodic independent comparison of records with goods
on hand.
d.
Independent matching of purchase orders, receiving
reports, and vendors' invoices.
ANSWER:

46.

D

Which of the following is an internal control procedure that
would prevent a paid disbursement voucher from being
presented for payment a second time?

a.
Vouchers should be prepared by individuals who are
responsible for signing disbursement checks.
b.
Disbursement vouchers should be approved by at least
two responsible management officials.
c.
The date on a disbursement voucher should be within a
few days of the date the voucher is presented for
payment.
d.
The official signing the check should cancel the paid
voucher after examining the documentation supporting
the disbursement.
ANSWER:

45.

88

C

Which of the following control procedures may prevent the
failure to bill customers for some shipments?
a.
Each shipment should be supported by a pre-numbered
sales invoice that is accounted for.
b.
Each sales order should be approved by authorized
personnel.

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Chapter 6 Internal Control: Concepts
c.
d.

Sales journal entries should be reconciled to daily
sales summaries.
Each sales invoice should be supported by a shipping
document.

ANSWER:
47.

For maximum effectiveness, the organizational status of the
internal audit department:
a.
Should be sufficient to permit the accomplishment of
its audit responsibilities.
b.
Is best when the reporting relationship is direct to
the board of directors.
c.
Requires the board's annual approval of the audit
department’s, plans, and budgets.
d.
Is guaranteed when the charter specifically defines its
independence.

ANSWER:

48.

A

Effective internal control over the payroll function should
include which of the following?
a.
Total time recorded on time clock cards should be
reconciled to job reports by employees responsible for
those specific jobs.
b.
Payroll department employees should be supervised by
the management of the human resources department.
c.
Payroll department employees should be responsible for
maintaining employee personnel records.
d.
Total time spent on jobs should be compared with total
time indicated on time clock cards.
ANSWER:

49.

A

D

Corporate directors, management, external auditors and

internal auditors all play important roles in creating a
proper control environment. Top management is primarily
responsible for:
a.
Establishing a proper environment and specifying an
overall internal control structure.
b.
Designing and operating a control system that provides
reasonable assurance that established objectives will
be met.
c.
Ensuring that external and internal auditors adequately
monitor the control environment.
d.
Implementing and monitoring controls designed by the
board of directors.


Chapter 6 Internal Control: Concepts

ANSWER:
50.

C

Which of the following departments should have the
responsibility for authorizing payroll rate changes?
a.
Human Resources.
b.

Payroll.
c.
Treasurer.
d.
Timekeeping.
ANSWER:

53.

A

Which of the following controls would be the most
appropriate means to ensure that terminated employees had
been removed from the payroll?
a.
Mailing checks to employees' residences.
b.
Establishing direct-deposit procedures with employees'
banks.
c. Reconciling payroll and time-keeping records.
d. Establishing computerized limit checks on payroll rates.
ANSWER:

52.

A

Which of the following is an internal control weakness
related to factory equipment?
a.

A policy exists requiring all purchases of factory
equipment to be made by the department in need of the
equipment.
b.
Checks issued in payment of purchases of equipment are
not signed by the controller.
c.
Factory equipment replacements are generally made when
estimated useful lives, as indicated in depreciation
schedules, have expired.
d.
Proceeds from sales of fully depreciated equipment are
credited to other income.
ANSWER:

51.

90

A

The director of internal auditing for a large retail
organization reports to the controller and is responsible
for designing and installing computer applications relating
to inventory control. Which of the following is the major
limitation of this arrangement?
a.
It prevents the audit organization from devoting full
time to auditing.
b.

Auditors generally do not have the required expertise
to design and implement such systems.


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Chapter 6 Internal Control: Concepts
c.
d.

It potentially affects the director's independence and
thereby lessens the value of audit services.
Such arrangements are unlawful because the director
participates in incompatible functions.

ANSWER:
54.

C

An internal auditor is examining inventory control in a
merchandising division with annual sales of $3,000,000 and a
40 percent gross profit rate. Tests show that 2 percent of
the dollar amount of purchases do not get into inventory due
to breakage and employee theft. Adding certain controls
costing $35,000 annually could reduce these losses to .5
percent of purchases. Should the control be recommended?
a.
Yes, because the projected savings exceed the cost of
the added controls.

b.
No, because the cost of the added controls exceeds the
projected savings.
c.
Yes, because the ideal system of internal control is
the most extensive one.
d.
Yes, regardless of cost-benefit considerations, because
the situation involves employee theft.
ANSWER:

B

COMPLETION:
55.

An overriding factor contributing to internal control
effectiveness is
toward internal
control.
ANSWER:

56.

A chart of accounts, accounting manuals, and standard
journal entries promote proper
of transactions.
ANSWER:

57.

RECORDING

Evidence of proper approval, review, and recording of
transactions is provided by a well-documented
ANSWER:

58.

MANAGEMENT ATTITUDE

AUDIT TRAIL

Limited access controls and accountability controls are
subsets of
.

.


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Chapter 6 Internal Control: Concepts

ANSWER:
59.

The independent auditor is interested only in those aspects
of control that affect the
.

ANSWER:

60.

OMISSION

To the extent the assertion of
omission are minimized.
ANSWER:

61.

FINANCIAL STATEMENTS

An effective system of budgeting, standard costs, and
performance reporting should highlight significant variances
caused by failure to record transactions. This set of
controls, therefore, assists in detecting material errors of
.
ANSWER:

61.

SAFEGUARD CONTROLS

is met, errors of

COMPLETENESS

To assure proper control in a small business, the necessary

approval and review procedures should be performed by the
.
ANSWER:

OWNER/MANAGER

MATCHING:
63. Indicate by letter the internal control that best describes
each of the listed control procedures.
a.
b.
c.
d.

Accuracy control--prevention
Accuracy control--detection
Safeguard control--prevention
Safeguard control--detection

____1.

All incoming checks are restrictively endorsed
immediately upon receipt

____2.

Accounting manuals are used to determine debit and credit
accounts for nonrecurring transactions

____3.

Bank accounts are reconciled monthly by persons not
having access to either financial assets or accounting
records


93

Chapter 6 Internal Control: Concepts

____4.

Newly-hired accounting personnel undergo rigorous
training before assuming responsibility for
transaction
processing
____5.

Members of the internal audit staff perform a monthly
review of all non routine journal entries

____6.

All cash receipts are prelisted and deposited intact
daily

____7.

A member of the controller’s staff compares the receipted
bank deposit ticket with the cash prelisting

____8.

A set of standard journal entries is used to record such
monthly journal entries as depreciation, amortization,
accrued payroll, accrued interest, and bad debts expense

____9.

All revenue and expense budget variances in excess of
predetermined levels are investigated for cause on a
monthly basis

____10. Before signing checks, the treasurer reviews all
documentation
SOLUTION:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

c
a
d

a
b
c
d
a
b
b

PROBLEM/ESSAY:
64. An important component of internal control monitoring is the
periodic examination of substance and comparison with its
recorded accountability. Give three examples of this form of
monitoring and, for each example, identify the account and the
underlying substance.


Chapter 6 Internal Control: Concepts

94

SOLUTION:
1.
2.
3.

Compare inventories (substance) with perpetual inventory
records (account)
Reconcile bank accounts
Substance: bank statements
Account: general ledger cash account

Agree accounts receivable subsidiary ledger with
control, mail statements to customers, and clear

all

4.
5.
6.
7.
8.

exceptions reported by customers
Substance: customer responses to statements
Account: accounts receivable subsidiary ledger and
control account
Count cash in cash register (substance) and compare with
locked-in tape (account)
Compare brokers’ monthly statement (substance) with
investment ledger (account)
Compare vendors’ statements (substance) with accounts
payable ledger (account)
Compare receipted bank deposit slip (substance) with
cash receipts entry and prelisting (account)
Inspect plant assets (substance) and compare with plant
assets ledger (account)

65. Asset safeguard controls may be classified as access
controls and accountability controls. Give two examples of each.
SOLUTION:
Access controls:

1.
2.
3.
4.
5.
6.

Secure areas for merchandise, small tools, supplies,
securities, etc.
Cash registers with locked-in tapes
Limited access to unused documents
Daily intact deposits of cash receipts
System of passwords to limit access to computer data
bases
Dual access to negotiable securities

Accountability controls:
1.
2.

Fixing responsibility over prenumbered documents
Periodic accounting for numeric sequence of used
documents


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Chapter 6 Internal Control: Concepts
3.
4.

Establishing imprest funds for petty cash and fixing
responsibility for custodianship
Bonding of employees in positions of trust

66. For each of the cases described below, identify the
principal control activities that would have prevented or
detected the misstatement.
1. The shipping clerk of Duvinski Enterprises was able to
remove goods from the company’s warehouse by fabricating
shipping orders and bills of lading. An accomplice with a
trucking company was able to pick up the goods during normal
business hours and transport them to warehouse space rented by
the duo. The fraud was detected when the one of the trucking
company dispatchers discovered that the truck was being used
for unscheduled runs. Further investigation by the firm
revealed the delivery destination, whereupon the driver
confessed to the thefts.
2. In conducting the annual audit for Bevis Rod and Reel, Inc.,
the auditors noted that several monthly and year-end
adjustments had not been recorded by the company. Among the
omissions were depreciation, interest accruals, and employer
payroll taxes.
3. Although the auditors, by drafting the necessary audit
adjustments, provide reasonable assurance as to the fairness
of the annual financial statements, Comptronix Exploration and
Development Company’s monthly statements frequently contained
material errors due to improper recording of unique and often
complex transactions.
4. Unrecorded customer remittances were misappropriated

accounts receivable clerk. The affected accounts were
by a combination of fictitious sales returns, inflated
discounts, and write-off of the overstated balances to
allowance for doubtful accounts.

by an
reduced
sales
the

SOLUTION:
1. Use of prenumbered documents, restricted access to unused
documents, fixing of responsibility over document custody, and
periodic accounting for, and cancellation of, used documents
would have prevented the clerk from gaining access to the
documents and using them to effect the fraudulent transfer.
Also, as part of the accounting for used documents, shipping
orders and bills of lading should be matched with sales


Chapter 6 Internal Control: Concepts
invoices to determine that all shipments have been billed to
customers. In the present case, the shipments were never
billed.
2. A set of standard journal entries for all recurring
adjustments would have ensured proper recording of monthly
depreciation, interest, and payroll taxes. Monthly review of
the general ledger trial balance by responsible accounting
personnel provides further assurance that both recurring and
nonrecurring adjustments are not overlooked.

3. A detailed chart of accounts and accounting manuals
describing the various accounts and related transactions,
together with adequate hiring and training policies for
accounting personnel, should provide reasonable assurance of
correct recording of non routine transactions.
4. Proper separation of duties should have prevented the
accounts receivable clerk from having access to customer
remittances. Customer accounts should be posted from cash
prelistings and remittance advices--not from the checks
themselves. Also, effective internal control should require
proper approval of all accounts receivable write-offs.
Finally, sales returns should be supported by proper
documentation, including receiving reports evidencing receipt
of the returned goods.

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