CIA Exam Part 1: Study Unit (4)
Questions and Answers and Rationales
Appropriate internal control for a multinational corporation's branch office that has a
monetary transfer unit requires that
A. The individual who initiates wire transfers not reconcile the bank statement.
B. Foreign currency rates be computed separately by two different employees.
C. Corporate management approve the hiring of monetary transfer unit employees.
D. The branch manager receive all wire transfers. - Answer (A) is correct.
Answer (A) is correct.
A control is any action taken by management to enhance the likelihood that established
goals and objectives will be achieved. Controls include segregation of duties to reduce
the risk that any person may be able to perpetrate and conceal errors or fraud in the
normal course of his or her duties. Different persons should authorize transactions,
record transactions, and maintain custody of the assets associated with the transaction.
Independent reconciliation of bank accounts is necessary for good internal control.
Which of the following observations made during the preliminary survey of a local
department store's disbursement cycle reflects a control strength?
A. The receiving department is given a copy of the purchase order complete with a
description of goods, quantity ordered, and extended price for all merchandise ordered.
B. Individual department managers are responsible for the movement of merchandise
from the receiving dock to storage or sales areas as appropriate.
C. The chief financial officer's office prepares checks for suppliers based on vouchers
prepared by the accounts payable department.
D. Individual department managers use prenumbered forms to order merchandise from
vendors. - Answer (C) is correct.
Accounting for payables is a recording function. The matching of the supplier's invoice,
the purchase order, and the receiving report (and usually the purchase requisition)
should be the responsibility of the accounting department. These are the primary
supporting documents for the payment voucher prepared by the accounts payable
section that will be relied upon by the chief financial officer in making payment.
The internal auditor recognizes that certain limitations are inherent in any system of
internal controls. Which one of the following scenarios is the result of an inherent
limitation of internal control?
A. The organization sells to customers on account, without credit approval.
B. A security guard allows one of the warehouse employees to remove assets from the
premises without authorization.
C. An employee who is unable to read is assigned custody of the organization's
computer tape library and run manuals that are used during the third shift.
,D. The comptroller both makes and records cash deposits. - Answer (B) is correct.
Inherent limitations in internal control arise from mistakes in judgment,
misunderstandings of instructions, personnel carelessness, distraction, fatigue,
collusion, perpetrations by management, changing conditions, and deterioration of
degrees of compliance. Thus, a control (use of security guards) based on segregation of
functions may be overcome by collusion among two or more employees.
An internal auditor is assigned to perform an engagement to evaluate the organization's
insurance program, including the appropriateness of the approach to minimizing risks.
The organization self-insures against large casualty losses and health benefits provided
for all its employees. The organization is a large national firm with over 15,000
employees located in various parts of the country. It uses an outside claims processor
to administer its healthcare program. The organization's medical costs have been rising
by approximately 8% per year for the past 5 years, and management is concerned with
controlling these costs. The healthcare processor wishes to implement controls that
would help prevent fraud by dentists who are submitting billings for services not
provided. Assume further that all the claims are submitted electronically to the
healthcare processor. Which of the following control procedures would be the most
effective?
A. Develop an integrated test facility and submit false claims to verify that the system is
detecting such claims on a consistent basis.
B. Require all submitted claims to be accompanied by a signed statement by the dentist
testifying that the claimed procedures were performed.
C. Send confirmations to the dentists requesting them to confirm the exact nature of the
claims submitted to the healthcare processor.
D. Develop a program that identifies procedures performed on an individual in excess of
expectations based on the age of the employee, whether a similar procedure was
performed recently, or the average cost per claim. - Answer (D) is correct.
Under this detective control, unusual claims could be identified and followed up to
determine if they are legitimate. This control is a type of IT input control known as a
reasonableness test.
The following is a section of a system flowchart for a payroll application:
Batched time cards
Input of payroll date
time card data batched time cards
Validation of payroll data
Time card data
valid time card data
Errors
X
,Symbol X could represent
A. Erroneous time cards.
B. Unclaimed payroll checks.
C. Batched time cards.
D. An error report. - Answer (D) is correct.
Symbol X is a document, that is, hard copy output of the validation routine shown. The
time card data, the validated data, and the errors are recorded on magnetic disk after
the validation process. Thus, either an error report or the valid time card information is
represented by Symbol X.
When a copy of the sale invoice is not received by an organization's shipping
department, an employee requests the document from the proper authority. This
process is a(n)
A. Detective, preventive control.
B. Passive, mitigating control.
C. Directive, detective control.
D. Active, detective control. - Answer (D) is correct.
When shipping documents are not received in the shipping department (such as copies
of the sales invoice, customer order form, and bill of lading), the clerk should attempt to
obtain the proper documentation from the originating organization. This type of control is
detective because it detects and attempts to correct an undesirable event that has
occurred. It is also active because it takes a conscious intervention by the clerk to
ensure the documentation is received.
A utility with a large investment in repair vehicles would most likely implement which
internal control to reduce the risk of vehicle theft or loss?
A. Maintain vehicles in a secured location with release and return subject to approval by
a custodian.
B. Systematically account for all repair work orders.
C. Physically inventory vehicles and reconcile the results with the accounting records.
D. Review insurance coverage for adequacy. - Answer (A) is correct.
Physical safeguarding of assets is enacted through the use of preventive controls that
reduce the likelihood of theft or other loss. Keeping the vehicles at a secure location and
restricting access establishes accountability by the custodian and allows for proper
authorization of their use.
Checks from customers are received in the organization's mail room each day. What
controls should be in place to safeguard them?
A. Forwarding all checks to the cashier upon receipt.
B. Establishing a separate post office box for customer payments.
C. Requiring a specific mail clerk to list and restrictively endorse each check.
D. Providing bonding protection for mail clerks. - Answer (C) is correct.
, An employee who does not have access to other records should open the mail and
prepare a list of checks received. The check listing will later be reconciled with the daily
bank deposit and entries to accounts receivable. A restrictive endorsement ("for deposit
only") will put transferees on notice to act accordingly (that is, deposit the check in the
organization's account).
Organizational independence is required in the processing of customers' orders in order
to maintain an internal control structure. Which one of the following situations is not a
proper segregation of duties in the processing of orders from customers?
A. Invoice preparation by the billing department and posting to customers' accounts by
the accounts receivable department.
B. Approval by credit department of a sales order prepared by the sales department.
C. Shipping of goods by the shipping department that have been retrieved from stock by
the finished goods storeroom department.
D. Approval of a sales credit memo because of a product return by the sales
department with subsequent posting to the customer's account by the accounts
receivable department. - Answer (D) is correct.
Allowing a sales department employee to approve a credit memo without a receiving
report would be unacceptably risky. Sales personnel could overstate sales in one period
and then reverse them in subsequent periods. Thus, a copy of the receiving report for
returned goods should be sent to billing for preparation of a credit memo after approval
by a responsible supervisor who is independent of sales.
An advantage of using systems flowcharts to document information about internal
control instead of using internal control questionnaires is that systems flowcharts
A. Provide a visual depiction of clients' activities.
B. Indicate whether controls are operating effectively.
C. Identify internal control deficiencies more prominently.
D. Reduce the need to observe clients' employees performing routine tasks. - Answer
(A) is correct.
Systems flowcharts provide a visual representation of a series of sequential processes,
that is, of a flow of documents, data, and operations. In many instances, a flowchart is
preferable to a questionnaire because a picture is usually more easily comprehended.
A recent inventory shortage at XYZ Corp., an unaffiliated supplier, contributed to
production failures at OPS Corp. in the current period. To avoid future production
failures because of supplier inventory shortages, the most appropriate method is for
OPS to
A. Increase the size of orders.
B. Establish an inventory control framework at XYZ.
C. Inform XYZ about its risk appetite regarding supply failures.
D. Produce the inventory items instead of purchasing from suppliers. - Answer (C) is
correct.
Questions and Answers and Rationales
Appropriate internal control for a multinational corporation's branch office that has a
monetary transfer unit requires that
A. The individual who initiates wire transfers not reconcile the bank statement.
B. Foreign currency rates be computed separately by two different employees.
C. Corporate management approve the hiring of monetary transfer unit employees.
D. The branch manager receive all wire transfers. - Answer (A) is correct.
Answer (A) is correct.
A control is any action taken by management to enhance the likelihood that established
goals and objectives will be achieved. Controls include segregation of duties to reduce
the risk that any person may be able to perpetrate and conceal errors or fraud in the
normal course of his or her duties. Different persons should authorize transactions,
record transactions, and maintain custody of the assets associated with the transaction.
Independent reconciliation of bank accounts is necessary for good internal control.
Which of the following observations made during the preliminary survey of a local
department store's disbursement cycle reflects a control strength?
A. The receiving department is given a copy of the purchase order complete with a
description of goods, quantity ordered, and extended price for all merchandise ordered.
B. Individual department managers are responsible for the movement of merchandise
from the receiving dock to storage or sales areas as appropriate.
C. The chief financial officer's office prepares checks for suppliers based on vouchers
prepared by the accounts payable department.
D. Individual department managers use prenumbered forms to order merchandise from
vendors. - Answer (C) is correct.
Accounting for payables is a recording function. The matching of the supplier's invoice,
the purchase order, and the receiving report (and usually the purchase requisition)
should be the responsibility of the accounting department. These are the primary
supporting documents for the payment voucher prepared by the accounts payable
section that will be relied upon by the chief financial officer in making payment.
The internal auditor recognizes that certain limitations are inherent in any system of
internal controls. Which one of the following scenarios is the result of an inherent
limitation of internal control?
A. The organization sells to customers on account, without credit approval.
B. A security guard allows one of the warehouse employees to remove assets from the
premises without authorization.
C. An employee who is unable to read is assigned custody of the organization's
computer tape library and run manuals that are used during the third shift.
,D. The comptroller both makes and records cash deposits. - Answer (B) is correct.
Inherent limitations in internal control arise from mistakes in judgment,
misunderstandings of instructions, personnel carelessness, distraction, fatigue,
collusion, perpetrations by management, changing conditions, and deterioration of
degrees of compliance. Thus, a control (use of security guards) based on segregation of
functions may be overcome by collusion among two or more employees.
An internal auditor is assigned to perform an engagement to evaluate the organization's
insurance program, including the appropriateness of the approach to minimizing risks.
The organization self-insures against large casualty losses and health benefits provided
for all its employees. The organization is a large national firm with over 15,000
employees located in various parts of the country. It uses an outside claims processor
to administer its healthcare program. The organization's medical costs have been rising
by approximately 8% per year for the past 5 years, and management is concerned with
controlling these costs. The healthcare processor wishes to implement controls that
would help prevent fraud by dentists who are submitting billings for services not
provided. Assume further that all the claims are submitted electronically to the
healthcare processor. Which of the following control procedures would be the most
effective?
A. Develop an integrated test facility and submit false claims to verify that the system is
detecting such claims on a consistent basis.
B. Require all submitted claims to be accompanied by a signed statement by the dentist
testifying that the claimed procedures were performed.
C. Send confirmations to the dentists requesting them to confirm the exact nature of the
claims submitted to the healthcare processor.
D. Develop a program that identifies procedures performed on an individual in excess of
expectations based on the age of the employee, whether a similar procedure was
performed recently, or the average cost per claim. - Answer (D) is correct.
Under this detective control, unusual claims could be identified and followed up to
determine if they are legitimate. This control is a type of IT input control known as a
reasonableness test.
The following is a section of a system flowchart for a payroll application:
Batched time cards
Input of payroll date
time card data batched time cards
Validation of payroll data
Time card data
valid time card data
Errors
X
,Symbol X could represent
A. Erroneous time cards.
B. Unclaimed payroll checks.
C. Batched time cards.
D. An error report. - Answer (D) is correct.
Symbol X is a document, that is, hard copy output of the validation routine shown. The
time card data, the validated data, and the errors are recorded on magnetic disk after
the validation process. Thus, either an error report or the valid time card information is
represented by Symbol X.
When a copy of the sale invoice is not received by an organization's shipping
department, an employee requests the document from the proper authority. This
process is a(n)
A. Detective, preventive control.
B. Passive, mitigating control.
C. Directive, detective control.
D. Active, detective control. - Answer (D) is correct.
When shipping documents are not received in the shipping department (such as copies
of the sales invoice, customer order form, and bill of lading), the clerk should attempt to
obtain the proper documentation from the originating organization. This type of control is
detective because it detects and attempts to correct an undesirable event that has
occurred. It is also active because it takes a conscious intervention by the clerk to
ensure the documentation is received.
A utility with a large investment in repair vehicles would most likely implement which
internal control to reduce the risk of vehicle theft or loss?
A. Maintain vehicles in a secured location with release and return subject to approval by
a custodian.
B. Systematically account for all repair work orders.
C. Physically inventory vehicles and reconcile the results with the accounting records.
D. Review insurance coverage for adequacy. - Answer (A) is correct.
Physical safeguarding of assets is enacted through the use of preventive controls that
reduce the likelihood of theft or other loss. Keeping the vehicles at a secure location and
restricting access establishes accountability by the custodian and allows for proper
authorization of their use.
Checks from customers are received in the organization's mail room each day. What
controls should be in place to safeguard them?
A. Forwarding all checks to the cashier upon receipt.
B. Establishing a separate post office box for customer payments.
C. Requiring a specific mail clerk to list and restrictively endorse each check.
D. Providing bonding protection for mail clerks. - Answer (C) is correct.
, An employee who does not have access to other records should open the mail and
prepare a list of checks received. The check listing will later be reconciled with the daily
bank deposit and entries to accounts receivable. A restrictive endorsement ("for deposit
only") will put transferees on notice to act accordingly (that is, deposit the check in the
organization's account).
Organizational independence is required in the processing of customers' orders in order
to maintain an internal control structure. Which one of the following situations is not a
proper segregation of duties in the processing of orders from customers?
A. Invoice preparation by the billing department and posting to customers' accounts by
the accounts receivable department.
B. Approval by credit department of a sales order prepared by the sales department.
C. Shipping of goods by the shipping department that have been retrieved from stock by
the finished goods storeroom department.
D. Approval of a sales credit memo because of a product return by the sales
department with subsequent posting to the customer's account by the accounts
receivable department. - Answer (D) is correct.
Allowing a sales department employee to approve a credit memo without a receiving
report would be unacceptably risky. Sales personnel could overstate sales in one period
and then reverse them in subsequent periods. Thus, a copy of the receiving report for
returned goods should be sent to billing for preparation of a credit memo after approval
by a responsible supervisor who is independent of sales.
An advantage of using systems flowcharts to document information about internal
control instead of using internal control questionnaires is that systems flowcharts
A. Provide a visual depiction of clients' activities.
B. Indicate whether controls are operating effectively.
C. Identify internal control deficiencies more prominently.
D. Reduce the need to observe clients' employees performing routine tasks. - Answer
(A) is correct.
Systems flowcharts provide a visual representation of a series of sequential processes,
that is, of a flow of documents, data, and operations. In many instances, a flowchart is
preferable to a questionnaire because a picture is usually more easily comprehended.
A recent inventory shortage at XYZ Corp., an unaffiliated supplier, contributed to
production failures at OPS Corp. in the current period. To avoid future production
failures because of supplier inventory shortages, the most appropriate method is for
OPS to
A. Increase the size of orders.
B. Establish an inventory control framework at XYZ.
C. Inform XYZ about its risk appetite regarding supply failures.
D. Produce the inventory items instead of purchasing from suppliers. - Answer (C) is
correct.
