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.
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.
3. 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.
4. 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.
b. Forward a copy of the shipping order and bill of lading to billing.
c. 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.
d. Forward a copy a the signed bill of lading to the stores manager.
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.
6. 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.
7. 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.
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.
9. 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.
10. 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.
11. 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.
c. Misappropriation of an asset or groups of assets.
d. Misinterpretations of facts that existed when the financial statements were
prepared.
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.
13. 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.
14. 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. Count goods upon receipt in storeroom.
b. Match purchase order, receiving report, and vendor's invoice for each voucher
in accounts payable department.
c. Compare goods received with goods requisitioned in receiving department.
d. Verify vouchers for accuracy and approval in internal audit department.
15. For effective internal control purposes, which of the following individuals
should be responsible for mailing signed checks?
a. Receptionist.
b. Treasurer.
c. Accounts payable clerk.
d. Payroll clerk.
16. 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.
17. 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.
18. 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.
19. Which of the following would not be considered an internal control feature?
a. Prenumbered documents.
b. Limited access to documents.
c. Competent personnel.
d. A comparison-shopping staff.
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.
21. 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.
22. 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 the written job requirements specified by
the corporate controller.
d. An accounting manual, accompanied by a detailed chart of accounts, carefully
and clearly describes each type of transaction affecting the entity.
23. 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
24. 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.
25. 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.
26. 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.
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.
28. 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.
29. 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.
30. A set of control procedures referred to as "periodic inventories and
comparisons," provides effective monitoring 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.
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.
32. 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.
d. Prohibit goods from leaving the warehouse without being accompanied by a
signed bill of lading and a properly approved shipping order.
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.
34. 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.
35. 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.
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.
37. 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.
38. 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.
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.
40. 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.
41. 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.
42. 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.
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.
44. 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.
45. 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.
46. 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.
c. Sales journal entries should be reconciled to daily sales summaries.
d. Each sales invoice should be supported by a shipping document.
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.
48. 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.
49. 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.
50. 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.
51. 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.
52. Which of the following departments should have the responsibility for authorizing
payroll rate changes?
a. Human Resources.
b. Payroll.
c. Treasurer.
d. Timekeeping.
53. 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.
c. It potentially affects the director's independence and thereby lessens the
value of audit services.
d. Such arrangements are unlawful because the director participates in incompatible
functions.
54. 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.