External Auditing Questions

10-27.

Henry Mills is responsible for preparing checks, recording cash disbursements, and preparing bank reconciliations for Signet Corporation. While reconciling the October bank statement, Mills noticed that several checks totaling $937 had been outstanding for more than one year. Concluding that these checks would never be presented for payments, Mills prepared a check for $937 payable to himself, forged the treasurer's signature, and cashed the check. Mills made no entry in the accounts for this disbursement and attempted to conceal the theft by destroying the forged check and omitting the long-outstanding checks from subsequent bank reconciliations.
Required:
a. Identify the weaknesses in Signet Corporation's internal control.
b. Explain several audit procedures that might disclose the fraudulent disbursement.

10-44.
Following are typical questions that might appear on an internal control questionnaire for investments in marketable securities.
1. Is custody of investment securities maintained by an employee who does not maintain the detailed records of the securities?
2. Are securities registered in the company name?
3. Are investment activities reviewed by an investment committee of the board of directors?

Required:
• a. Describe the purpose of each of the above controls.
• b. Describe the manner in which each of the above procedures might be tested.
• c. Assuming that the operating effectiveness of each of the above procedures is found to be inadequate, describe how the auditors might alter their substantive procedures to compensate for the increased level of control risk.

11-42.
The following are typical questions that might appear on an internal control questionnaire for accounts receivable:
• 1. Are sales invoices checked for proper pricing, terms, and clerical accuracy?
• 2. Are shipping documents prenumbered and all numbers accounted for?
• 3. Is customer credit approval obtained from the credit department prior to shipment of goods?
Required:
• a. Describe the purpose of each of the above controls.
• b. Describe the manner in which the operating effectiveness of each of the above procedures might be tested.
• c. Assuming that the operating effectiveness of each of the above procedures is found to be inadequate, describe how the auditors might alter their substantive procedures to compensate for the increased level of control risk (risk of material misstatement).

12--12
Recommend controls that should be in place that would help eliminate the errors and problems described in the following scenarios:

1. An inexperienced clerk assigned to the preparation of sales invoices in a manufacturing company became confused as to the nature of certain articles being shipped, with the result that the process used on the invoices were far less than called for in the company's price lists.

2. The controller of a new client operating a medium-size manufacturing business complains to you that he believes the company has sustained significant losses on several occasions because certain sales invoices were misplaced and never recorded as accounts receivable.