Chapter 2

Multiple Choice Questions

1. The IIA Code of Ethics is based on all but which of the following ethical principles?

A. Integrity

B. Independence

C. Competency

D. Confidentiality

2. Internal auditors are responsible to:

A. the board of directors.

B. management.

C. both A and B.

D. neither A nor B.

3. Which of the following is not one of the broad categories of operational audits?

A. Functional audits.

B. Organizational audits.

C. Single Audit Act audits.

D. Special assignment audits.

4. Which of the following is not a similarity between external and internal auditors?

A. Both must be independent of the company.

B. Both must be competent.

C. Both use similar methodologies in performing their work.

D. Both consider risk and materiality in their work.

5. External auditors consider internal auditors effective if they are:

A. independent of the operating units being evaluated.

B. competent and well trained.

C. have performed relevant audit tests of the internal controls and financial statements.

D. All of the above.

6. Auditing standards external auditors to use the internal auditors for direct assistance on the audit.

A. discourage

B. prohibit

C. encourage

D. permit

7. Which of the following groups could not be involved in an operation audit?

A. CPA firms

B. Internal auditors

C. Govemment auditors.

D. All of the above could be involved.

8. The professional organization which is responsible for providing guidance for internal auditors is the:

A. ACPACI

В. ПА.

C. PICPA.

D. AIA.

9. Which of the following is not one of the three phases in an operational audit?

A. Planning.

8. Training and supervising employees.

C. Evidence accumulation and evaluation.

D. Reporting and follow-up.

10. An audit designed to evaluate the efficiency and effectiveness of organization, or some part of an
organization would not be called a(n):
A. performance audit.

B. management audit.

C. operational audit.

D. compliance audit.

11. Which of the following is not one of the major differences between financial and operational
auditing?

A. The financial audit is oriented to the past, but an operational audit concerns performance for the
future.

B. The financial audit report is distributed to many readers, but the operational audit report goes to a
few managers.

C. Financial audits deal with the information on the financial statements, but operational audits are
concerned with the information in the ledgers.

D. Financial audits are limited to matters that directly affect the financial statements, but operational
audits cover any aspect d efficiency and effectiveness.

12. Before an operational audit for effectiveness can be performed, there must be

A. a financial audit by an independent auditor.

B. a financial audit by an internal auditor

C. a review performed by either an independent or an internal auditor.

D. specific criteria developed to define effectiveness.

13. Which of the following statements regarding types of operational audits is false?

A. A functional audit has the advantage of permitting specialization by auditors.

B. An advantage of functional auditing is its ability to evaluate interrelated functions.

C. The emphasis in an organizational audit is on how efficiently and effectively functions interact.

D. Special operational auditing assignments arise at the request of management.

14. The two most important qualities for an operational auditor are:

A. personality and appearance.

B. Independence and competence.

C. competence and technical training.

D. academic background and sufficient experience.

15. Which of the following is not a difference between operational auditing and financial auditing?

A. Both must be CPAs.

B. Operational audit reports are usually of a restricted distribution while financial audit reports are
widely distributed.

C. Operational audits often cover non-financial issues while financial audits do not.

D. None of the above is a difference.

16. A typical objective of an operational audit is to determine whether an entity's:

A. internal control is adequately operating as designed.

B. financial statements present fairly the results of operations.

C. specific operating units are functioning efficiently and effectively.

D. operational information is in accordance with generally accepted government auditing standards.

17. Which of the following can affect the independence of operational auditors?

Responsibilities

Reporting Structure

A. Yes

No

No

B. No

C. No

Yes

D. Yes

Yes
18. Which is not a purpose of an economy and efficiency audit?

A. Whether the entity is acquiring, protecting, and using resources economically and efficiently.

B. The causes of inefficiencies and uneconomical practices,

C. Whether the entity has complied with laws and regulations concerning matters of economy and
efficiency.

D. Each of the above is a purpose.

19. A(n) functions interact. audit emphasizes how efficiently and effectively

A. operational

B. compliance

C. financial

D. organizational

20. Which of the following is not a purpose of a program audit as performed by government auditors?

A. Determination of the extent to which the desired results established by the legislature are being
achieved.

B. Determination of the causes of inefficiencies in sponsored programs.

C. Determination of the effectiveness of organizations, programs and activities.

D. Determination as to whether the entity has complied with laws and regulations applicable to the
program.

21. What distinguishes internal control evaluation and testing for financial and operational auditing?

A. Purpose of the work.

B. Scope of the work.

C. Both A and B.

D. Neither A nог В.

22., To be effective, an internal audit department must report to:

Operating departments

A. Yes
B. No

C. Yes

D. No

23. The accounting department

a. No

b. Yes

c. No

d. Yes

23. External financial statement auditors must obtain evidence regarding what attributes of an internal
audit department if the extermal auditors intend to rely on the internal auditor's work?

Independence from the Audit Committee

Yes

Competence

Yes

No

No

Yes

ABC

D.

No

Yes

No

24. The following are the similarities between internal and external auditors except

A. Both must be competent as auditors and remain objective in performing their work and reporting
their results.

B. Both follow a similar methodology in performing their audits, including planning and performing tests
of controls and substantive tests.
C. Both functions serve the needs of the management.

D. Both consider risk and materiality in deciding the extent of their tests and evaluating results. However,
their decisions about materiality and risks may differ because external users may have different needs
than management or the board.

25. Below are the criteria which the external auditors typically consider internal auditors effective if they
meet the following except:

A. Independent of the operating units being evaluated.

B. Competent and well-trained.

C. Have performed relevant audit tests of the internal controls and financial statements.

D. All of the above are correct.

26. Operational auditing is the review of an organization for efficiency and effectiveness. Which of the
following statements are true?

A. Effectiveness refers to the degree to which the organization's objectives and goals are accomplished.

B. Efficiency refers to the degree to which costs are reduced without reducing effectiveness.

C. Both a and b are correct.

D. Both a and b are incorrect.

27. Which of the following statements is/are correct?

Statement I. Independence is a fundamental ethical principle for internal auditors.

Statement II. Communication skills are also essente oplet only s relates to fellow auditors, but also
process owners and operators Statement III. Adding value and being perceived as trusted advisors to
Their organizations are perhaps the highest aspirations of interna auditors around the world.

A. Statement III only.

B. Statements I and II.

C. Statements 11 and III.

D. Statements I, II, and III.

28. Which of the following statements is/are correct?

Statement I. Current professional auditing standards prohibit external auditors from using internal
auditors for direct assistance on external

audits. Statement II. Current professional auditing standards require external auditors to use internal
auditors for direct assistance on external audits.

A. Statement I only.

B. Statements I and II.

C. None of the statements.

D. Statement II only.

29. Which of the following statements is/are correct?

Statement I. Operational audits may be performed by internal auditors and government auditors, but
not by external auditors.

Statement II. To help them remain independent of the operations they audit, internal auditors should
report directly to the controller.

A. Statements I and II.

B. None of the statements.

C. Statement I only.

D. Statement II only.

30. Which of the following statements is/are correct?

Statement I. Internal auditors should have the authority to require Implementation of suggestions for
improvement.

Statement II. One disadvantage of functional auditing is the failure to evaluate interrelated functions.

A. Statements I and II.

B. Statement I only.

C. Statement II only.

D. None of the statements.

Case Analysis
FTW Corporation sells computer peripherals and related devices, such as printers, ink, flash drives and
cables. FTW has a staff of three purchasing agents, each of whom oversees a specific set of inventory
items.

Each purchasing agent uses his/her discretion in making decisions about when to order inventory, how
much inventory to order and which vendor to purchase from. When ordered inventory arrives at FTW,
one of two receiving clerks matches the items, quantities, and vendors against a copy of the purchase
order, then either stocks the merchandise on the shelves or puts it in the storeroom. FTW's accountant
receives a copy of the invoice from the vendor, as well as an e-mail from one of the receiving clerks
indicating that merchandise has been received. The e-mail also includes the relevant purchase order
number. The accountant files the invoice by date in a filing cabinet; once a week, the accountant
removes invoices from the filing cabinet and pays them by check. To cut down on clutter in the office,
the accountant shreds the vendor invoice after the check has been paid by the bank. The accountant also
completes a bank reconciliation within two weeks of receiving the bank statement in the mail.

Requirements:

1. Upon reading the case, discuss the need of an operations audit.

2. Integrate the concept of 7 E's of Operations Audit, as applicable to identify potential problems in the
case.

3. As an internal auditor, what are the skills and qualities you need to have an effective audit and to
resolve the problems encountered?

4. Based on your proposed recommendations, as an internal auditor, how will you become a trusted
advisor and an effective consultant?

CHAPTER 3

Multiple Choice Questions

1. This identifies what the internal audit function will review based on available resources and the needs
and priorities of the organization.

A. Audit Checklist

B. Audit Plan

C. Operations Manual

D. Audit Manual

2 factors are conditions and other variables that in their present, or absence, as the case may be, either
exacerbate or diminish the underlying risk.
A. Risk

B. Audit

C. Operations

D. Planning

3. The following questions/inquiries can be used in determining risk, EXCEPT:

A. Where are the people, processes, systems, or assets vulnerable?

B. What could go wrong?

C. What is the passcode lock of that computer?

D. How could that unit fail?

4. Audit Evidence can be in the form of the following, EXCEPT:

A. Observation

B. Workpapers

C. Flowcharts

D. None of the above. All options are forms of audit evidence.

5. A review of how an organization's management and its operating procedures are functioning with
respect to their effectiveness and efficiency in meeting stated objectives.

A. Internal Audit

B. Operational Audit

C. Cash Audit

D. External Audit

6. The auditor faces a risk that the audit will not detect mater misstatements in the financial statements.
In regard to minimizing the risk, the auditor primarily relies on:

A. Substantive procedures

B. Tests of controls

C. Internal control
D. Statistical analysis

7. Which of the following is least likely to be included in an auditor's inquiry of management while
obtaining information to identify the risks of material misstatement due to fraud?

A. Are all financial reporting operations at one location?

b. Does it have knowledge of fraud or suspect fraud? C. Does it have programs to mitigate fraud risks?

D. Has it reported to the audit committee the nature of the company's internal control?

8. The primary purpose of the internal auditors' evaluation of internal control is to:

A. Determine if management has planned and implemented activities needed to attain goals and
objectives

B. Determine the extent of tests of controls needed during field work.

C. Identify areas for fraud investigation.

D. Determine if employees have incompatible duties that have compromised the control environment.

9. The internal auditing department provides information about control and quality of performance to:

A. Management and the board of directors.

B. A level in the organization sufficient to ensure acceptance of all recommendations.

C. Outside agencies for regulatory and financial compliance.

D. Any member of the organization upon request.

10. The scope of an internal audit is initially defined by the:

A. Audit objectives

B. Scheduling and time estimates

C Preliminary survey

D. Audit program

11. Interviewing operating personnel, identifying he objectives of the auditee, identifying standards used
to evaluate performance, and assessing the risk inherent in the auditee's operations are activities
typically performed in which phase of an internal audit?
A. The fieldwork phase

b. The preliminary survey phase

C. The audit programming phase

D. The reporting phase

12. Which of the following best describes the scope of internal auditing as it has developed to date?

A. Internal auditing involves appraising the economy and efficiency with which resources are employed.

B. Internal auditing involves evaluating compliance with policies plans, procedures, laws, and regulations.

C. Internal auditing has evolved to verifying the existence of assets and reviewing the means of
safeguarding assets.

D. Internal auditing has evolved to more of an operational orientation from a financial orientation.

13. Which of the following statements best describes why the profession of certified public accountants
has deemed it essential to promulgate a code of professional conduct and to establish a mechanism for
enforcing observation of the code?

A. A distinguishing mark of a profession is its acceptance of responsibility to the public.

B. A prerequisite to success is the establishment of an ethical code that stresses primarily the
professional's responsibility to clients and colleagues.

C. A requirement of most state laws calls for the profession to establish a code of ethics.

D. An essential means of self-protection for the profession is the establishment of flexible ethical
standards by the professions.

14. A primary purpose for establishing a code of conduct within a professional organization is to:

A. Reduce the likelihood that members of the profession will be sued for substandard work

b. Ensure that all members of the profession perform at approximately the same level of competence

C. Demonstrate acceptance of responsibility to the interests of those served by the profession

D. Require members of the profession to exhibit loyalty in all matters pertaining to the affairs of their
organization.

15. Corporate governance is a process by which the owners and creditors of an organization.

A. Exert control.

B. Require accountability.
C. Exert control and require accountability.

D. Neither exerts control nor requires accountability.

16. Governance demands accountability back through the system to the:

A. shareholders

B. audit committee

C. management

D. All of the above.

17. The corporate governance responsibilities of management include:

A. establishing risk management processes.

B. establishing proper internal controls.

C. requiring high ethical standards.

D. All of the above.

18. All of the following groups have responsibility for ensuring proper corporate governance except:

A. stockholders

B. board of directors

C. regulatory agencies

D. All of the above have responsibility.

19. A proper system of corporate governance is one that demands

A. decision making by auditors in place of management.

B. accountability back through the system to the shareholders.

internal audit representation on the board of directors. C.

D. audit planning to obtain competent and sufficient audit evidence.

20, Companies with good governance generally have the following characteristic(s):

A. are less likely to engage in "financial engineering".

b. take the requirements of good internal control over financial

reporting seriously.

C. make a commitment to financial competencies needed.

D. All of the above.

21.S1. Operational risk, as opposed to efficiency, is the risk of loss resulting from inadequate internal
processes, people, and systems or from external events.

S2. FS audit is concerned on to see that the credit control has been strictly followed white med on to
seedit is concerned on to study the credit control while operationing better measures as necessary.

Which of the following statements is/are false?

A. Statement I only.

B. Statements I and II.

C. None of the statements.

D. Statement II only.

22. After assessment of risk maturity, periodic audit planning is done which results to the production of:

A. Audit report

B. Planning report

C. Audit plan

D. Risk register

23.51. Risk-based audit applies to both internal and external audits.

52. The scope of internal auditing should encompass the examination of the adequacy and effectiveness
of the organization's system of internal control and the quality of performance in carrying out assigned
responsibilities.

Which of the following statements is/are true?

A. Statement I only.

B. Statements I and II.

C. None of the statements.

D. Statement II only.
24. The following are planning considerations in operations audit except

A. Conduct a preliminary risk assessment by utilizing a group Interview.

B. Gather top management input on the preliminary risk assessment

C. Prepare a Draft Annual Audit Plan based upon the results of the ris assessment process.

D. Preparation of audit point sheet.

25. Who is responsible for reviewing and approving the final engagement communication before its
issuance?

A. Chief Executive Officer

B. Chief Audit Executive

C. Chief Operating Officer

D. Audit Committee Chair

Case Analysis

Bes Corporation has an internal audit department operating out of the corporate headquarters. Various
types of audit assignments are performed by the department for the eight divisions of the company. The
following Endings resuited from recent audits of Bes Corporation's Bhiee Division:

1. One of the departments in the division appeared to have an excessive turnover rate. Upon
investigation, the personnel department seemed to be unable to find enough workers with the specified
skills for this department. Some workers are trained on the job. The departmental supervisor is held
accountable for labour efficiency variances but does not have qualified staff or sufficient time to train the
workers properly. The supervisor holds individual workers responsible for meeting predetermined
standards from the day they report to work. This has resulted in a rapid turnover of workers who are
trainable but not yet able to meet standards.

2. The internal audit department recently participated in a computer feasibility study for this division. It
advised and concurred on the purchase and installation of a specific computer system. Although the
system is up and operating, the results are less than desirable. The software and hardware meet the
specifications of the feasibility study, but there are several functions unique to this division that the
system has been unable to accomplish. Linking of files has been a problem. For example, several vendors
have been paid for materials not meeting company specifications. A revision of the existing software is
probably not possible, and a permanent solution probably requires replacing the existing computer
system with a new one.

3. One of the products manufactured by this division was reces redesigned to eliminate a potential
safety defect. This defect was discovered after several users were injured. At present, there are no
pending lawsuits because none of the injured parties has identified a defect in tsuits because none of of
the injury. There is insufactor Information to deteurt as weause the defect was a contributing factor.

The director of internal auditing and assistant controller is in charge of the internal audit department
and reports to the controller in corporate headquarters. Copies of internal audit reports are sent
routinely to Bes board of directors.

Requirements:

1. What are the procedures to be done in terms of fieldwork stage of an internal auditor as a response to
audit finding number 1 (excessive turnover)?

2. What are your possible recommendations as an internal auditor as a response to audit finding number
1 (excessive turnover)?

3. Based on the case, are there any objectivity problems with Bes Corporation? Explain.

4. What if the internal audit department is part of the corporation controllership function, and copies of
the internal audit reports am sent to the board of directors, evaluate the appropriateness of the location
of the internal audit department within Bes' organizationa structure.

5. Who are those within Bes should receive the reports of the intermal audit department?

CHAPTER 4

1. Which of the following is not one of the three primary objectives of effective internal control?

A. Reliability of financial reporting.

B. Efficiency and effectiveness of operations.

C. Compliance with laws and regulations.

D. Assurance of elimination of business risk.

2. Which of the following are considered control environment elements?

Commitment to Competence
No

Detection

Organizational Structure

No

Yes

Risk

Yes

Yes

No

Yes

Yes

No

No

Yes

3. which of the following statements concerning the relevance of various types of controls to a financial
statement audit is correct?

A. All controls are ordinarily relevant to a financial statement aude

B. Controls over safeguarding of assets and liabilities are of primary importance, while controls over the
reliability of financial reporting may also be relevant

C Controls over the reliability of financial reporting are ordinarily most directly relevant to a financial
statement audit, but other controls may also be relevant.

D. An auditor may ordinarily ignore a consideration of controls when a substantive audit approach is
taken.

4. An auditor should consider two key issues when obtaining an understanding of a client's internal
controls. These issues are

A. The effectiveness and efficiency of the controls.

B. The frequency and effectiveness of the controls.

C. The design and implementation of the controls.

D. The implementation and efficiency of the controls.

5. Authorizations can be either general or specific. Which of the following is not an example of a general
authorization?

A. Automatic reorder points for raw materials inventory.

B. A sales manager's authorization for a sales return.

C. Credit limits for various classes of transactions.

D. A sales price list for merchandise.

6. An auditor should obtain sufficient knowledge of an entity's information system, including the related
business processes relevant to financial reporting, to understand the

A. Policies used to detect the concealment of fraud.

B. Process used to prepare significant accounting estimates.

C. Safeguards used to limit access to computer facilities.

D. Procedures used to assure proper authorization of transactions.

7. Which of the following controls most likely would provide reasonable assurarice that all credit sales
transactions of an

A. The accounting department supervisor controls the mailing of entity are recorded? monthly
statements to customers and investigates any differences reported by customers.

B. The accounting department supervisor independently reconciles, on

a monthly basis, the accounts receivable subsidiary ledger to the

accounts receivable control account.

C. The billing department supervisor matches prenumbered shipping documents with entries in the sales
journal.

D. The billing department supervisor sends copies of approved sales orders to the credit department for
comparison to authorized credit limits and current customer account balances.

8. Physical control used to minimize incompatible functions at work refers to

A. Segregation of Duties

B. Accounting Records

C. Supervision
D. Independent Verification

9. Physical control used to capture the economic essence of transactions and provide an audit trail of
economic events refers to

A. Segregation of Duties

B. Accounting Records

C. Supervision

D. Access Control

10. Auditors assessing the integrity of the organization's management and using investigative agencies to
report on the backgrounds of key managers is one of the five components of the COSO framework.

A. Control environment

C. Monitoring

B. Risk assessment

D. Information and communication

11. The authorization of a transaction to ensure that all material transactions processed by the
information system are valid and in accordance with management's objectives is one of the five
components of the COSO Framework,

A Control environment

B. Control activities

C. Monitoring

D. Information and communication

12. The classes of transactions that are material to the financial statements and how those transactions
are initiated is one of the five components of the COSO framework.

A. Control environment

8. Risk assessment

C. Control activities

D. Information and communication

13. A change in the organizational structure resulting in the reduction antilor reallocation of personnel
such that business operations and transaction processing are affected is one of the five components of

the COSO Framework. A. Control environment

B. Risk assessment

C. Monitoring

D. Information and communication

14. Physical control used to ensure that only authorized personnel have access to the firm's assets refers
to

A. Segregation of Duties

C. Access control

B. Accounting Records

D. Independent Verification

15. Every system of internal control has limitations on its effectiveness These include

A. The concept that the company should establish and maintain a system of internal control.

B. The possibility of error---no system is perfect.

C. Circumvention---personnel may circumvent the system through collusion.

D. B and C only.

16. In the COSO enterprise risk management framework, organization's overall tone relates most closely
to:

A. Internal environment

B. Objective setting

C. Event identification

D. Monitoring

17. Miguel and Rafaela were developing a risk management plan for the company following the COSO
framework. One of the company's is to have sufficient cash available for operations; that goal had be
difficult to achieve due to risk, Miquel and Rafaela recommended their company inves cash in short-term
securities that could be liquidated quickly seasonal fluctuations easily, Which element of the COSO
framework is most related to he recommendation? in sales. To reduce

A. Internal environment

B. Monitoring

C. Control activities

D. Risk response

18. In a conversation about risk management, Miguel and Rafaela produced a ranked list of their
company's risk exposures. The ranked ast is most closely related to which element of the COSO
framework?

A Information and communication

8. Rak assessment

C. Risk response

D. Monitoring

19. COSO has published integrated frameworks for both internal control and for enterprise risk
management. Which of the following statements about the frameworks is most true?

A. The internal control framework is more useful than the enterprise risk management framework.

B. The enterprise risk management framework is more useful than the internal control framework.

C. Management attitudes are an element of both frameworks.

D. Both frameworks are required.

20. Which of the following best pairs an element of the COSO enterprise risk management framework
with an example of that element?

A. Objective setting, determining which elements of the COSO framework to use

8. Event identification, Identifying needed internal controls

C. Risk assessment, annual management retreats focused on the ERM plan

D. Risk response, diversifying risk by expanding internationally

21. One of the steps in the generalized model of business process management discussed in the text
focuses on collecting process- related data. If Laurie and Milton are concerned about the risks created by
inefficiency in the company's current fixed asset purchasing

process, they could collect data related to: the average length of time between an order for a fixed asset
and its delivery,

Il the costs incurred in the fixed asset purchasing process.

AT only

B. II only

Both I and II

D. Neither 1 nor 11

Case Analyses

Case 1 - (Risk Assessment) You are the Chief Executive Officer of a large USA multinational company
operating in the energy sector. Your company has operations in 23 different countries, some of which are
developing economies, and it has raised debt finance, as well as equity finance, in 17 these countries.
You are aware that there have been protests from environmental lobby groups in several areas regarding
oil pipelines. There have also been demonstrations about the impact of operations on local
communities.

Your company has an internal audit committee, an audit committee, and a reasonably well-developed
system of internal control loosely structured around the Turnbull Report's recommendations. However,
the board has decided that perhaps it should form a new committee, a 'risk committee which will deal
with risk management and internal control specifically.

Requirement:

Accordingly, the board has asked you to prepare a memo which summarizel the main risks facing the
business at present, and the relative importance of these risks to the business, to highlight where the
primary exposures are likely to be.

Case 2 - (Control Environment) Raiza Motors Company, a diversified Ausnufacturer, has five divisions that
operate throughout Singapore and Australia. Raiza Motors has historically allowed its divisions to
operate witronomously. Corporate intervention be allowed its divisionsned results of directo obtained.
Corporate managemencurred only when plant the board policy of hiring competent people. The
company has a code of conduct but policy of irs and audit committee are ment has high integrity, but
this has there is little monitoring of compliance by employees. Management is f conservative in terms of
accounting principles and practices, but emolover compensation packages depend highly on
performance. Raiza Moton Company does not have an internal audit department, and it relies on you
firm to review the controls in each division.
Don Gisean is the gearray of sager of the Fabricator Division. The Fabricator Division produces a variety
of standardized parts for small appliances, Gisean has been the general manager for the last seven years,
and each year he has seen able to improve the profitability of the division. He is compensated based
largely on the division's profitability. Much of the improvement in profitability has come through
aggressive cost cutting, including a substantial reduction in control activities over inventory.

During the last year, a new competitor has entered Fabricator's markets and has offered substantial price
reductions in order to grab market share. Gisean has responded to the competitor's actions by matching
the price cuts in the hope of maintaining market share. Gisean is very concerned because he cannot see
any other areas where costs can be reduced so that the division's growth and profitability can be
maintained. If profitability is not maintained, his salary and bonus will be reduced.

Gisean has decided that one way to make the division more profitable is to manipulate inventory
because it represents a large amount of the division's balance sheet. He also knows that controls over
inventory are weak. He views this inventory manipulation as a short-run solution to the profit decline
due to the competitor's price cutting. Gisean is certain that once the competitor stops cutting prices or
goes bankrupt, the misstatements in nventory can be corrected with little impact on the bottomline.

Requirements:

3. Evaluate the strengths and weaknesses of Raiza Motors Company's

b. What environment. Motors Company's control environment have led to and facilitated Gisean's
manipulation of inventory?

Case 3- (Control Activities) A company's accountant was able to approve Tayment of invoices and write
company checks to a family member, with whom the accountant would split the proceeds. The
accountant covered up the theft with journal entries in the accounting information system.

Requirement:

Which duties should be separated to prevent such problems in the future?

Don Gisean is the gearray of sager of the Fabricator Division. The Fabricator Division produces a variety
of standardized parts for small appliances, Gisean has been the general manager for the last seven years,
and each year he has seen able to improve the profitability of the division. He is compensated based
largely on the division's profitability. Much of the improvement in profitability has come through
aggressive cost cutting, including a substantial reduction in control activities over inventory.

During the last year, a new competitor has entered Fabricator's markets and has offered substantial price
reductions in order to grab market share. Gisean has responded to the competitor's actions by matching
the price cuts in the hope of maintaining market share. Gisean is very concerned because he cannot see
any other areas where costs can be reduced so that the division's growth and profitability can be
maintained. If profitability is not maintained, his salary and bonus will be reduced.

Gisean has decided that one way to make the division more profitable is to manipulate inventory
because it represents a large amount of the division's balance sheet. He also knows that controls over
inventory are weak. He views this inventory manipulation as a short-run solution to the profit decline
due to the competitor's price cutting. Gisean is certain that once the competitor stops cutting prices or
goes bankrupt, the misstatements in nventory can be corrected with little impact on the bottomline.

Requirements:

3. Evaluate the strengths and weaknesses of Raiza Motors Company's

b. What environment. Motors Company's control environment have led to and facilitated Gisean's
manipulation of inventory?

Case 3- (Control Activities) A company's accountant was able to approve Tayment of invoices and write
company checks to a family member, with whom the accountant would split the proceeds. The
accountant covered up the theft with journal entries in the accounting information system.

Requirement:

Which duties should be separated to prevent such problems in the future?

Case 4- (Internal Controls and Risk Management) Payswell Company small manufacturer, has been in
business for 10 years Sem management is thinking about outsourcing the company's payroll process

Requirements:

a. What are three important objectives of a payroll process?

b. What are the key risks that threaten the achievement of those objectives?

What are the potential benefits of outsourcing the payroll process?

d. What new risks may arise if the process is outsourced?

e. How should Payswell's management:

1. Identify the key controls over the outsourced payroll process?

2. Determine whether those controls are designed adequately att operating effectively?