Internal Control and Accountability in Business

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Questions and Answers

What is the primary purpose of interim testing?

To detect fraud

To evaluate the client's financial statements

To obtain evidence on which to base the auditor's opinion

To test the operating effectiveness of controls (correct)

The audit report release date is the same as the date of the financial statements.

False

What is the purpose of roll-forward procedures?

To extend the conclusions from an interim date to the date of the financial statements

Surprise audits are a type of _______________________ procedure.

fraud detection Signup and view all the answers

What is the primary purpose of reviewing journal entries?

To verify the accuracy of financial transactions Signup and view all the answers

Match the following audit procedures with their descriptions:

Vendor verification = To verify the accuracy of vendor information Data Analytics = To examine large datasets to identify patterns and trends Segregation of duties assessment = To evaluate the division of responsibilities within an organization Signup and view all the answers

Dual date reports are used to indicate that the auditor has performed additional audit procedures for a significant event that occurred before the date of the auditor's report.

False Signup and view all the answers

What is the purpose of examining material transactions between the interim testing date and the date of the financial statements?

To extend the conclusions from an interim date to the date of the financial statements Signup and view all the answers

What is the purpose of testing controls in the purchasing cycle?

To reduce assessed control risk Signup and view all the answers

In the purchasing cycle, substantive procedures are more prominent than testing controls.

False Signup and view all the answers

What is the purpose of reviewing changes in authorization when testing for proper authorization in the expenditure cycle?

To ensure that changes to authorization have been properly approved and documented. Signup and view all the answers

An auditor would find the proper authorization that indicates it is okay to pay a vendor on the _______________________.

payment authorization form Signup and view all the answers

Match the following audit procedures with their descriptions:

Inspecting = Reviewing documents and records Inquiry = Asking personnel about their roles and responsibilities Observing = Watching employees perform their tasks Recalculating = Verifying calculations and totals Signup and view all the answers

What is the primary focus of the audit approach in the purchasing cycle?

Testing controls within the system Signup and view all the answers

A three-match control is a common automated control to ensure the proper recording of _______________________.

expenses Signup and view all the answers

Cut-off testing is a substantive procedure used to verify the timing of transactions.

False Signup and view all the answers

What is the purpose of audit procedures for unrecorded liabilities?

To find expenses or obligations that haven't been reflected in the financial statements Signup and view all the answers

In a high-risk material misstatement scenario, the extent of testing for accounts payable would be reduced.

False Signup and view all the answers

What is an example of an analytical procedure that can be used to test prepaid expenses and accrued liabilities?

Horizontal and vertical analyses Signup and view all the answers

The purpose of verifying purchase orders is to test the _________ of liabilities.

completeness Signup and view all the answers

Match the following audit procedures with their corresponding objective:

Review of subsequent payments = Test for unrecorded liabilities Vendor statement reconciliation = Verify accuracy of vendor statements Examine receiving reports = Verify timing of transactions Inquiry with management = Detect fraud risk Review contracts = Test for completeness of liabilities Analytical procedures = Identify unusual patterns or trends Signup and view all the answers

In a low-risk material misstatement scenario, the emphasis would be on detailed testing of transactions.

False Signup and view all the answers

Why is the emphasis on the completeness assertion for liabilities instead of on the existence assertion as in the audit of assets?

Risk of understatement Signup and view all the answers

In substantive procedures, the emphasis is on the ______________ assertion for liabilities.

completeness Signup and view all the answers

Study Notes

Expenditure Cycle Internal Control

Proper authorization is essential for all expenditures, considering corporate values and ethics
Security measures include restricting access to inventory and blank documents like purchase orders and receiving reports
A three-match control is often used to ensure proper recording of expenses

Control Considerations

Separation of responsibilities is crucial for internal controls
Control-checking activities should be detailed and thorough
Access to inventory and physical assets must be restricted to minimize risk

Testing of Operating Effectiveness of Internal Control

Identify controls to rely on to reduce assessed control risk
Select a sample of items from the data population for audit
Actions of test of controls include:
- Inspecting
- Inquiry
- Observing
- Scanning
- Matching
- Recalculating

Authorization in Expenditure Cycle

Review policies and procedures for proper authorization
Sample transactions and check for signatures and supporting documents
Review changes in authorization and inquire with personnel
Evaluate segregation of duties

Authorization Sources

Purchase order
Receiving report
Vendor invoice
Authorization signature or approval
Payment authorization form

Substantive Procedures

Audit approach in purchasing cycle relies on testing controls and less on procedures
Procedures for accounts payable are affected by risk of material misstatement
Low risk: reduced extent of testing, less detailed testing, and reliance on controls
High risk: increased extent of testing, detailed testing of transactions, and greater emphasis on analytical procedures and independent confirmations

Unrecorded Liabilities

Purpose: to find unrecorded expenses or obligations
Examples of audit procedures:
- Review subsequent payments
- Vendor statement reconciliation
- Examine receiving reports
- Inquire with management
- Review contracts
- Analytical procedures

Emphasis on Completeness Assertion

Risk of understatement
Control environment
Impact on financial statements
Fraud risk

Other Expenditure Cycle Accounts

Prepaid expenses and accrued liabilities can be tested using analytical procedures
Examples of audit procedures:
- Vendor verification
- Data analytics
- Examine purchase orders
- Inspect invoices
- Review receiving reports
- Segregation of duties assessment
- Surprise audits
- Confirmation of balances
- Review journal entries

Audit Timeline

Interim testing: between the beginning of the year and the year-end date under audit
Date of the financial statements: the year-end date of the latest period covered by the client's financial statements
Date of the auditor's report (audit completion date): the date on which auditors have gathered evidence for their opinions
Audit report release date: the date on which auditors allow the client to use their reports
Dual date report: used to indicate additional audit procedures for a significant event occurring after the date of the auditor's report

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Description

This quiz assesses knowledge of internal control measures in business, including authorization, corporate values, security, separation of responsibilities, and control-checking activities.

Internal Control and Accountability in Business

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Questions and Answers

What is the primary purpose of interim testing?

The audit report release date is the same as the date of the financial statements.

What is the purpose of roll-forward procedures?

Surprise audits are a type of _______________________ procedure.

What is the primary purpose of reviewing journal entries?

Match the following audit procedures with their descriptions:

Dual date reports are used to indicate that the auditor has performed additional audit procedures for a significant event that occurred before the date of the auditor's report.

What is the purpose of examining material transactions between the interim testing date and the date of the financial statements?

What is the purpose of testing controls in the purchasing cycle?

In the purchasing cycle, substantive procedures are more prominent than testing controls.

What is the purpose of reviewing changes in authorization when testing for proper authorization in the expenditure cycle?

An auditor would find the proper authorization that indicates it is okay to pay a vendor on the _______________________.

Match the following audit procedures with their descriptions:

What is the primary focus of the audit approach in the purchasing cycle?

A three-match control is a common automated control to ensure the proper recording of _______________________.

Cut-off testing is a substantive procedure used to verify the timing of transactions.

What is the purpose of audit procedures for unrecorded liabilities?

In a high-risk material misstatement scenario, the extent of testing for accounts payable would be reduced.

What is an example of an analytical procedure that can be used to test prepaid expenses and accrued liabilities?

The purpose of verifying purchase orders is to test the _________ of liabilities.

Match the following audit procedures with their corresponding objective:

In a low-risk material misstatement scenario, the emphasis would be on detailed testing of transactions.

Why is the emphasis on the completeness assertion for liabilities instead of on the existence assertion as in the audit of assets?

In substantive procedures, the emphasis is on the ______________ assertion for liabilities.

Study Notes

Expenditure Cycle Internal Control

Control Considerations

Testing of Operating Effectiveness of Internal Control

Authorization in Expenditure Cycle

Authorization Sources

Substantive Procedures

Unrecorded Liabilities

Emphasis on Completeness Assertion

Other Expenditure Cycle Accounts

Audit Timeline

Studying That Suits You

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