1 Effective internal control in a small company that has an insufficient number of employees to permit proper division of responsibilities can best be enhanced by Engaging a CPA to perform monthly write up work Employment of temporary personnel to aid in the segregation of duties Delegation of full clear cut responsibility to each employee for the functions assigned to each Direct participation by the owner of the business in the recordkeeping activities of the business The manner in which control objectives are achieved varies with the size and complexity of the entity Thus direct participation of an owner manager in the recordkeeping and other activities of the business facilitates monitoring of employee actions Such effective involvement may preclude the need for extensive accounting procedures sophisticated information systems or written policies 2 Proper segregation of duties reduces the opportunities to allow persons to be in positions both to Perpetrate and conceal fraud and error Record cash receipts and cash disbursements Accountants may record both cash receipts and cash disbursements as long as they do not have custody of cash Establish internal control and authorize transactions Management establishes internal control and ultimately has the responsibility to authorize transactions Journalize entries and prepare financial statements Accountants typically journalize entries and prepare financial statements 3 The internal auditing department s guidance and oversight of management s performance is accomplished economically and efficiently Management s planning organizing and directing processes are properly evaluated Material errors or fraud will be prevented or detected and corrected within a timely period by employees in the course of performing their assigned duties Management s plans have not been circumvented by worker collusion Collusion is an inherent limitation of internal control Cost effective controls should restrict deviations to a tolerable rate Thus material errors and improper or illegal acts should be prevented or detected and corrected within a timely period by employees in the normal course of performing their assigned duties Accordingly the cost benefit relationship is considered by management during the design of systems and the potential loss associated with any exposure or risk is weighed against the cost to control it 4 An auditor would most likely be concerned with controls that provide reasonable assurance about the Internal controls are designed to provide reasonable assurance that Decision to make expenditures for certain advertising activities Efficiency of management s decision making process Appropriate prices the entity should charge for its products Entity s ability to initiate authorize record process and report financial data In obtaining an understanding of internal control in a financial statement audit an auditor is not obligated to 5 Search for significant deficiencies in the operation of internal control Identify the risks of material misstatement Obtain knowledge about the operating effectiveness of internal control Determine whether controls have been implemented Consider factors that affect the risks of material misstatement Understanding internal controls relevant to the audit involves evaluating the design of the controls and determining whether they have been implemented The auditor of a nonissuer need not obtain an understanding about operating effectiveness as part of understanding internal control However 1 the auditor s assessment of the risks of material misstatement RMMs may include an expectation of the operating effectiveness of controls or 2 substantive procedures may not provide sufficient appropriate evidence at the relevant assertion level about operating effectiveness In these circumstances the auditor should test controls In all audits the auditor should obtain an understanding of each of the five components of internal control sufficient to plan the audit An understanding is obtained by performing risk assessment procedures to evaluate the design of controls relevant to the audit and to determine whether they have been implemented In addition the auditor should obtain and document the understanding of the entity s internal control components However in an audit the auditor is not obligated to search for significant deficiencies or material weaknesses 6 Which of the following factors is least likely to affect the extent of the auditor s understanding of the entity s internal controls The inherent limitations of an audit The nature of specific relevant controls The amount of time budgeted to complete the engagement The size and complexity of the entity 7 Which of the following characteristics distinguishes computer processing from manual processing Computer processing virtually eliminates the occurrence of computational error normally associated with manual processing Most computer systems are designed so that transaction trails useful for audit purposes do not exist Errors or fraud in computer processing will be detected soon after their occurrence The potential for systematic error is ordinarily greater in manual processing than in computerized processing 8 Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle Merchandise received is not promptly reconciled to the outstanding purchase order file The write off of receivables by personnel who receive cash permits the misappropriation of cash Obsolete items included in inventory balances are rarely reduced to the lower of cost or market value Fictitious transactions are recorded that cause an understatement of revenue and overstatement of receivables 9 Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account monthly The billing department supervisor sends copies of approved sales orders to the credit department for comparison to authorized credit limits and current customer account balances The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences they report The billing department supervisor matches prenumbered shipping documents with entries in the sales journal 10 An auditor is determining