Internal Controls and risk assessment multiple choice questions in accounting.
l-Below are situations where the accounting controls are documented for the transaction stream for recording a credit sale. Rank each situation in order of risk, lowest to highest (Rank 1 is lowest risk and Rank 5 is highest risk) assuming a combined risk assessment group that includes the management assertions: existence, completeness, valuation. As follows: Rank 1 is lowest risk. Rank 2 is 2"d lowest risk. Rank 3 is Middle Risk. Rank 4 is 2\"d highest risk. Rank 5 is Highest risk. Each Situation has the same processes: Sales Order, Shipping Ticket, Invoice, Account Receivable (AR) Master File, Sales General Ledger (GL), and Accounts Receivable (AR) General Ledger (GL). (Note: all the processes are computerized.) Each situation also assumes the accounting system is designed the same and the control environment is identical. Situation A: Controls satisfying management assertions: Each process has a control or more than one control so that all the management assertions are met. No compensating controls exist. Each process has at least one preventive control. Each control is done by someone other than the person who performs the related process. Situation B: Controls satisfying management assertions: Each process has a control or more than one control so that all the management assertions are met. No compensating controls exist. Each process has at least one preventive control. The controls related to the Invoice process and AR GL process are performed by the same person who performs those processes. Situation C: Controls satisfying management assertions: No control procedure(s) exist at each accounting process. However, sales orders are authorized by the credit manager. Otherwise, no other controls exist. Processes are recorded by someone other than the credit manager. Situation D: Controls satisfying management assertions: Sales Order does not have a control that satises the management assertion of Existence/ Occurrence. Shipping Ticket is missing a control to satisfy completeness management assertion. The other processes have a control or more than one control so that all the management assertions are met for that process. A compensating control exists at the AR GL process for missing controls at the Sales Order and Shipping Ticket processes. Each process with a control has at least one preventive control. Each control is done by someone other than the person who performs the related process. Situation E: Controls Satisfying management assertions: Sales and Shipping ticket satisfy completeness and existence/occurrence and valuation. There are no controls that satisfy any management assertions for Invoice, Sales and AR general ledger. The controls that are in place are performed by the same person who performs the process. 2-The transaction error "real but not recorded" relates to which (may be more than one) of the following management assertions? -Valuation -Completeness Ownership/Rights & Obligations -Existence/Occurrence 3-The management assertion "Existence/Occurrence relate to which (may be more than one) of the following transaction errors? Recorded but not real Wrong amount -Real but not recorded -Not properly authorized 4-The control risk assessment is an evaluation concerning the likelihood that the internal control structure does not prevent, detect/correct material financial misstatements in relation to -Personnel Policies and particular transactions streams -Segregation of Duties and the accounting system -The accounting system and Personnel Policies -Management assertions for particular transaction streams 5-What is the order of the documentation/evaluation steps in for an auditors control risk assessment? Make final control risk assessment, document and evaluate control environment, document control procedures, document and evaluate the accounting system, test key controls, preliminary control risk assessment Make preliminary control risk assessment, make final control risk assessment, document and evaluate accounting system, test key controls, document and evaluate control environment -Document and evaluate the accounting system, document control procedures, document and evaluate control environment, make preliminary control risk assessment, test key controls, make final control risk assessment. -Document and evaluate the Control environment, Document and evaluate the accounting system, Document control procedures, make preliminary control risk assessment, test key controls, make final control risk assessment 6-Documentation and Evaluation of Information Technology (IT) controls are included in the documentation and evaluation of which component of the internal control structure Control Environment such as general and application controls Accounting System such as such as how an invoice to a customer is recorded Segregation of Accounting Duties such as one person having custody of inventory but not able to record cost of goods sold transactions.-Accounting Controls such as review of the bank reconciliation 7-Given all other things equal, an internal control situation (A) with more key controls in the same transaction stream than another situation (B), the preliminary control risk assessment for situation (A) should generally have a control risk assessment that is -Equal Risk -Higher Risk Lower Risk -Key controls do not apply to preliminary control risk 8-A Control Risk assessment of Maximum means that the internal control structure is -Somewhat Strong -Very Strong Somewhat Weak -Not to be relied upon 9-A control point in the accounting system is a major process in the accounting system and identies -Where controls should be placed within the accounting system (location) -What control procedures should be used What management assertion a control should satisfy -What type of error a control procedure will prevent or detect/correct 10-lnternal Control Structure is made up of the following major components -Transaction errors, computers, source documents -People, transactions, nancial statements -Control environment, accounting system, control procedures and policies -lnvoices, sales orders, shipping tickets ll-The transaction error \"wrong period\" relates to which of the following management assertions? Existence/Occurrence, Completeness, Valuation -Valuation only -Valuation and Completeness only -Completeness only
