ACCA AA · Chapter 8
Internal control systems MCQs with Answers
12 multiple-choice questions on Internal control systems for ACCA AA Audit and Assurance. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which of the following is NOT one of the components of an entity's system of internal control under ISA 315?
- A) The control environment
- B) The entity's risk assessment process
- C) The external auditor's tests of controls
- D) Control activities
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Answer: C) The external auditor's tests of controls
The components are the control environment, the entity's risk assessment process, the entity's process to monitor the system of internal control, the information system and communication, and control activities. The external auditor's testing is part of the audit, not part of the entity's internal control.
Question 2
Which of the following is an element of the control environment?
- A) Management's commitment to integrity and ethical values
- B) Sequential numbering of sales invoices
- C) Password controls over the payroll system
- D) Monthly bank reconciliations
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Answer: A) Management's commitment to integrity and ethical values
The control environment reflects the attitudes, awareness and actions of management and those charged with governance, often described as the 'tone at the top'. Bank reconciliations, sequential numbering and passwords are control activities.
Question 3
At Sprocket Co, a single purchasing clerk raises purchase orders, records supplier invoices in the payables ledger and prepares supplier payments for signature. What is the main risk created by this arrangement?
- A) Non-current assets could be depreciated at incorrect rates
- B) Goods could be dispatched to customers without a valid order
- C) Payroll could include employees who have left the company
- D) Fictitious suppliers could be set up and paid without detection because of a lack of segregation of duties
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Answer: D) Fictitious suppliers could be set up and paid without detection because of a lack of segregation of duties
When one person controls ordering, recording and payment, they could create a fictitious supplier, record false invoices and arrange payment without another person being involved. Segregation of these duties means that collusion would be needed. The other risks relate to sales, payroll and non-current assets, not the purchases cycle.
Question 4
Which control would best address the objective that goods are only supplied to customers with acceptable credit ratings?
- A) Monthly reconciliation of the receivables ledger to the control account
- B) Credit checks on new customers and review of credit limits before orders are accepted
- C) Sequential numbering of goods dispatched notes
- D) Matching of sales invoices to goods dispatched notes
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Answer: B) Credit checks on new customers and review of credit limits before orders are accepted
Credit checks and credit limits stop orders being accepted from customers who may not pay, reducing irrecoverable debts. Sequential numbering and matching of dispatch notes address completeness and accuracy of invoicing, and ledger reconciliations address accurate recording rather than credit risk.
Question 5
Which control most directly helps to ensure that all goods dispatched to customers are invoiced?
- A) Sequentially numbered goods dispatched notes are matched to sales invoices and gaps in the sequence are investigated
- B) Customer statements are sent out monthly
- C) Price lists are updated and approved by the sales director
- D) Sales invoices are authorised by the sales manager before they are sent
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Answer: A) Sequentially numbered goods dispatched notes are matched to sales invoices and gaps in the sequence are investigated
Matching sequentially numbered dispatch notes to invoices, with follow-up of any missing numbers, identifies goods that have left the premises without being billed, addressing completeness of revenue. Authorisation and price lists address accuracy and validity, and customer statements mainly detect overcharging or misallocated cash.
Question 6
What is the main purpose of matching a supplier invoice to the related purchase order and goods received note before payment?
- A) To ensure that all sales are recorded in the correct period
- B) To ensure that inventory is valued at the lower of cost and net realisable value
- C) To ensure that the company only pays for goods that were authorised and actually received
- D) To ensure that the supplier is paid as early as possible
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Answer: C) To ensure that the company only pays for goods that were authorised and actually received
The three-way match confirms that the goods were properly ordered, that they were received in the correct quantity and condition, and that the invoice reflects those goods at the agreed price. It prevents payment for goods not ordered or not received.
Question 7
Which control would best prevent fictitious employees from being added to the payroll?
- A) Net pay is transferred directly to employees' bank accounts
- B) The payroll total is compared with the prior month
- C) Payroll is processed using a recognised software package
- D) New joiners are authorised by the human resources department, which is independent of the payroll processing function
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Answer: D) New joiners are authorised by the human resources department, which is independent of the payroll processing function
Requiring independent authorisation of new joiners separates the authority to add employees from the ability to process and pay them. Bank transfers do not stop payments to fictitious bank accounts, and month-on-month comparison would be unlikely to detect one extra salary among many.
Question 8
Which of the following controls would be most effective in reducing the risk of theft of high-value inventory from a warehouse?
- A) Valuing inventory using the first-in, first-out method
- B) Recording inventory purchases in the general ledger daily
- C) Restricting physical access to the warehouse and reconciling perpetual inventory records to regular counts
- D) Reviewing the gross margin for each product line annually
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Answer: C) Restricting physical access to the warehouse and reconciling perpetual inventory records to regular counts
Restricting access prevents theft, and regular reconciliations of physical counts to records detect losses promptly so they can be investigated. The valuation method and ledger posting do not safeguard the goods, and an annual margin review is too high-level and too late to be an effective control.
Question 9
Which of the following bank reconciliation procedures represents the strongest control?
- A) The reconciliation is prepared monthly by someone independent of cash recording and reviewed and signed by a senior manager
- B) The reconciliation is prepared monthly by the cashier who also records receipts and payments
- C) The reconciliation is prepared annually by the cashier at the year end
- D) The bank statement is filed monthly without a reconciliation, as the bank's records are reliable
Show answer & explanation
Answer: A) The reconciliation is prepared monthly by someone independent of cash recording and reviewed and signed by a senior manager
Monthly reconciliation by an independent person, with evidenced review, detects errors and irregularities promptly and prevents the person recording cash from concealing misappropriation. An annual reconciliation is too infrequent, and allowing the cashier to reconcile their own work removes segregation of duties.
Question 10
Under ISA 265, how must the auditor communicate significant deficiencies in internal control identified during the audit?
- A) In writing to the shareholders at the annual general meeting
- B) In the Basis for Opinion section of the auditor's report
- C) Orally to the finance director only
- D) In writing to those charged with governance on a timely basis
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Answer: D) In writing to those charged with governance on a timely basis
ISA 265 requires significant deficiencies to be communicated in writing to those charged with governance on a timely basis, and also communicated to an appropriate level of management. Other deficiencies may be communicated to management in writing or orally. Control deficiencies are not reported in the auditor's report.
Question 11
Which of the following is a test of controls rather than a substantive procedure?
- A) Comparing the year-end payables balance with the prior year and investigating changes
- B) Inspecting a sample of purchase invoices for the signature of the authorising manager
- C) Reconciling supplier statements to payables ledger balances at the year end
- D) Agreeing a sample of purchase invoices to the payables ledger to confirm the amounts recorded
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Answer: B) Inspecting a sample of purchase invoices for the signature of the authorising manager
A test of controls evaluates the operating effectiveness of a control, here the authorisation of invoices. The other procedures are substantive: they seek evidence directly about whether amounts are misstated, through tests of detail or analytical procedures, and do not test whether a control operated.
Question 12
Which of the following is an application control rather than a general IT control?
- A) A range check that rejects payroll inputs of more than 60 hours worked per week
- B) Procedures for testing and authorising changes to programs
- C) A disaster recovery plan with off-site backups
- D) Policies for granting user access rights on joining the company
Show answer & explanation
Answer: A) A range check that rejects payroll inputs of more than 60 hours worked per week
Application controls operate within specific applications to ensure the completeness and accuracy of processing, for example range checks, check digits and batch totals. Program change controls, backup and recovery arrangements and access policies are general IT controls that support the IT environment as a whole.