Multiple Choice Questions
The following questions concern internal controls in the acquisition and payment cycle. Choose the best response.
a. Which of the following controls will most likely justify a reduced assessed level of control risk for the existence assertion for equipment?
(1) Internal auditors periodically select equipment items in the fixed assets master file and locate the related equipment on company premises.
(2) Department heads are asked to provide information to the accounting department each quarter about any equipment no longer in use or somewhat damaged.
(3) All contracts of equipment purchases are reviewed by both the controller and attorney to verify that legal title transfers to the client and that none represent operating leases.
(4) As part of quarterly and annual inventory physical counts, factory equipment is listed and subsequently reconciled to the fixed asset master file.
b. Which of the following is not an internal control deficiency related to factory equipment?
(1) Checks issued in payment of acquisitions of equipment are not signed by the controller.
(2) All acquisitions of factory equipment are required to be made by the department in need of the equipment.
(3) Factory equipment replacements are generally made when estimated useful lives, as indicated in depreciation schedules, have expired.
(4) Proceeds from sales of fully depreciated equipment are credited to other income.
c. Which of the following controls will most likely justify a reduced assessed level of control risk for the existence assertion related to the equipment account?
(1) As purchases of equipment are recorded in the purchases journal, the system automatically posts the item to the equipment master file.
(2) Internal auditors physically examines equipment on a periodic basis and verify that the equipment is included in the equipment master file.
(3) All additions to the equipment account must be supported by a valid receiving report.
(4) Assignment of general ledger account coding is reviewed by the accounts payable supervisor as purchases are recorded in the purchases journal.