CPA Exam — AUDPerforming Further Procedures and Obtaining EvidenceEasy
An auditor is evaluating the controls over cash disbursements. The control requires that all checks over $5,000 must be signed by two authorized signatories. During testing, the auditor finds several checks exceeding $5,000 signed by only one person. This indicates:
- AA potential fraud indicator, as management is bypassing controls.
- BA test of controls deviation that directly impacts the substantive testing strategy for cash.
- CAn immaterial deviation, as the checks were still signed by an authorized person.
- DA likely control deficiency, requiring further investigation to determine the severity.
Show answer & explanationAnswer & explanation
Correct answer: D. A likely control deficiency, requiring further investigation to determine the severity.
A control requiring two signatures for checks over a certain amount is a specified control procedure. If checks are found with only one signature, it represents a deviation from the prescribed control, indicating a control deficiency that needs further evaluation for its severity (e.g., significant deficiency or material weakness).
Why the other options are wrong
- A. While a control bypass *could* be a fraud indicator, the immediate and most direct conclusion is that a control deficiency exists. Further investigation would assess if fraud is a factor.
- B. It is a test of controls deviation, and it *will* likely impact the substantive testing strategy (requiring more substantive testing), but the most direct indication is a control deficiency itself.
- C. It is not necessarily immaterial without further evaluation; the control was designed to prevent misstatements that could arise from single-signature checks.
Control Deficiency (Cash Disbursements)
A control deficiency exists when a control does not operate as designed or when a necessary control is missing, increasing the risk of material misstatement.
- Deviation from prescribed control procedures.
- Requires evaluation of severity (deficiency, significant deficiency, material weakness).
- Impacts the auditor's assessment of control risk.
Memory trick: A Broken Rule is a Flaw in the Control's Design.