Question 1

With regard to the rote of the audit committee which of the following statements are correct? Select ALL that apply

Options :

A : The audit committee should design the system of internal controls

B : The audit committee should decide annually whether it needs an internal audit function

C : The audit committee should decide annually whether it needs an external audit function

D : The audit committee should review and monitor the effectiveness of the company-s internal audit function

E : The audit committee should provide arrangements for whistle blowing

F : The audit committee should engage consultants to carry out business reviews

Answer: A,D

Question 2

The management of U isreviewing internal controls throughout the company. Ithasnoted the following:-
1. In the trade receivables section, journal adjustments are made by the clerks, without any reference to their supervisor. Journal adjustments may relate to sales returns, discounts allowed, or transfers between accounts.
2. In the purchasing department, the purchasing manager selects and approves all suppliers, astheyarethe only person with sufficient experience to do so. They usea very limited number of suppliers becausethey can rely on these suppliers to provide goods of the quality required at a competitive price. They donot keep any documents in relation to negotiations with other potential suppliers or other quotes obtained.
In relation to the above, which of the following statements are valid?

Options :

A : The fact that the purchasing manager uses a very small number of suppliers is, in itself, a sign of poor internal controls.

B : It is acceptable for clerks in the trade receivables section to make journal adjustments without authorisation provided the amounts involved are not material to U-s financial statements.

C : It is acceptable for clerks in the trade receivable section to make journal adjustments without authorisation, provided they have no access to cash receipts.

D : The fact that the purchasing manager does not keep documentation relating to negotiations with suppliers, or potential suppliers,is evidence that they are involved in fraudulent activity.

E : Clerks making journal adjustments without reference to their supervisor is evidence of inadequate separation of duties.

F : The way the role of purchasing manager is carried out in U increases the chance that the company will fall victim to fraudulent activity.

Answer: A

Question 3

Company M has lost 25% of its revenue in the last three months due to bad debts. One of thereceivables written offwasfroma long standing customer and the other three werefromnew customers. The management accountant has warned the sales team that the company cannot survive any more substantial bad debts.
Which of the following internal controls should be put in place to try and prevent further bad debts?

Options :

A : A credit check should be carried out on each new customer.

B : Credit limits should be set for all customers. However, if the credit limit will cost a sale then sales staff can override this limit.

C : Two sales staff must authorise new customers and sign a form stating that they have done so.

D : An aged analysis of customer balances must be reviewed every month.

E : As soon as a customer payment is overdue they should not be allowed to purchase more until their balance has been reduced

Answer: A,D

Question 4

Which TWO of the following scenarios should be considered in strategic scenario planning by a publishing company that specialises in academic textbooks?

Options :

A : There could be a change in the technology used by consumers, such as smaller mobile phones with smaller screens

B : Budget changes could have an impact on the funding available to college and university libraries

C : The terms offered by media companies for film rights for books could change

D : The quality of output from printing presses might improve

E : Environmental concerns could lead to a decrease in the availability of trees to make paper

Answer: B,C

Question 5

An electricity company owns and operates a nuclear power station located ten miles from a large city. A recent and very extensive engineering examination of the power station concludes with the estimate that the probability of a major nuclear disaster within the next 20 years is 0.2%.
Which of the following best explains the relevance of quantifying the risk in that way?

Options :

A : There is no acceptable level of risk for a major nuclear accident and so the probability has little information value in itself.

B : The probability is so low as to be ignored.

C : The directors will be able to argue that they were not negligent in the event of a major disaster within the 20 year period.

D : The calculation of a precise probability demonstrates that the engineers who conducted the inspection are experts in their field.

Answer: A