CMA Part I SU 9

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  1. The static budget variance measures the difference between:
    The static budget amount and the actual results. It is the total variance to be explained.
  2. The static budget variance consists of:
    A flexible budget variance and a sales-volume variance.
  3. The flexible budget variance is the difference between:
    The actual results and the budgeted amount for the actual activity level.

    The FBV may be analyzed in terms of variances related to selling prices, input costs, and input quantities.
  4. The sales-volume variance is the difference between:
    The flexible budget and the static budget amounts if selling prices and costs are constant.
  5. A reason to establish internal control is to:

    A. Encourage compliance with organizational objectives.

    B. Provide reasonable assurance that the objectives of the organization are achieved.

    C. Safeguard the resources of the organization.

    D. Ensure the accuracy, reliability, and timeliness of information.
    • Answer B is correct.
    • According to AU 319, “Internal control is a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations.”
  6. The cash receipts function should be separated from the related recordkeeping in an organization to:

    A. Prevent paying cash disbursements from cash receipts.

    B. Establish accountability when the cash is first received.

    C. Physically safeguard the cash receipts.

    D. Minimize undetected misappropriations of cash receipts.
    • Answer D is correct.
    • Separating cash receipts and recordkeeping prevents an employee from misappropriating cash and altering the records to conceal the irregularity.
  7. Which of the following is an appropriate responsibility of an audit committee?

    A. Performing a review of the procurement function of the organization.

    B. Reviewing the engagement records of the public accounting firm to determine the firm’s competence.

    C. Reviewing the internal audit activity’s (IAA’s) engagement work schedule submitted by the chief audit executive (CAE).

    D. Recommending the assignment of specific internal auditing staff members for specific engagements.
    • Answer C is correct.
    • The audit committee consists of outside members of the board of directors (who should be independent of management). Regular communication with this committee helps assure independence and provides a means for the directors and the IAA to keep each other informed. The CAE should communicate the IAA’s plans and resource requirements to senior management and the board for review and approval. Moreover, the CAE should submit to senior management for approval, and to the board for its information, a summary of the IAA’s work schedule, staffing plan, and financial budget.
  8. Which one of the following options would be most effective in deterring the commission of fraud?

    A. Employee training, segregation of duties, and punishment for unethical behavior.

    B. Policies of strong internal control, segregation of duties, and requiring employees to take vacations.

    C. Policies of strong internal control and punishments for unethical behavior.

    D. Hiring ethical employees, employee training, and segregation of duties.
    • Answer B is correct.
    • Strong internal control policies are essential for establishing the “tone at the top.”  Segregation of duties is one of the most fundamental forms of internal control. Requiring vacations makes it difficult for employees to carry on undiscovered fraud in the absence of collusion.
  9. One control objective of the financing/treasury cycle is the proper authorization of company transactions dealing with debt and equity instruments. Which of the following controls would best meet this objective?

    A. Separation of responsibility for custody of funds from recording of the transaction.

    B. Use of an underwriter in all cases of new issue of debt or equity instruments.

    C. Written company policies requiring review of major funding/repayment proposals by the board of directors.

    D. The company serves as its own registrar and transfer agent.
    • Answer C is correct.
    • The control objective of authorization concerns the proper execution of transactions in accordance with management’s wishes. One means of achieving this control objective is the establishment of policies as guides to action. When a decision affects the capitalization of the entity, a policy should be in force requiring review at the highest level.
  10. Which group has the primary responsibility for the establishment, implementation, and monitoring of adequate controls in the posting of accounts receivable?

    A. Internal auditors.

    B. External auditors.

    C. Accounts receivable staff.

    D. Accounting management.
    • Answer D is correct.
    • Management is responsible for establishing goals and objectives, developing and implementing control procedures, and accomplishing desired results.
  11. The COSO framework breaks up the definition of control objectives into the categories of effectiveness and efficiency of operations, reliability of controls, and compliance with the accounting standards. T/F
    • False. 
    • The COSO framework defines internal control as:  “Internal control is broadly defined as a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: Effectiveness and efficiency of operations, Reliability of financial reporting, and Compliance with applicable laws and regulations.”
  12. Assets are assured to have been recorded properly if the assets on hand agree with the recorded accountability. T/F
    • False.
    • A comparison revealing that the assets do not agree with the recorded accountability provides evidence of unrecorded or improperly recorded transactions. The converse, however, does not necessarily follow. For example, agreement of a cash count with the recorded balance does not provide evidence that all cash received has been properly recorded.
  13. Assigning different employees to perform the functions of authorizing transactions, recording transactions, or maintaining custody of assets is an example of a physical control. T/F
    • False.
    • Physical controls pertain to the physical security of assets and records. Segregation of duties involves assigning different employees to perform the functions of authorizing transactions, recording transactions, or maintaining custody of assets.
  14. Under the Foreign Corrupt Practices Act, all public companies must devise and maintain a system of internal accounting control. T/F
    • True.
    • Under the Foreign Corrupt Practices Act of 1977, all public companies must devise and maintain a system of internal accounting control sufficient to provide reasonable assurance that: Transactions are executed in accordance with management’s general or specific authorization; transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles (GAAP);Access to assets is permitted only in accordance with management’s general or specific authorization; the recorded accountability for assets is compared with the existing assets at reasonable intervals, and appropriate action is taken with respect to any differences.
  15. Management can best strengthen internal control over the custody of inventory stored in an off-site warehouse by implementing

    A Regular reconciliation of physical inventories to accounting records.

    B. Reconciliations of transfer slips to/from the warehouse with inventory records.

    C. Regular confirmation of the amount on hand with the custodian of the warehouse. 

    D. Increases in insurance coverage.
    • Answer A is correct.
    • Regular reconciliation of physical inventories to accounting records. The most effective control over off-site inventory is the periodic comparison of the recorded accountability with the actual physical inventory.
  16. Which one of the following functions performed in an organization is a violation of sound principles of internal control?

    A. A mail clerk opening the mail compares the check received with the source document accompanying the payment, either confirming or noting the amount paid, then forwards the checks daily (along with a listing of the cash receipts) to the cashier for deposit.

    B. The General Ledger Department compares the summary journal entry, received from the cashier for cash receipts applicable to outstanding accounts, with the batch total for the posting to the Subsidiary Ledger by the Accounts Receivable Department.

    C. A mail clerk opening the mail compares the check received with the source document accompanying the payment, either confirming or noting the amount paid, then forwards the source documents that accompany the payments (along with a listing of the cash receipts) to Accounts Receivable, on a daily basis, for posting to the Subsidiary Ledger.

    D.At the end of the week, the cashier prepares a deposit slip for all of the cash receipts received during the week.
    Answer D is correct.

    Sound internal control requires that cash be deposited every day.
  17. An adequate system of internal controls is most likely to detect a fraud perpetrated by a

    A. Single employee.

    B. Single manager.

    C. Group of employees in collusion.

    D. Group of managers in collusion.
    • Answer A is correct.
    • 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.
  18. An audit of the payroll function revealed several instances in which a payroll clerk had added fictitious employees to the payroll and deposited the checks in accounts of close relatives. What control should have prevented such actions?

    A. Having the treasurer’s office sign payroll checks.

    B. Allowing changes to the payroll to be authorized only by the personnel department.

    C. Establishing a policy to deal with close relatives working in the same department.

    D. Using time cards and attendance records in the computation of employee gross earnings.
    • Answer B is correct.
    • The payroll department is responsible for assembling payroll information (recordkeeping). The personnel department is responsible for authorizing and executing employee transactions such as hiring, firing, and changes in pay rates and deductions. Segregating these functions helps prevent fraud. Thus, the payroll for each period should be compared with the active employment files of the personnel department. Authorization by the personnel department is the only control placed in the transaction flow early enough to prevent the addition of bogus employees to the payroll.
  19. Which of the following controls could be used to detect bank deposits that are recorded but never made? 

    A. Consolidating cash receiving points.

    B. Having bank reconciliations performed by a third party.

    C. Linking receipts to other internal accountabilities (i.e., collections to either accounts receivable or sales).

    D. Establishing accountability for receipts at the earliest possible time.
    • Answer B is correct.
    • 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. The other answer choices are controls 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.
  20. Firms subject to the reporting requirements of the Securities Exchange Act of 1934 are required by the Foreign Corrupt Practices Act of 1977 to maintain satisfactory internal control. The role of the independent auditor relative to this Act is to

    A. Attest to the financial statements.

    B. Report clients with unsatisfactory internal control to the SEC.

    C. Provide assurances to users as part of the traditional audit attest function that the client is in compliance with the present legislation.

    D. Express an opinion on the sufficiency of the client’s internal control to meet the requirements of the Act.
    • Answer A is correct.
    • Whether a client is in conformity with the Foreign Corrupt Practices Act is a legal question. Auditors cannot be expected to provide clients or users of the financial statements with legal advice. The role of the auditor is to assess control risk in the course of an engagement to attest to the fair presentation of the financial statements.
  21. Proper segregation of duties reduces the opportunities for persons to be in positions to both

    A. Record cash receipts and cash disbursements.

    B. Perpetrate and conceal errors or fraud.

    C. Establish internal control and authorize transactions. 

    D. Journalize entries and prepare financial statements.
    • Answer B is correct.
    • Proper segregation of duties and responsibilities reduces the opportunity for an individual to both perpetrate and conceal an error or fraud in the normal course of his/her duties. Hence, different people should be assigned the responsibilities for authorizing transactions, recordkeeping, and asset custody.
  22. Which of the following is not an aspect of the Foreign Corrupt Practices Act of 1977?

    A. It requires the establishment of independent audit committees.

    B. It subjects management to fines and imprisonment. 

    C. It prohibits bribes to foreign officials. 

    D. It requires an internal control system to be developed and maintained.
    • Answer A is correct.
    • The Foreign Corrupt Practices Act of 1977 prohibits bribes to foreign officials and requires firms to have adequate systems of internal control. Violation of the Act subjects individual managers to fines and/or imprisonment. The Act does not specifically require the establishment of audit committees, but many firms have established audit committees as one means of dealing with the internal control provisions of the Act.
  23. The PCAOB’s preferred approach to internal controls, as described in Auditing Standard (AS) 5, involves focusing on internal controls

    A. As detective rather than preventive.

    B. As efficiency-oriented rather than financial statement-oriented.

    C. As financial statement-oriented rather than efficiency-oriented.

    D. As preventive rather than detective.
    • Answer (C) is correct.
    • AS 5 states that, “... a company’s internal control cannot be considered effective if one or more material weaknesses exist...”  Material weaknesses are deficiencies in internal control that might result in a material misstatement of the financial statements.
  24. A restaurant food chain has over 680 restaurants. All food orders for each restaurant are required to be input into an electronic device which records all food orders by food servers and transmits the order to the kitchen for preparation. All food servers are responsible for collecting cash for all their orders and must turn in cash at the end of their shift equal to the sales value of food ordered for their I.D. number. The manager then reconciles the cash received for the day with the computerized record of food orders generated. All differences are investigated immediately by the restaurant. Corporate headquarters has established monitoring controls to determine when an individual restaurant might not be recording all its revenue and transmitting the applicable cash to the corporate headquarters. Which one of the following would be the best example of a monitoring control?

    A. Management prepares a detailed analysis of gross margin per store and investigates any store that shows a significantly lower gross margin.

    B. All food orders must be entered on the computer, and segregation of duties is maintained between the food servers and the cooks.

    C. The restaurant manager reconciles the cash received with the food orders recorded on the computer.

    D. Cash is transmitted to corporate headquarters on a daily basis.
    • Answer (A) is correct.
    • Monitoring is a process that assesses the quality of internal control over time. It involves assessment by appropriate personnel of the design and operation of controls and the taking of corrective action. Monitoring can be done through ongoing activities or separate evaluations. Ongoing monitoring procedures are built into the normal recurring activities of an entity and include regular management and supervisory activities. Thus, analysis of gross margin data and investigation of significant deviations is a monitoring process.
  25. Fact Pattern:  ABC is a major retailer with over 52 department stores. The marketing department is responsible for1.Conducting marketing surveys2.Recommending locations for new store openings3.Ordering products and determining retail prices for the products4.Developing promotion and advertising for each line of products5.Determining the pricing of special sale itemsThe marketing department has separate product managers for each product line. Each product manager is given a purchasing budget by the marketing manager. Product managers are not rotated among product lines because of the need to acquire product knowledge and to build relationships with vendors. A subsection of the department does marketing surveys.In addition to ordering and pricing, the product managers also determine the timing and method of product delivery. Products are delivered to a central distribution center where goods are received, retail prices are marked on the product, and the goods are segregated for distribution to stores. Receiving documents are created by scanning in receipts; the number of items scanned in are reconciled with the price tags generated and attached to products. The average product spends between 12 and 72 hours in the distribution center before being loaded on trucks for delivery to each store. Receipts are recorded at the distribution center, thus the company has not found the need to maintain a receiving function at each store.Each product manager is evaluated on a combination of sales and gross profit generated from their product line. Many products are seasonal and individual store managers can require that seasonal products be "cleared out" to make space for the next season’s products.

    A control deficiency associated with the given scenario is

    A. The store manager can require items to be closed out, thus affecting the potential performance evaluation of individual product managers.

    B. The product manager negotiates the purchase price and sets the selling price.

    C. Evaluating product managers by total gross profit generated by product line will lead to dysfunctional behavior.

    D. There is no receiving function located at individual stores.
    • Answer (D) is correct.
    • Each store should have a receiving function. The possibility exists that goods could be diverted from the distribution center and not delivered to the appropriate retail store.
Card Set:
CMA Part I SU 9
2014-03-13 17:15:06

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