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M3 Exercise (Ic)

The document contains a 10 question multiple choice quiz about internal controls. The questions cover topics such as the basic concept of internal control, control environment characteristics, appropriate accounting department responsibilities, controls over unrecorded shipments, controls over materials used in production, deterring payroll fraud, controls over uninvoiced shipments, detecting errors in payroll changes, detecting misclassified expenses, and offsetting weaknesses in accounts receivable controls. The key is provided with the correct answer for each question.

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64 views

M3 Exercise (Ic)

The document contains a 10 question multiple choice quiz about internal controls. The questions cover topics such as the basic concept of internal control, control environment characteristics, appropriate accounting department responsibilities, controls over unrecorded shipments, controls over materials used in production, deterring payroll fraud, controls over uninvoiced shipments, detecting errors in payroll changes, detecting misclassified expenses, and offsetting weaknesses in accounts receivable controls. The key is provided with the correct answer for each question.

Uploaded by

kristelle0marisse
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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M3 INTERNAL CONTROL

M3 EXERCISE

1. The basic concept of internal control which


recognizes that the cost of internal control should
not exceed the benefits expected to be derived is
known as
a. Management by exception.
b. Management responsibility.
c. Limited liability.
d. Reasonable assurance.

2. Of the following control environment


characteristics, identify the one that contributes
most to effective internal control
a. The audit committee consists of the president,
two vice- presidents, and the corporate
controller.
b. The company does not have a centralized human
resources function.
c. The company has an effective internal audit
staff that monitors controls on a continuous
basis.
d. The company routinely transacts business with
related parties.

3. It would be appropriate for the payroll accounting


department to be responsible for which of the
following functions?
a. Approval of employee time records.
b. Maintenance of records of employment,
discharges, and pay increases.
c. Preparation of periodic governmental reports
as to employees' earnings and withholding
taxes. d. Temporary retention of
unclaimed employee paychecks.

4. The most effective control to prevent unbilled and


unrecorded shipments of finished goods is to
a. Require all outgoing shipments to be
accompanied by a prenumbered shipping order and
bill of lading (signed by the carrier).
Forward a copy of these documents to
accounting, to be placed in an open file
awaiting receipt of the customer invoice copy.
b. Forward a copy of the shipping order and bill
of lading to billing.

c. Implement a policy that prevents sales invoices


from being mailed to customers in the absence
of a properly approved shipping order and bill
of lading signed by the carrier.
d. Forward a copy a the signed bill of lading to
the stores manager.

5. Apex Manufacturing Corporation mass produces eight


different products. The controller, who is
interested in strengthening internal controls over
the accounting for materials used in production,
would be most likely to implement
a. An economic order quantity (EOQ) system.
b. A job order cost accounting system.
c. A perpetual inventory system.
d. A separation of duties among production
personnel.

6. Which of the following activities represents both an


appropriate human resources function and a deterrent
to payroll fraud?
a. Distribution of paychecks.
b. Authorization of overtime.
c. Authorization of additions to and deletions
from the
payroll.
d. Collection and retention of unclaimed
paychecks.

7. Alpha Company uses its sales invoices for posting


perpetual inventory records. Inadequate internal
control procedures over the invoicing function allow
goods to be shipped that are not invoiced. The
inadequate controls could cause an
a. Understatement of revenues, receivables, and
inventory.
b. Overstatement of revenues and receivables, and
an understatement of inventory.
c. Understatement of revenues and receivables, and
an overstatement of inventory.
d. Overstatement of revenues, receivables, and
inventory.

8. The human resources department receives an edit


listing of payroll changes processed at every
payroll cycle. If they do not verify the changes
processed, this could result in:
a. Undetected errors in payroll rates for new
employees.
b. Inaccurate social security deductions.
c. Labor hours charged to the wrong account in the
cost reporting system.
d. Employees not being asked if they want to
contribute to the company pension plan.

9. Property acquisitions that are misclassified as


maintenance expense would most likely be detected by
internal control procedures that provide for
a. Investigation of variances within a formal
budgeting system.
b. Review and approval of the monthly depreciation
entry by the plant supervisor.
c. Segregation of duties of employees in the
accounts payable department.
d. Examination by the internal auditor of vendor
invoices and canceled checks for property
acquisitions.

10. During the review of a small business client's


internal control system, the auditor discovered that
the accounts receivable clerk approves credit memos
and has access to cash. Which of the following
controls would be most effective in offsetting this
weakness?
a. The owner reviews errors in billings to
customers and postings to the subsidiary
ledger.
b. The controller receives the monthly bank
statement directly and reconciles the checking
accounts.
c. The owner reviews credit memos after they are
recorded.
d. The controller reconciles the total of the
detail accounts receivable accounts to the
amount shown in the ledger.

KEY

1 ANSWER: D

2 ANSWER: C
3 ANSWER: C
4 ANSWER: A
5 ANSWER: C
6 ANSWER: C
7 ANSWER: C
8 ANSWER: A
9 ANSWER: A
10 ANSWER: C

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