The following questions concern internal controls in the acquisition and payment cycle. Choose the best response.
a. Which of the following questions is an auditor least likely to include on an internal control questionnaire concerning the initiation and execution of equipment transactions?
(1) Are requests for major repairs approved at a higher level than the department
initiating the request?
(2) Are prenumbered purchase orders used for equipment and periodically account-
ed for?
(3) Are requests for purchases of equipment reviewed for consideration of soliciting
competitive bids?
(4) Are procedures in place to monitor and properly restrict access to equipment?
b. 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 depart-
ment each quarter about any equipment no longer in use or somewhat dam-
aged.
(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.
c. Equipment acquisitions that are misclassified as maintenance expense most likely
would be detected by an internal control that provides for
(1) segregation of duties of employees in the accounts payable department.
(2) authorization by the board of directors of significant equipment acquisitions.
(3) investigations of variances within a formal budgeting system.
(4) independent verification of invoices for disbursements recorded as equipment
acquisitions.
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