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Question 7

Raw materials are always purchased from the same vendor. This is an internal control weakness because:

Quality is substandard from that one vendor.

That one vendor is slow in shipping the goods.

The purchasing department should be required to obtain competitive bids on all purchases over a specified amount; which helps control costs.

There is the potential to violate the Foreign Corrupts Practices Act.

Question 8

In a company that carries a significant amount of inventory, there is no receiving department or receiving report, however, this is not an internal control weakness as there are people who work in the stockroom and manage the inventory.

True

False

Question 9

For a company with lots of merchandise inventory, A receiving department should be established. Personnel in this department should count or weigh all goods received and prepare prenumbered receiving reports. These reports should be signed, dated, and controlled. Copies should be sent to the accounting department, purchasing department, and storeroom.

true

false

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Jarrod Robel
Jarrod RobelLv2
28 Sep 2019

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1.    The production manager, Nick Wang, is responsible for initiating orders for inventory. The system sends Nick an email alerting him of the stock falling below 65% of the previous month's usage. He then generates a pre-numbered purchase order (PO). He can also adjust the quantities on the purchase order when he anticipates increases or decreases in sales. The purchase order is then sent to the purchase clerk Ray Kim via email.

 

2.    For inventory orders, Ray normally sends the purchase orders directly to their approved suppliers. The suppliers will then send Ray a confirmation of items and quantities and an estimated date for the parts to be delivered. When the confirmation is received, Ray will log on his computer, finds the relevant PO initiated by Nick and select the supplier's name on the PO and then click on the box "sent to suppliers".

 

3.    If a PO cannot be filled by any of the approved suppliers, Ray may look for a new supplier. When he obtains a quote from a new supplier, he passes the quote and the new supplier's information to his manager, Barry Sadler for approval. Once approved, Barry will add the new supplier into the approved supplier list.

 

4.    Jasmine Lee Ltd requires their suppliers to attach a Delivery Note (DN) with inventory they ordered. DN should have a reference to the relevant PO number and shows the quantities and items being delivered. When a delivery arrives at the warehouse, the warehouse assistant Gordon Scully will reject the delivery if there is no PO on it or the PO number is invalid. Gordon reconciles the DN to the relevant PO on the computer to match items and quantities. Once it is confirmed, Gordon initials and dates one copy of the DN and then passes it to Gary Chen the warehouse manager.

 

5.    When Gary receives the DN, he logs on to a computer and updates the PO to be "received" and the computer is requested to print a pre-numbered Goods Receiving Report (GRR). The computer retrieves a list of the items ordered from Purchase Order Master file and supplier details in the Supplier Master file to check for accuracy and then prints the GRR. Gary then counts the actual items against the GRR. Once all items are counted and checked, Gary updates the inventory record to reflect the actual items and quantities that have been received. When updating inventory, the computer asks for the relevant PO, if the computer accepts the PO number, it automatically displays the ordered items and quantities and ask Gary to confirm. After Gary updates inventory, the system will generate a journal (Note: the journal posted by the system is to Dr Raw materials inventory; Cr Creditor.). Gary then writes the journal number on the GRR and signs it. The signed GRR together with a copy of DN are left in a tray on the desk of Ray.

 

6.    If discrepancies are found between the DN and the results from the actual counting, a copy of the GRR and DN will be passed to Ray to contact the suppliers. Inventory will not be updated until the discrepancies are sort out.

 

7.    Ray receives all supplier invoices. Suppliers include the relevant PO number on their invoices. On receipt of an invoice, Ray agrees the details on supplier's invoice against the relevant PO. If they agree, he sequentially numbers the invoice based on its due date to ensure that it will be paid within discount period. If there are no discrepancies, he prepares a payment requisition for the invoiced amount and forwards the payment requisition, with the invoice attached, to Barry Sadler for authorisation.

 

8.      Barry signs the payment requisitions to confirm authorisation and forwards the documentation to the banking clerk, Toni Burton who keys the payments into the payment journal (the journal posted by the system is Dr Creditor; Cr Bank). The system generates a journal number which Toni writes on the payment requisition to make sure the account payable balance is updated. Toni files the payment requisitions with the supporting documents.

 

9.      Toni then loads the payments on the online banking facility with reference to the payment requisition number. Barry must approve and release the payments. The banking system automatically sends electronic transfer records to Barry who subsequently forwards them to Ray. Ray checks it against supplier invoices and then sends a remittance advice to individual suppliers.

 

 

Required:

a)      Identity SIX control strengths of the purchases and payments system.

b)     For each control strength, explain what the purpose of the control (i.e what does the control prevent or detect).

You may use the following format to present your answer.                                   

Internal control strengths

Identify a control strength (a)

The purpose of the control (b)

 

 

 

c)      Identity FIVE control weaknesses of the purchases and payments system.

d)     For each control weakness, explain its potential consequence/implication and provide a suggestion for improvement.

You may use the following format to present your answer.                   

Internal control weaknesses

Identify a control weakness (c)

Consequence/Implication and suggestion for improvement (d)

 

14. (1) In violation of company policy, Lowell Company erroneouslycapitalized the cost of painting its warehouse. The auditorsexamining Lowell's financial statements would most likely detectthis when:

A) Discussing capitalization policies with Lowell'scontroller.

B) Examining maintenance expense accounts.

C) Observing, during the physical inventory observation, that thewarehouse had been painted.

D) Examining the construction work orders supporting itemscapitalized during the year.


15. Which of the following is not one of the auditors' objectivesin auditing depreciation?


A) Establishing the reasonableness of the client's replacementpolicy.

B) Establishing that the methods used are appropriate.

C) Establishing that the methods are consistently applied.

D) Establishing the reasonableness of depreciationcomputations.

16. The scope of an internal audit is initially defined bythe:

A) Audit objectives.

B) Scheduling and time estimates.

C) Preliminary survey.

D) Audit program.

17. For audit purposes, a corporation's articles of incorporationare normally:

A) Copied and placed on the owners' equity lead schedule.

B) Copied and placed in the permanent file.

C) Confirmed with the transfer agent.

D) Ignored since they are not normally considered to be related tothe internal control structure.

18. Arel, CPA, was engaged by a group of royalty recipients toapply agreed-upon procedures to financial data supplied by ModitCo. regarding Modit's written assertion about its compliance withcontractual requirements to pay royalties. Arel's report on theseagreed-upon procedures should contain a(n):

A) Disclaimer of opinion about the fair presentation of Modit'sfinancial statements.

B) List of the procedures performed (or reference thereto) andArel's findings.

C) Opinion about the effectiveness of Modit's internal controlactivities concerning royalty payments.

D) Acknowledgment that the sufficiency of the procedures is solelyArel's responsibility

19. The auditor's primary means of obtaining corroboration ofmanagement's information concerning litigation is a:

A) Letter of audit inquiry to the client's lawyer.

B) Letter of corroboration from the auditor's lawyer upon review ofthe legal documentation.

C) Confirmation of claims and assessments from the other parties tothe litigation.

D) Confirmation of claims and assessments from an officer of thecourt presiding over the litigation.

20. An auditor identified a material weakness in internal controlin August. The client was informed and the client corrected thematerial weakness prior to year-end (December 31); the auditoragrees that the correction eliminates the material weakness priorto year-end. The appropriate audit report on internal control underPCAOB standards on reporting on internal control is:

A) Adverse.

B) Unqualified.

C) Disclaimer.

D) Qualified.

21. Which of the following auditing procedures is ordinarilyperformed last?

A) Reading of the minutes of the directors' meetings.

B) Confirming accounts payable.

C) Obtaining a management representation letter.

D) Testing of the purchasing function

22. When an auditor has concluded there is substantial doubt aboutan entity's ability to continue as a going concern for a reasonableperiod of time beyond the current financial statement date(9/30/X1), the auditor's responsibility includes:

A) Preparing prospective financial information to verify whethermanagement's plans can be effectively implemented.

B) Projecting conditions and events from one year prior to thisyear's date (9/30/X0) to 9/30/X1.

C) Issuing an adverse or negative assurance opinion, depending uponmateriality, due to the possible effects on the financialstatements.

D) Considering the adequacy of disclosure about the entity'spossible inability to continue as a going concern.

23. Which of the following manipulations would understate accountspayable on the financial statements?


A) Overstatement of purchases.

B) Closing the cash disbursements journal prior to year-end.

C) Leaving the cash receipts journal open after year-end.

D) Overstating purchase returns

24. An example of an internal control weakness is to assign thepayroll department the responsibility for:


A) Preparing the payroll expense distribution.

B) Preparing the payroll checks.

C) Authorizing increases in pay.

D) Preparing journal entries for payroll expense

25. In governmental accounting, emphasis is placed on:


A) Total assets owned by the governmental entity.

B) Generating income form funds employed.

C) Expenditures of funds.

D) The flow of funds through the income statement.

26. In auditing long-term debt, an auditor would be most likelyto:


A) Perform analytical procedures on the bond prenumbered discountaccounts.

B) Examine documentation of assets purchased with bond proceeds forliens.

C) Compare interest expense with the long-term debt amount forreasonableness.

D) Confirm the existence of individual long-term debt holders atyear-end.

27. Which of the following tests of controls most likely would helpassure an auditor that goods shipped are properly billed?


A) Scan the sales journal for sequential and unusual entries.

B) Examine shipping documents for matching sales invoices.

C) Compare the accounts receivable ledger to daily salessummaries.

D) Inspect unused sales invoices for consecutivepre-numbering.

28. Which of the following audit procedures is best for identifyingunrecorded trade accounts payable?


A) Reviewing cash disbursements recorded subsequent to the balancesheet date to determine whether the related payable applies to theprior period.

B) Investigating payables recorded just prior to and justsubsequent to the balance sheet date to determine whether they aresupported by receiving reports.

C) Examining unusual relationships between monthly accounts payablebalances and recorded cash payments.

D) Reconciling vendors' statements to the file of receiving reportsto identify items received just prior to the balance sheetdate.

29. Which of the following is true about the auditors' observationof the client's physical inventory?


A) The count must be made at year-end.

B) The auditors should supervise the client's personnel.

C) The auditors' observation addresses the existenceassertion.

D) The auditors should justify any omission of the observation inthe audit report.

30. Which of the following is not a reason for the specialsignificance attached by the auditors to the verification ofinventories?


A) The determination of inventory valuation directly affects netincome.

B) The existence of inventories is inherently difficult tosubstantiate.

C) Special valuation problems often exist for inventories.

D) Inventories are often the largest current asset of anenterprise.

31. (1) When the auditors obtain an understanding of internalcontrol for the financing cycle documentation will frequentlyinclude a written description as well as a(n):


A) List of audit objectives.

B) Decision table.

C) Summary of tests of controls.

D) Internal control questionnaire.

a) HKL is a manufacturer and distributor of printed stationeryproducts that are sold in a wide variety of retail stores aroundthe country. There are two divisions: Manufacturing andDistribution. A very large inventory is held in the distributionwarehouse to cope with orders from retailers who expect deliverywithin 24 hours of placing an order.

HKL’s management accountant for the Manufacturing divisioncharges the Distribution division for all goods transferred at thestandard cost of manufacture which is agreed by each divisionduring the annual budget cycle. The Manufacturing division makes a10% profit on the cost of production but absorbs all productionvariances. The goods transferred to Distribution are therefore at aknown cost and physically checked by both the Manufacturing and theDistribution division staff at the time of transfer.

The customer order process for HKL’s Distribution division is asfollows:

i) HKL’s customer service center receives orders by telephone,post, fax, email and through an online Internet ordering facility.The customer service center checks the creditworthiness ofcustomers and bundles up orders several times each day to go to theDistribution division.

ii) All orders received by the Distribution division are inputto HKL’s computer system which checks stock availability and staffwould then produce an invoice for the goods using anotheraccounting system.

iii) Internet orders have been credit checked automatically andstock has been reserved as part of the order entry process carriedout by the customer. Internet orders automatically result in aninvoice being printed without additional input.

iv) The Distribution division uses a copy of the invoice toselect goods from the warehouse, which are then assembled in theloading dock for delivery using HKL’s own fleet of deliveryvehicles.

v) When HKL’s drivers deliver the goods to the customer, thecustomer signs for the receipt and the signed copy of the invoiceis returned to the Distribution division and then to the accountdepartment.

vi) HKL’s management accountant for the Distribution divisionproduces monthly management reports based on the selling price ofthe goods less the standard cost of manufacture. The control forinventory is compared with the monthly inventory valuation reportand while there are differences, these are mainly the result ofwrite-offs of damaged or obsolete stock, which are recorded onjournal entry forms by the Distribution division and sent to theaccount department.

Due to the size of inventory held, a physical stocktake is onlytaken once per annum by Distribution staff, at the end of thefinancial year. Besides, there is limited use of computerizedsystem to keep track the movement of stocks; they rely on humanpower to check the stocks for delivery. As for this, this hasalways revealed some stock losses, although these have been at anacceptable level. Both internal and external auditors are presentduring the stocktake and check selected items of stock with theDistribution division staff. Due to the range of products held inthe warehouse, the auditors rely on the Distribution division staffto identify the products held.

Identify and analyse the key weaknesses in the risk managementapproach that the directors of HKL should look into. Also, suggestthe course of action that should be taken. Relevant examples orillustrations should be given. (13 marks)

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