Exam 12: Audit Testing for the Supply Chain and Production Process

Correct Answer:

Verified

Inventory controls emphasize the flow and cost of inventory in the system because management must know who has what inventory, and for what purpose, at each stage of processing. Key internal controls related to financial reporting include the following:
i) A perpetual inventory system is the key element for establishing control over inventory.
ii) Periodic physical verification is an important source of control over inventory.
iii) Internal control is also needed in the area of waste and scrap. Scrap with a positive market value should be processed and sold to a recycler. Waste disposal may require compliance with complex environmental laws.
iv) Allocation of labor and overhead to work in process should have a consistent GAAP policy.

Correct Answer:

Verified

a. Identify legitimate resource needs.
b. Establish reliable supply chain meeting quality, cost, and delivery needs.
c. Obtain resources at the best price given quality and other constraints.
d. Minimize production costs, using vendors as part of the design process
e. Ensure availability of resources at time and place needed.
f. Minimize procurement and transaction costs.
g. Minimize storage and handling costs.
h. Protect resources and inventory from loss or unauthorized use.
i. Make payments for legitimate obligations only.
j. Produce goods and services that meet cost and quality targets.
k. Maximize use of capacity.
l. Minimize and control spoiled and defective units and properly handle by-products.
m. Minimize and control waste.
n. Capture and effectively utilize supplier and production information.
o. Capture, process, and report information necessary for process improvement.

Correct Answer:

Verified

To avoid improper use of cash and to assure that liabilities are paid at the proper amount cash payments should be tightly controlled. Key internal controls related to financial reporting include:
i) The most critical control element for disbursements is authorization. Check preparation should be segregated from purchasing and payment authorization. This facilitates the independent review of payments to assure that they are proper and accurate. Note that checks are often prepared electronically and signed using a check-signing machine. The trend toward electronic funds transfer reduces the need for manual controls but creates a need for other types of controls that require evaluation by an IT specialist.
ii) Payable postings should be verified.
iii) Documents supporting disbursements should be canceled after payment to assure that the same liability is not paid twice.