Multiple Choices Questions
1. Which of the following would be considered a significant deficiency in an organization's control environment?
a. The internal audit function is outsourced to a public accounting firm that is not performing the financial statement audit.
b. Management has approximately 60% of its compensation in stock options but the options cannot be exercised for five years.
c. Management relies on the external audit as its primary source of monitoring controls.
d. The audit committee meets with the external auditor and the internal auditor, but does not allow the CFO to participate in these meetings.
2. Which of the following would not be considered an advantage of using an internal control questionnaire in understanding and documenting the controls in an important accounting application?
a. The questionnaire can be computerized to provide linkages of weaknesses to particular types of errors that might occur in the account balances.
b. Questionnaires can be used for many years without updating.
c. Questionnaires can be easily understood and provide easy identification of potential control deficiencies through "no" responses to questions.
d. Questionnaires can be adapted to both large and small businesses as well as to different industries.
3. Which of the following controls would be most effective in assisting the organization in achieving the completeness objective?
a. All employee time cards should be collected by the supervisor and transmitted directly to the payroll department for processing.
b. All shipments must be approved by the credit manager to ensure that the total invoice amount does not exceed approved limits.
c. All receipts of merchandise must be independently counted or weighed by someone in the receiving department who also reviews the goods for quality control deficiencies.
d. All shipments must be recorded on pre numbered shipping documents that are independently accounted for.
4. Proper implementation of reconciliation controls would be effective in detecting all of the following errors except:
a. Transactions were appropriately posted to individual subsidiary accounts, but because of a computer malfunction, some of the transactions were not posted to the master account.
b. The client has experienced inventory shrinkage that has caused the perpetual inventory records to be overstated.
c. Three shipments were never invoiced because employees in the shipping room colluded with a shipper to deliver goods to their own private company for resale and never recorded the shipments on any documents.
d. A bank teller properly recorded all transactions involving checks but pocketed all cash receipts, even though customers were given a receipt as evidence of the deposit to their accounts.
5. Which of the following statements would not be correct regarding the authorization function as implemented in an organization?
a. Blanket authorizations can be implemented in computer systems on the approval of the user area. All changes to the authorization parameters embodied in the computer should be made only on written, documented requests by the user area responsible for the authorization.
b. General authorizations may be delegated by top management in the form of company policies.
c. The auditor can rely on an authorization control only when there is documentary evidence of the authorization in the form of a signature or an authorizer's initials somewhere in the system.
d. Effective implementation of a "password" scheme to limit access to computer records is a form of authorization control.
6. Segregation of duties is best accomplished when the auditor can determine that:
a. Employees perform only one job; for example, someone working on accounts payable does not have access to other accounting records such as the detail in property, plant, and equipment.
b. The internal audit department performs an independent test of transactions throughout the year and reports any errors to departmental managers.
c. The person responsible for reconciling the bank account is responsible for cash disbursements, not cash receipts.
d. The payroll department cannot add employees to the payroll or change pay rates without the explicit authorization of the personnel department.
7. Authorization of transactions in a computerized processing environment can take place in the form of:
a. Computerized authorization in the form of user-approved blanket authorizations.
b. Electronic authorization of specific transactions carefully controlled by a password system.
c. User-approved (and tested) program to automatically compute economic order quantities and reorder when stock levels fall below a specified limit.
d. All of the above.
8. The accounts payable department receives the purchase order form to accomplish all of the following except:
a. Compare invoice price to purchase order price.
b. Ensure that the purchase had been properly authorized.
c. Ensure that the party requesting the goods had received the goods.
d. Compare quantity ordered to the quantity purchased.
9. Which of the following would not be considered an effective implementation of the monitoring element of the COSO internal control framework?
a. Internal audit periodically performs an evaluation of internal controls that have been documented and tested in prior years.
b. Management reviews current economic performance against expectations and investigates to determine causes of significant deviations from the expectations.
c. The company implements software that captures all processed transactions that exceed company authorized limits.
d. The company builds in edit checks to determine whether all purchases are made from authorized vendors.
10. Which of the following best describes "more than a remote probability" as used in the PCAOB'S definition of significant and material deficiency in internal control? The failure is:
a. Likely
b. Reasonably possible
c. Unlikely
d. One in a 1000 chance