Introduction to Internal Auditing

1. The most persuasive means of assessing production quality control is to:
a. Evaluate the number and reasons for sales adjustments.
b. Analyze labor efficiency variances.
c. Analyze materials efficiency variances.
d. Evaluate the production/inventory/sales mix.

2. A means of preventing production delays as a consequence of equipment breakdowns and repairs is to:
a. Schedule production based on capacity utilization.
b. Budget maintenance department activities based on an analysis of equipment work orders.
c. Preauthorize maintenance department work orders and overtime pay.
d. Establish a preventive maintenance program for all production equipment.

3. A perpetual inventory system uses a minimum quantity on hand to initiate procedures for restocking. In reviewing the appropriateness of the minimum quantity level established by the stores department, the audit would be least likely to consider:
a. Stock out costs, including lost customers.
b. Seasonal variations in forecasting inventory demand.
c. Optimal order sizes determined by the economical order quantity model.
d. The per-unit cost and potential obsolescence of the inventory.

4. Which of the following exemplifies an inherent limitation of internal control?
a. A controller both makes and records cash deposits.
b. A security guard allows one of the warehouse employees to remove company assets from the premises without authorization.
c. The company sells to customers on credit without proper credit approval.
d. An employee who is unable to read is assigned custody of the company's tape library and run manuals.

5. One operating department of an organization does not have adequate procedures for inspecting and verifying the quantities of goods received. To evaluate the materiality of this control deficiency, the auditor should review the departments:
a. Yea-end inventory balance.
b. Annual inventory purchases.
c. Year-end total assets.
d. Annual operating expenses.

6. There is generally no incentive for efficiency or economy in a cost-plus construction contract for small, unique projects. There is a potential for inflated costs. An appropriate control to encourage efficiency and economy in these contracts is:
a. Elimination of change orders to the contract.
b. Provision for maximum costs and sharing any savings.
c. Use of an agreed-upon price for each unit of work.
d. A checklist approach to the audit of contract costs.

7. Which of the following procedures is consistent with the effective administration of a company's insurance function?
a. The insurance manager receives billings for insurance coverage and disburses payments.
b. Insurance coverage is adjusted annually based on the appropriate price index.
c. Final settlements are negotiated after claims are developed and submitted.
d. Policies are always placed with the carrier offering the lowest rate for a specified level of coverage.