1. To minimize the risk that agents in the purchasing department will use their positions for personal gain, the organization should
A.Rotate purchasing agent assignments periodically.
B.Request internal auditors to confirm selected purchases and accounts payable.
C.Specify that all items purchased must pass value-per-unit-of-cost reviews.
D.Direct the purchasing department to maintain records on purchase prices paid, with review of such being required each 6 months.
 
A yes. The risk of favoritism is increased when buyers have long-term relationships with specific vendors. Periodic rotation of buyer assignments will limit the opportunity to show favoritism. This risk is also reduced if buyers are required to take vacations.
B no. Confirmation does not enable internal auditors to detect inappropriate benefits received by purchasing agents or deter long-term relationships.
C no. value-per-unit-of-cost reviews could be helpful in assuring value received for price paid but do not directly focus on receipt of inappropriate benefits by purchasing agents.
D no. review of records every 6 months does not enable the organization to detect receipt of inappropriate amounts by an agent or deter relationships that could lead to such activity.

2. Upon receipt of purchased goods, receiving department personnel match the quantity received with the packing slip quantity and mark the retail price on the goods based on a master price list. The annotated packing slip is then forwarded to inventory control and goods are automatically moved to the retail sales area. The most significant control strength of this activity is
A.Immediately pricing goods for retail sale.
B.Matching quantity received with the packing slip.
C.Using a master price list for marking the sale price.
D.Automatically moving goods to the retail sales area.
 
C yes. Use of the master price list assures that the correct retail price is marked.
A no. Timing is not as important as the accuracy of prices
B no. matching quantity received with the packing slip does not ensure receipt of the quantity ordered.
D no. Goods may or may not be needed in retail sales.
 
3.  Management can best strengthen internal control over the custody of inventory stored in an off-site warehouse by implementing.
A . Reconciliation of transfer slips to/ from the warehouse with inventory records.
B . increases in insurance coverage.
C. regular reconciliation of physical inventories to accounting records.
D, Regular confirmation of the amount on hand with the custodian of the warehouse.
 
C yes. The most effective control over off-site inventory is the periodic comparison of the recorded accountability with the actual physical inventory.
A no. examination of documents is a less effective procedure than actual observation of the inventory.
B no. Increasing insurance coverage helps protect the business against losses but does not strengthen internal control over the custody of inventory.
D no. Confirming with the custodian the amount of inventory on hand does not verify that the inventory is actually at the warehouse.

4. Which of the following controls could be used to detect bank deposits that are recorded but never made?
A.Establishing accountability for receipts at the earliest possible time.
B.Linking receipts to other internal accountabilities (i.e., collections to either accounts receivable or sales).
C.Consolidation cash receiving points.
D.Having bank reconciliations performed by a third party.
 
D. yes. Having an independent third party prepare the bank reconciliations would reveal any discrepancies between recorded deposits and the bank statements. A bank reconciliation compares the bank statement with company records and resolves differences caused by deposits in transit, outstanding checks, NSF checks, bank charges, errors, etc.
A no. This control is implemented before deposits are prepared and recorded in the company’s books. The problem here is the detection of the diversion of funds that have been properly recorded upon receipt.
B C same as A.

5.  An adequate system of internal controls is most likely to detect a fraud perpetrated by a
A.Group of employees in collusion.
B.Single employee.
C.Group of managers in collusion.
D.Single manager.
 
B yes. Segregation of duties and other control procedures serve to prevent or detect a fraud committed by an employee acting alone. One employee may not have the ability to engage in wrongdoing or may be subject to detection by other employees in the course of performing their assigned duties. However, collusion may circumvent controls. For example, comparison of recorded accountability with assets may fail to detect fraud if persons having custody of assets collude with record keepers.
A no. A group has a better chance of successfully perpetrating a fraud than does an individual employee.
C no. management can override controls.
D no. even a single manager may be able to override controls.

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