Session 7 IAP

Which of the following observations made during the preliminary survey of a local department store’s disbursement cycle reflects a control strength?

• Individual department managers use prenumbered forms to order merchandise from vendors.

• The chief financial officer’s office prepares checks for suppliers based on vouchers prepared by the accounts payable department.

• 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.

• Individual department managers are responsible for the movement of merchandise from the receiving dock to storage or sales areas as appropriate.

Checks from customers are received in the organization’s mail room each day. What controls should be in place to safeguard them?

• Providing bonding protection for mail clerks.

• Forwarding all checks to the cashier upon receipt.

• Requiring a specific mail clerk to list and restrictively endorse each check.

• Establishing a separate post office box for customer payments.

Which one of the following situations represents an internal control weakness in accounts receivable?

• Delinquent accounts are reviewed only by the sales manager.

• Customers’ statements are mailed monthly by the accounts receivable department.

• Internal auditors confirm customer accounts periodically.

• The cashier is denied access to customers’ records and monthly statements.

Which method of evaluating internal controls during the preliminary survey provides the internal auditor with the best visual grasp of a system and a mean for analyzing complex operations?

• A matrix approach.

• A questionnaire approach.

• A detailed narrative approach.

• A flowcharting approach.

Fact Pattern:  An organization has grown rapidly and has just automated its human resource system. The organization has developed a large database that tracks employees, employee benefits, payroll deductions, job classifications, ethnic code, age, insurance, medical protection, and other similar information. Management has asked the internal audit activity to review the new system.

An employee in the payroll department is contemplating a fraud involving the addition of a fictitious employee and the entry of fictitious hours worked. The paycheck would then be sent to the payroll employee’s home address. The most effective control procedure to prevent this type of fraud is to require that

• A report of all new employees added be approved by someone outside of the payroll department. Also, a report showing all employees and hours worked should be sent to the supervisor’s department for review.

• All new employees and their hours worked be entered by the human resources department.

• The payroll department physically delivers paychecks to employees rather than mailing them.

• All changes to employee records be approved by supervisors outside of both human resources and payroll.

The following is a section of a system flowchart for a payroll application:

Symbol X could represent

• Batched time cards.

• Unclaimed payroll checks.

• An error report.

• Erroneous time cards.

Which of the following controls would prevent the ordering of quantities in excess of an organization’s needs?

• Review of all purchase requisitions by a supervisor in the user department prior to submitting them to the purchasing department.

• A policy requiring review of the purchase order before receiving a new shipment.

• Automatic reorder by the purchasing department when low inventory level is indicated by the system.

• A policy requiring agreement of the receiving report and packing slip before storage of new receipts.

Which of the following is optimal to provide a summary-level description of a complex new computer system?

• A detailed narrative.

• Program code checking and flowchart verification.

• A system flowchart.

• A control flowchart.

The manager of a production line has the authority to order and receive replacement parts for all machinery that requires periodic maintenance. The internal auditor received an anonymous tip that the manager ordered substantially more parts than were necessary from a family member in the parts supply business. The unneeded parts were never delivered. Instead, the manager processed receiving documents and charged the parts to machinery maintenance accounts. The payments for the undelivered parts were sent to the supplier, and the money was divided between the manager and the family member. Which of the following internal controls would have most likely prevented this fraud from occurring?

• Segregating the receiving function from the authorization of parts purchases.

• Comparing the bill of lading for replacement parts to the approved purchase order.

• Establishing predefined spending levels for all vendors during the bidding process.

• Using the company’s inventory system to match quantities requested with quantities received.

This data flow diagram could be expanded to show the

• Details of the preparation of purchase orders.

• Physical media used for stock records, the vendor file, and purchase orders.

• Workstations required in a distributed system for preparing purchase orders.

• Edit checks used in preparing purchase orders from stock records.