Auditing: Effective Internal Control
ACCT420
Auditing
Test Three – Out of Class Portion
Due Monday, April 30, 2012 1. Listed below are four interbank cash transfers, indicated by the letters a, b, c and d, of a client for late December 20X1, and early January 20X2. Your answer choice for the next two questions should be selected from this list.
For each of transfers a through d indicate whether cash is understated, unaffected, or overstated by the transfer and provide a brief example of what could cause the situation in which cash is either understated or overstated.
a. Unaffected.
b. Unaffected.
c. Understated. Although there are a number of possible situations, one is that in which a check is written on the disbursing bank on the last day of December with a credit to cash, and an associated debit to some expense account so as to decrease reported profits (and taxes) for the year.
d. Overstated. One situation is that in which an employee has misappropriated funds during the year, and draw a check transferring funds to the account with the shortage so as to cover the shortage. As of December 31, the shortage is replaced, with no reduction as yet recorded in the account on which it is drawn.
2. Since financial investments are assets with a high degree of inherent risk, companies must establish effective internal control over their investments.
a. Describe the functions that should be segregated to provide good internal control over financial investments.
b. Describe two other internal control policies that should be established for financial investments.
a. The functions that should be segregated with respect to financial investments are:
1. Authorization of purchases and sales,
2. Custody of the securities, and
3. Maintaining records of investments.
b. Other internal controls include (only two required):
Establishing formal investment policies. Maintaining a complete detailed record of investments and revenue from investments. Registration of securities in the name of the
Auditing
Test Three – Out of Class Portion
Due Monday, April 30, 2012 1. Listed below are four interbank cash transfers, indicated by the letters a, b, c and d, of a client for late December 20X1, and early January 20X2. Your answer choice for the next two questions should be selected from this list.
For each of transfers a through d indicate whether cash is understated, unaffected, or overstated by the transfer and provide a brief example of what could cause the situation in which cash is either understated or overstated.
a. Unaffected.
b. Unaffected.
c. Understated. Although there are a number of possible situations, one is that in which a check is written on the disbursing bank on the last day of December with a credit to cash, and an associated debit to some expense account so as to decrease reported profits (and taxes) for the year.
d. Overstated. One situation is that in which an employee has misappropriated funds during the year, and draw a check transferring funds to the account with the shortage so as to cover the shortage. As of December 31, the shortage is replaced, with no reduction as yet recorded in the account on which it is drawn.
2. Since financial investments are assets with a high degree of inherent risk, companies must establish effective internal control over their investments.
a. Describe the functions that should be segregated to provide good internal control over financial investments.
b. Describe two other internal control policies that should be established for financial investments.
a. The functions that should be segregated with respect to financial investments are:
1. Authorization of purchases and sales,
2. Custody of the securities, and
3. Maintaining records of investments.
b. Other internal controls include (only two required):
Establishing formal investment policies. Maintaining a complete detailed record of investments and revenue from investments. Registration of securities in the name of the