Gleim AUD Chp 7

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Which of the following is usually a benefit of transmitting transactions in an electronic data interchange (EDI) environment?
1 A reduced need to test computer controls related to sales and collections transactions.
2 No need to rely on third-party service providers to ensure security.
3 A compressed business cycle with lower year-end receivables balances.
4 An increased opportunity to apply statistical sampling techniques to account balances.

3 A compressed business cycle with lower year-end receivables balances.
EDI transactions are typically transmitted and processed in real time. Thus, EDI compresses the business cycle by eliminating delays. The time required to receive and process an order, ship goods, and receive payment is greatly reduced compared with that of a typical manual system. Accordingly, more rapid receipt of payment minimizes receivables and improves cash flow.

Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable?
1 Are the proceeds from notes payable used for the purchase of noncurrent assets?
2 Are assets that collateralize notes payable critically needed for the entity's continued existence?
3 Are direct borrowings on notes payable authorized by the board of directors?
4 Are two or more authorized signatures required on checks that repay notes payable?

3 Are direct borrowings on notes payable authorized by the board of directors?
This answer is correct.
Control is enhanced when different persons or departments authorize, record, and maintain custody of assets for a class of transactions. Authorization of notes payable transactions is best done by the board of directors.

In a properly designed internal control system, the same employee most likely would match vendors' invoices with receiving reports and also
1 Post the detailed accounts payable records.
2 Cancel vendors' invoices after payment.
3 Reconcile the accounts payable ledger.
4 Recompute the calculations on vendors' invoices.

4 Recompute the calculations on vendors' invoices.
This answer is correct.
The vouchers payable clerk would typically match purchase orders, vendors' invoices, and receiving reports; test the calculations and terms on the vendors' invoices; and prepare a disbursement voucher.

The objectives of internal control for a production cycle are to provide assurance that transactions are properly executed and recorded, and that
1 Independent internal verification of activity reports is established.
2 Production orders are prenumbered and signed by a supervisor.
3 Custody of work-in-process and of finished goods is properly maintained.
4 Transfers to finished goods are documented by a completed production report and a quality control report.

3 Custody of work-in-process and of finished goods is properly maintained.
This answer is correct.
A principal objective of internal control is to safeguard assets. In the production cycle, control activities must be in place to ensure that inventory is protected from misuse and theft. Accordingly, inventories should be in the custody of a storekeeper, and transfers should be properly documented and recorded to establish accountability.

Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department?
1 Canceling supporting documentation after payment.
2 Verifying the mathematical accuracy of the vendor's invoice.
3 Approving the voucher for payment by an authorized person.
4 Comparing the vendor's invoice with the receiving report.

1 Canceling supporting documentation after payment.
This answer is correct.
Checks for disbursements should be signed by a responsible person in the cash disbursements department after necessary supporting evidence has been examined. This individual should therefore be responsible for canceling the supporting documentation after payment.

If internal control is properly designed, the same employee may be permitted to
1 Sign checks and also cancel supporting documents.
2 Reconcile the bank statements, and also receive and deposit cash.
3 Receive and deposit checks, and also approve write-offs of customer accounts.
4 Approve vouchers for payment, and also sign checks.

1 Sign checks and also cancel supporting documents.
This answer is correct.
Checks for disbursements should be signed by an officer, normally the CFO, after necessary supporting evidence has been examined. The documentation typically consists of a voucher, purchase order, receiving report, and a vendor invoice. Canceling vouchers and supporting papers (with perforations, ink, etc.) upon payment of the voucher prevents the payment of a duplicate voucher. If the person signing the check cancels the documents, they cannot be recycled for duplicate payments. Securing the paid-voucher file from access by the accounts payable clerk is another effective control.

Which of the following controls most likely would assist in reducing the risk of material misstatement related to the existence or occurrence of manufacturing transactions?
1 Perpetual inventory records are independently compared with goods on hand.
2 Forms used for direct materials requisitions are prenumbered and accounted for.
3 Subsidiary ledgers are periodically reconciled with inventory control accounts.
4 Finished goods are stored in locked limited-access warehouses.

1 Perpetual inventory records are independently compared with goods on hand.
This answer is correct.
The recorded accountability for assets should be compared with existing assets at reasonable intervals. If assets are susceptible to loss through errors and fraud, the comparison should be made independently. An independent comparison is one made by persons not having responsibility for asset custody or the authorization or recording of transactions.

Which of the following controls would an entity most likely use in safeguarding against the loss of trading securities?
1 The internal auditor verifies the trading securities in the entity's safe each year on the balance sheet date.
2 An independent trust company that has no direct contact with the employees who have record-keeping responsibilities has possession of the securities.
3 The independent auditor traces all purchases and sales of trading securities through the subsidiary ledgers to the general ledger.
4 A designated member of the board of directors controls the securities in a bank safe-deposit box.

2 An independent trust company that has no direct contact with the employees who have record-keeping responsibilities has possession of the securities.
This answer is correct.
Assigning custody of trading securities to a bank or trust company provides the greatest security because such an institution normally has strict controls over assets entrusted to it and access to its vaults.

Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by an internal control activity that provides for
1 Investigation of variances within a formal budgeting system.
2 Authorization by the board of directors of significant equipment acquisitions.
3 Independent verification of invoices for disbursements recorded as equipment acquisitions.
4 Separation of duties for employees in the accounts payable department.

Investigation of variances within a formal budgeting system.
This answer is correct.
A formal planning and budgeting system that estimates maintenance expense at a certain level will report a significant variance if capital expenditures are charged to the account. Investigation of the variance is likely to disclose the misclassification.

Which of the following is an essential element of the audit trail in an electronic data interchange (EDI) system?
1.Hardware security modules that store sensitive data.
2.Encrypted hash totals that authenticate messages.
3.Activity logs that indicate failed transactions.
4.Disaster recovery plans that ensure proper backup of files.

3.Activity logs that indicate failed transactions.

This answer is correct.
Because an audit trail allows for the tracing of a transaction from initiation to its disposition, an activity log provides a key link in the process. Such a log provides information about users who have accessed the system, the files accessed, the processing accomplished, the time of access, and the amount of time the processing required.

Which of the following activities most likely would detect whether payroll data were altered during processing?
1.Monitoring authorized distribution of data control sheets.
2.Using test data to verify the performance of edit routines.
3.Examining source documents for approval by supervisors.
4.Separating duties between approval of hardware and software specifications.

2.Using test data to verify the performance of edit routines.

This answer is correct.
The test data approach uses the computer to test the processing logic and controls within the system and the records produced. The auditor prepares a set of dummy transactions specifically designed to test the control activities that management claims to have incorporated into the processing programs. The auditor can expect the controls to be applied to the transactions in the prescribed manner. Thus, the auditor is testing the effectiveness of the controls over the payroll data.

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