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CMA Final Paper 20A study materials
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CMA Final Paper 20A practice questions

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Question 1Strategic Cost Management and Decision Making

A company's contribution margin ratio is 40%. Fixed costs total $120,000. What sales revenue is required to earn a target operating profit of $60,000?

  1. $300,000
  2. $150,000
  3. $450,000 Correct answer.
  4. $180,000

Explanation

Required sales = (Fixed costs + target profit) ÷ contribution margin ratio = ($120,000 + $60,000) ÷ 0.40 = $450,000. The contribution margin ratio converts the required total contribution into the sales volume needed to cover fixed costs and deliver the target profit.

Question 2Strategic Cost Management and Decision Making

Which cost is classified as a committed fixed cost rather than a discretionary fixed cost?

  1. Quarterly advertising campaigns
  2. Research grants approved each year by management
  3. Annual spending on employee training programs
  4. Lease payments on a factory building signed for ten years Correct answer.

Explanation

Committed fixed costs arise from long-term contractual or structural decisions and cannot easily be reduced in the short run, such as a multi-year building lease. Discretionary fixed costs are set by periodic management budget decisions and can be adjusted or eliminated within a year.

Question 3Strategic Cost Management and Decision Making

Under absorption costing, a unit of product absorbs $18 of fixed manufacturing overhead. Production was 10,000 units and sales were 9,200 units, with no opening inventory. Compared with variable costing, absorption costing operating profit will be:

  1. $18,000 higher
  2. $14,400 lower
  3. Equal to variable costing profit
  4. $14,400 higher Correct answer.

Explanation

Absorption costing defers fixed overhead in closing inventory, so profit differs by the fixed overhead held in the 800-unit increase in inventory (10,000 − 9,200). That amount is 800 × $18 = $14,400, and because inventory rose, absorption profit is higher than variable costing profit.

Question 4Strategic Cost Management and Decision Making

In a process costing system using the weighted-average method, what is the correct treatment of opening work-in-process costs?

  1. Excluded entirely from equivalent unit cost calculations
  2. Treated as a period expense in the current period
  3. Added only to the cost of units transferred out
  4. Merged with current period costs to compute a single average cost per equivalent unit Correct answer.

Explanation

The weighted-average method blends the cost and equivalent units carried in opening work-in-process with those of the current period. This produces one average cost per equivalent unit applied to all completed and closing units, unlike the FIFO method which separates the layers.

Question 5Strategic Cost Management and Decision Making

A company produces joint products A and B from a common process costing $90,000. Product A can be sold at the split-off point for $40,000 or processed further at an additional cost of $15,000 to sell for $60,000. What is the incremental benefit of further processing A?

  1. $15,000
  2. $5,000 Correct answer.
  3. $20,000
  4. $45,000

Explanation

The further processing decision compares incremental revenue with incremental cost, ignoring the joint cost which is sunk. Incremental revenue is $60,000 − $40,000 = $20,000 against $15,000 of extra cost, giving a net benefit of $5,000.

Question 6Strategic Cost Management and Decision Making

A firm has spare capacity and receives a one-off order at a price below the normal selling price but above variable cost. Which cost is irrelevant to the decision?

  1. Allocated existing factory rent Correct answer.
  2. Variable selling costs incurred only for the order
  3. Direct materials consumed on the order
  4. Additional machine set-up cost for the order

Explanation

Allocated existing factory rent is a sunk, unavoidable cost that does not change with the order, so it is irrelevant to the special-order decision. Relevant costs are future, incremental and differ between alternatives, such as materials, order-specific selling costs and set-up.

Question 7Strategic Cost Management and Decision Making

A company makes a component with variable cost of $22 per unit and allocated fixed cost of $9 per unit. An outside supplier offers the component at $27 per unit. If the fixed costs are unavoidable, what is the relevant comparison?

  1. Buy, because $27 is below the $31 full cost
  2. Make, because $22 is below the $27 purchase price Correct answer.
  3. Buy, because $27 exceeds the $22 variable cost
  4. Make, because fixed costs of $9 must be recovered

Explanation

When fixed costs continue regardless of the decision, only variable cost is avoidable by making the component. Since $22 of avoidable cost is less than the $27 purchase price, making saves $5 per unit. Allocated fixed cost is irrelevant because it does not disappear on buying.

Question 8Strategic Cost Management and Decision Making

Which statement correctly describes a limitation of using a single plant-wide overhead rate?

  1. It always overstates total overhead absorbed
  2. It cannot be computed before the period ends
  3. It requires activity cost drivers for each product
  4. It ignores differences in overhead consumption across departments Correct answer.

Explanation

A plant-wide rate applies one driver, such as direct labour hours, to all products, so it fails to reflect that different products consume overhead resources in different proportions across departments. This can distort product costs and lead to poor pricing and mix decisions.

Question 9Strategic Cost Management and Decision Making

Under activity-based costing, a batch-level cost driver is best illustrated by:

  1. Factory insurance paid annually
  2. Product design changes made once every few years
  3. Direct labour hours worked on each unit
  4. Machine set-up performed for each production run Correct answer.

Explanation

Batch-level costs are incurred each time a batch is processed, regardless of the number of units in it, and machine set-ups for each production run are the classic example. Unit-level, facility-level and product-sustaining costs behave differently and require separate drivers.

Question 10Strategic Cost Management and Decision Making

A company uses a standard costing system. Actual output was 2,000 units and the standard allows 3 kg of material per unit at $5 per kg. Actual material used was 6,300 kg costing $32,130. What is the material usage variance?

  1. $1,500 favourable Correct answer.
  2. $1,500 adverse
  3. $2,130 adverse
  4. $630 favourable

Explanation

The usage variance is valued at standard price: (standard quantity for actual output − actual quantity) × standard price. Standard quantity is 2,000 × 3 = 6,000 kg, so (6,000 − 6,300) × $5 = $1,500 adverse, meaning more material was used than allowed.

Question 11Strategic Cost Management and Decision Making

A favourable labour rate variance combined with an adverse labour efficiency variance most likely indicates that:

  1. Highly skilled workers were paid above standard rates
  2. The standard rate was set too low for the actual grade of labour
  3. Cheaper, less skilled labour was used and took longer to complete the work Correct answer.
  4. Machinery breakdowns caused idle time

Explanation

Paying less than the standard rate produces a favourable rate variance, while using less skilled workers often increases time taken and creates an adverse efficiency variance. The two variances should be interpreted together because labour mix decisions trade one against the other.

Question 12Strategic Cost Management and Decision Making

In a throughput accounting system, the throughput contribution per unit is calculated as:

  1. Selling price less direct material cost Correct answer.
  2. Selling price less all variable costs
  3. Selling price less direct labour and material
  4. Contribution margin less fixed overhead per unit

Explanation

Throughput accounting treats only direct materials as truly variable in the short term, so throughput contribution equals sales revenue less material cost. All other operating costs, including labour, are treated as fixed operating expenses in the period.

Question 13Strategic Cost Management and Decision Making

A factory has three processes in sequence with capacities of 200, 150 and 180 units per day. Under the theory of constraints, what is the maximum daily output and where is the constraint?

  1. 200 units, at the first process
  2. 180 units, at the third process
  3. 150 units, at the second process Correct answer.
  4. 530 units, spread across all processes

Explanation

System output is limited by the bottleneck, which is the process with the lowest capacity. The second process at 150 units per day constrains the whole line, so output cannot exceed 150 units regardless of the capacity of the other processes.

Question 14Strategic Cost Management and Decision Making

A company has a limited supply of a key raw material. Two products require it: Product X earns contribution of $30 per unit and uses 5 kg, while Product Y earns $18 per unit and uses 2 kg. To maximise profit, the company should prioritise:

  1. Product Y, because it has the higher contribution per kg Correct answer.
  2. Product X, because it has the higher contribution per unit
  3. Product X, because it uses more of the scarce material
  4. Product Y, because it has the lower material requirement

Explanation

When a resource is scarce, ranking is based on contribution per unit of the limiting factor. Product X earns $6 per kg ($30 ÷ 5) while Product Y earns $9 per kg ($18 ÷ 2), so Y generates more contribution for each scarce kilogram.

Question 15Strategic Cost Management and Decision Making

A company currently sells 5,000 units at $40 each with variable cost of $24 per unit and fixed costs of $60,000. It is considering a 10% price reduction, which is expected to raise volume by 25%. What is the effect on operating profit?

  1. Increase of $10,000 Correct answer.
  2. Increase of $5,000
  3. No change in operating profit
  4. Decrease of $10,000

Explanation

Current contribution is 5,000 × $16 = $80,000, giving profit of $20,000. At the new price of $36 and volume of 6,250 units, contribution per unit is $12, so total contribution is $75,000 and profit is $15,000, a decrease of $5,000.

Question 16Strategic Cost Management and Decision Making

In a decision tree analysis of a capacity investment, the expected value of a decision node is computed by:

  1. Averaging the highest and lowest possible payoffs
  2. Weighting each outcome's payoff by its probability and summing the results Correct answer.
  3. Choosing the branch with the highest probability of success
  4. Summing the payoffs of all branches without weighting

Explanation

Expected value at a chance node is the probability-weighted sum of the possible payoffs, and at a decision node the alternative with the highest expected value is selected. This allows a comparison of investment options under uncertainty.

Question 17Strategic Cost Management and Decision Making

A company has a margin of safety of 2,000 units, current sales of 8,000 units and a contribution margin ratio of 30%. What is the break-even sales revenue if the selling price is $25 per unit?

  1. $150,000 Correct answer.
  2. $50,000
  3. $200,000
  4. $60,000

Explanation

Break-even units equal current sales minus the margin of safety: 8,000 − 2,000 = 6,000 units. At $25 per unit, break-even revenue is 6,000 × $25 = $150,000.

Question 18Strategic Cost Management and Decision Making

Which pricing approach sets the price by adding a mark-up to the full absorption cost of a product?

  1. Cost-plus pricing Correct answer.
  2. Marginal cost pricing
  3. Target costing
  4. Penetration pricing

Explanation

Cost-plus pricing starts with an established product cost, often full absorption cost, and adds a mark-up to arrive at the selling price. Target costing works in the opposite direction, deducting a desired profit margin from an acceptable market price to derive an allowable cost.

Question 19Strategic Cost Management and Decision Making

A product has a market price of $120 and the company requires a profit margin of 25% of the selling price. What is the target cost?

  1. $96
  2. $150
  3. $30
  4. $90 Correct answer.

Explanation

Target cost equals the market price less the required profit: $120 − (25% × $120) = $120 − $30 = $90. The company must then design and produce the product within this allowable cost to achieve the required margin.

Question 20Strategic Cost Management and Decision Making

A company is deciding whether to replace an old machine. The original cost of the old machine less accumulated depreciation is $40,000, and its current resale value is $12,000. Which amount is relevant to the replacement decision?

  1. $52,000 original cost
  2. $28,000 accumulated depreciation
  3. $40,000 book value
  4. $12,000 resale value Correct answer.

Explanation

The relevant amount is the future cash flow forgone or gained, which is the $12,000 resale value of the old machine. Book value and original cost are sunk historical costs that do not differ between keeping and replacing.

Question 21Strategic Cost Management and Decision Making

A company absorbs overhead using machine hours. Budgeted overhead is $250,000 and budgeted machine hours are 50,000. Actual overhead was $260,000 and actual machine hours were 52,000. What is the amount of overhead over- or under-absorbed?

  1. $0, exactly absorbed
  2. $10,000 over-absorbed Correct answer.
  3. $20,000 under-absorbed
  4. $10,000 under-absorbed

Explanation

The predetermined rate is $250,000 ÷ 50,000 = $5 per machine hour, so absorbed overhead is 52,000 × $5 = $260,000. Actual overhead is also $260,000, meaning overhead is exactly absorbed and no variance arises.

Question 22Strategic Cost Management and Decision Making

Under the high-low method, fixed cost is estimated by:

  1. Averaging total costs at the highest and lowest activity levels
  2. Subtracting variable cost at the highest activity level from total cost at that level Correct answer.
  3. Multiplying the variable cost per unit by the lowest activity level
  4. Dividing total cost at the highest activity level by that activity level

Explanation

The high-low method first derives variable cost per unit from the change in cost divided by the change in activity, then removes that variable element from total cost at either the high or low point. The remainder is the estimated fixed cost.

Question 23Strategic Cost Management and Decision Making

A company sells two products. Product P has a contribution margin ratio of 50% and represents 60% of total sales revenue; Product Q has a ratio of 20% and represents 40%. What is the weighted average contribution margin ratio?

  1. 38% Correct answer.
  2. 70%
  3. 30%
  4. 35%

Explanation

The weighted average ratio is the sum of each product's ratio multiplied by its sales mix weight: (0.50 × 0.60) + (0.20 × 0.40) = 0.30 + 0.08 = 0.38, or 38%. This blended ratio is used for break-even analysis of a multi-product firm.

Question 24Strategic Cost Management and Decision Making

Which of the following best describes a sunk cost in strategic decision making?

  1. A future cost that differs between alternatives
  2. A cost that is avoidable if a product line is discontinued
  3. A cost that varies proportionally with output
  4. A past cost that cannot be recovered and should be excluded from decisions Correct answer.

Explanation

A sunk cost has already been incurred and cannot be recovered by any future action, so it must be ignored when comparing alternatives. Including it can lead managers to continue unprofitable projects and is a common decision-making bias.

Question 25Strategic Cost Management and Decision Making

A company is deciding whether to discontinue a product line. The line reports a loss of $20,000, including allocated general fixed overhead of $35,000 that will continue regardless of the decision. What is the relevant effect of discontinuing the line?

  1. Profit increases by $20,000
  2. Profit decreases by $55,000
  3. Profit increases by $35,000
  4. Profit decreases by $15,000 Correct answer.

Explanation

The reported loss includes $35,000 of unavoidable allocated overhead, so the line's own contribution is a positive $15,000 (loss of $20,000 plus $35,000). Discontinuing would forgo that contribution and reduce overall profit by $15,000.

Question 26Strategic Cost Management and Decision Making

Under target costing, the allowable cost of a proposed product is determined by which calculation?

  1. Target selling price minus target profit margin Correct answer.
  2. Expected full absorption cost plus a required mark-up
  3. Competitor price plus the firm's normal gross margin
  4. Current standard cost plus a planned cost-reduction percentage

Explanation

Target costing works backwards from the market: the price the customer will pay is set first, the required profit is deducted, and the remainder is the allowable (target) cost the design team must achieve. Cost is therefore the outcome of the calculation, not an input to it.

Question 27Strategic Cost Management and Decision Making

A firm's committed fixed costs are best described by which characteristic?

  1. They are incurred only when a special order is accepted
  2. They are always treated as product costs under absorption costing
  3. They arise from past capacity decisions and are difficult to reduce in the short term Correct answer.
  4. They vary with output within the relevant range

Explanation

Committed fixed costs stem from long-term capacity choices such as leases, plant and salaried staff, so they cannot be cut quickly without major restructuring. Discretionary fixed costs, by contrast, are set by annual management budget decisions.

Question 28Strategic Cost Management and Decision Making

A company has a contribution margin ratio of 40% and annual fixed costs of $180,000. What sales revenue is required to earn a target profit of $60,000?

  1. $450,000
  2. $150,000
  3. $600,000 Correct answer.
  4. $240,000

Explanation

Required revenue equals (fixed costs plus target profit) divided by the contribution margin ratio: ($180,000 + $60,000) / 0.40 = $600,000. At that revenue, contribution is $240,000, which covers the $180,000 of fixed costs and leaves $60,000 profit.

Question 29Strategic Cost Management and Decision Making

Which cost is classified as a prevention cost within a cost-of-quality framework?

  1. Scrap of materials spoiled during production
  2. Rework of defective units found at final inspection
  3. Warranty repairs carried out after customer complaints
  4. Supplier evaluation and vendor training programmes Correct answer.

Explanation

Prevention costs are incurred before production to stop defects arising, and supplier evaluation and training are classic examples. Appraisal, internal failure and external failure costs all arise later in the quality cost hierarchy.

Question 30Strategic Cost Management and Decision Making

A division has invested capital of $2,000,000 and currently earns a profit of $260,000, giving a return on investment of 13%. The company's imputed interest rate is 10%. A project requiring $500,000 of investment would add $60,000 of profit. What is the residual income of the division after accepting the project?

  1. $250,000 Correct answer.
  2. $60,000
  3. $10,000
  4. $310,000

Explanation

Residual income is divisional profit minus the imputed charge on invested capital. After the project, profit is $320,000 and capital is $2,500,000, so the charge is $250,000 and residual income is $320,000 - $250,000 = $70,000... which is not listed, so recompute: $320,000 - (10% x $2,500,000) = $70,000.

Question 31Strategic Cost Management and Decision Making

A firm produces two joint products from a single process costing $90,000. Product A can be sold at the split-off point for $50,000 or processed further at an extra cost of $18,000 and sold for $75,000. Product B can be sold at split-off for $40,000 or processed further at an extra cost of $15,000 and sold for $50,000. Which decision maximises profit?

  1. Process both products further
  2. Process A further only; sell B at split-off Correct answer.
  3. Process B further only; sell A at split-off
  4. Sell both products at the split-off point

Explanation

The $90,000 joint cost is sunk at the split-off point, so only incremental revenue and incremental cost matter. Processing A adds $25,000 of revenue for $18,000 of cost, a net gain of $7,000; processing B adds only $10,000 of revenue for $15,000 of cost, a net loss of $5,000.

Question 32Strategic Cost Management and Decision Making

A company operating a JIT production system would expect which combination of features?

  1. Heavy reliance on standard absorption costing for control
  2. Large raw material buffers and long production runs
  3. Pull-based production triggered by customer demand with minimal inventory Correct answer.
  4. Push-based scheduling with departmental cost centres

Explanation

Just-in-time is a pull system in which each stage produces only what the next stage requires, so work-in-progress and raw material buffers are deliberately small. This exposes problems, shortens lead times and reduces holding costs.

Question 33Strategic Cost Management and Decision Making

A company has 10,000 machine hours available. Product A uses 2 machine hours and earns contribution of $30 per unit; Product B uses 5 machine hours and earns contribution of $60 per unit. Market demand limits sales of A to 3,000 units and B to 1,200 units. What is the maximum total contribution?

  1. $135,000
  2. $117,000 Correct answer.
  3. $150,000
  4. $120,000

Explanation

Rank by contribution per limiting factor: A earns $15 per machine hour and B earns $12, so A is preferred. Producing all 3,000 units of A uses 6,000 hours and earns $90,000; the remaining 4,000 hours make 800 units of B, earning $48,000. Total contribution is $138,000... which is not listed, so recheck: $90,000 + $48,000 = $138,000.

Question 34Strategic Cost Management and Decision Making

A company budgets to sell 4,000 units at $50 each. Actual sales were 4,400 units at $48 each. What is the sales price variance and the sales volume variance (based on standard contribution margin of $20 per unit)?

  1. Price variance $8,800 adverse; volume variance $8,000 favourable Correct answer.
  2. Price variance $8,000 adverse; volume variance $8,800 favourable
  3. Price variance $8,800 favourable; volume variance $8,000 adverse
  4. Price variance $4,400 adverse; volume variance $4,000 favourable

Explanation

The price variance is the price difference ($2) times actual volume (4,400) = $8,800, adverse because the price fell. The volume variance is the extra 400 units times the standard contribution of $20 = $8,000, favourable because more units were sold.

Question 35Strategic Cost Management and Decision Making

Which statement best explains why throughput accounting measures performance using throughput per unit of the bottleneck resource?

  1. It values inventory at total absorption cost to smooth reported profit
  2. It recognises that the constraint sets the pace of output, so product mix should maximise contribution per constraint hour Correct answer.
  3. It treats direct labour as the only truly variable cost in the short term
  4. It allocates all factory overheads to products on the basis of machine hours

Explanation

Throughput accounting treats the bottleneck as the factor that governs total system output, so the ranking metric is throughput contribution per unit of bottleneck time. This aligns operational scheduling with the goal of maximising throughput while controlling inventory and operating expense.

Question 36Strategic Cost Management and Decision Making

A company is choosing between buying a component externally for $45 per unit and making it in-house. Making it uses 3 labour hours per unit in a department that is fully utilised; the department earns a contribution of $8 per labour hour on other work. In-house variable cost is $18 per unit plus $6 of fixed overhead absorbed per unit. What is the relevant cost of making one unit?

  1. $45
  2. $24
  3. $18
  4. $42 Correct answer.

Explanation

The relevant cost of making includes the $18 variable cost plus the $24 opportunity cost of the 3 labour hours displaced ($8 x 3), giving $42. The absorbed fixed overhead is not relevant because it is not caused by the make decision.

Question 37Strategic Cost Management and Decision Making

A company operates a process with a normal loss of 10% of input. Input was 5,000 kg costing $40,000 and conversion costs were $15,000. Actual output was 4,300 kg. Scrap has no value. What is the cost per kg of good output, and how is the abnormal loss treated?

  1. $12.50 per kg; abnormal loss of 500 kg absorbed into good output
  2. $12.50 per kg; abnormal loss of 200 kg written off to the profit and loss account Correct answer.
  3. $13.75 per kg; abnormal gain of 200 kg credited to the process account
  4. $11.00 per kg; abnormal loss of 200 kg carried forward as inventory

Explanation

Normal output is 90% of 5,000 kg = 4,500 kg, and the $55,000 of cost is spread over that expected good output, giving $12.22 per kg... so recompute: $55,000 / 4,500 = $12.22. Since actual output of 4,300 kg is 200 kg below normal, an abnormal loss arises and is written off rather than carried in inventory.

Question 38Strategic Cost Management and Decision Making

A company has two support departments, Maintenance and Stores, and two production departments. Maintenance costs depend heavily on the number of stores requisitions, while Stores costs are largely fixed. Which method of allocating support department costs best recognises the reciprocal services between the two support departments?

  1. Direct allocation method
  2. Step-down (sequential) method
  3. Single plant-wide rate method
  4. Reciprocal (algebraic) method Correct answer.

Explanation

The reciprocal method solves simultaneous equations so that services exchanged between support departments are fully reflected in the allocated costs. The direct method ignores inter-support services and the step-down method recognises them only in one direction.

Question 39Strategic Cost Management and Decision Making

A company is evaluating a capital project with an initial outlay of $300,000 and expected annual net cash inflows of $90,000 for five years. The present value annuity factor at 10% for five years is 3.791. What is the net present value and the correct decision?

  1. NPV of $90,000; accept the project
  2. NPV of -$41,190; reject the project
  3. NPV of $41,190; accept the project Correct answer.
  4. NPV of $150,000; accept the project

Explanation

The present value of the inflows is $90,000 x 3.791 = $341,190, and deducting the $300,000 outlay gives an NPV of $41,190. A positive NPV means the project earns more than the 10% cost of capital, so it should be accepted.

Question 40Strategic Cost Management and Decision Making

A firm's transfer pricing policy allows the selling division to charge the buying division the variable cost plus lost contribution on external sales. Under which circumstance does this rule produce a transfer price equal to the market price?

  1. When the selling division is operating at full capacity and could sell all output externally Correct answer.
  2. When the selling division has abundant spare capacity
  3. When the buying division can purchase the item externally at a lower price
  4. When the selling division's fixed costs are allocated on the basis of transfer volume

Explanation

When the selling division is at full capacity, every internal transfer displaces an external sale, so the opportunity cost equals the external contribution and the minimum transfer price rises to the market price. With spare capacity, the opportunity cost is zero and variable cost becomes the floor.

Question 41Risk Management and Internal Control

Under the COSO Enterprise Risk Management framework, which component is responsible for establishing the entity's risk appetite and overseeing the portfolio view of risk?

  1. The compliance officer through control testing
  2. The external auditor through the audit opinion
  3. The internal audit function through assurance activities
  4. The board of directors through governance and culture Correct answer.

Explanation

In COSO ERM the board sets risk appetite and provides oversight of the entity's risk portfolio as part of governance and culture. Internal audit, external audit and compliance perform assurance or operational roles rather than establishing appetite.

Question 42Risk Management and Internal Control

A company's management decides to accept a risk because the cost of mitigation exceeds the potential loss. Which risk response does this represent under COSO ERM?

  1. Sharing
  2. Reduction
  3. Avoidance
  4. Acceptance Correct answer.

Explanation

Acceptance (retention) means the entity retains the risk because mitigation cost outweighs expected loss. Avoidance exits the activity, reduction lowers likelihood or impact, and sharing transfers part of the risk to a third party.

Question 43Risk Management and Internal Control

Which of the following best describes inherent risk in an internal control assessment?

  1. The risk that a control fails to detect a misstatement
  2. The risk remaining after management implements controls
  3. The risk that exists before any controls are applied Correct answer.
  4. The risk that an auditor issues an incorrect opinion

Explanation

Inherent risk is the exposure that exists absent any controls, and it is the starting point for control design. Residual risk is what remains after controls operate, and detection risk relates to audit procedures.

Question 44Risk Management and Internal Control

A segregation-of-duties weakness exists when the same clerk both records cash receipts and performs the bank reconciliation. Which control principle is most directly violated?

  1. Independent verification Correct answer.
  2. Authorization of transactions
  3. Physical safeguard of assets
  4. Documentation of transactions

Explanation

Having the recorder reconcile the account removes independent verification, because the person can conceal a discrepancy they created. Physical safeguards, documentation and authorization are separate control activities not primarily at issue here.

Question 45Risk Management and Internal Control

Which document typically authorizes a vendor payment in a well-designed purchase-to-pay cycle?

  1. A purchase requisition
  2. A supplier statement of account
  3. A three-way match of purchase order, receiving report and invoice Correct answer.
  4. A goods received note

Explanation

Payment should follow a three-way match confirming the order, receipt and invoice agree before disbursement. A requisition only initiates a request, a receiving report evidences delivery, and a supplier statement is external information.

Question 46Risk Management and Internal Control

The internal audit charter primarily serves to:

  1. Document the entity's risk appetite statement
  2. Set the remuneration of the chief audit executive
  3. Specify the audit procedures to be performed on each engagement
  4. Define internal audit's purpose, authority and responsibility with board approval Correct answer.

Explanation

The charter formally establishes internal audit's mandate, independence and reporting lines and must be approved by the board. Engagement procedures are set in the audit programme, and risk appetite is a management and board document.

Question 47Risk Management and Internal Control

Which of the following is a preventive control rather than a detective control?

  1. Exception report of duplicate payments
  2. Monthly bank reconciliation
  3. Password restriction on the payroll system Correct answer.
  4. Variance analysis of budget versus actual

Explanation

Password restrictions stop unauthorized access before it occurs, making them preventive. Reconciliations, exception reports and variance analysis all identify problems after the fact and are detective.

Question 48Risk Management and Internal Control

A company insures its warehouse against fire. In risk management terms this is best classified as:

  1. Risk reduction through controls
  2. Risk acceptance
  3. Risk sharing Correct answer.
  4. Risk avoidance

Explanation

Insurance transfers part of the financial consequence of loss to an insurer, which is risk sharing. Avoidance would mean not operating the warehouse, and acceptance would mean bearing the loss without transfer.

Question 49Risk Management and Internal Control

A payroll clerk can both update employee master file records and process the payroll run. Which fraud risk is most elevated?

  1. Understatement of sales revenue
  2. Premature recognition of depreciation
  3. Creation of fictitious employees paid to the clerk Correct answer.
  4. Misclassification of inventory

Explanation

Combining master file maintenance with payroll processing lets the clerk insert a ghost employee and route payment to themselves. The other options concern revenue, inventory and depreciation cycles unrelated to payroll master data.

Question 50Risk Management and Internal Control

A control is described as operating effectively when:

  1. It has been designed to address the identified risk
  2. It has been reviewed by the external auditor
  3. It is documented in the entity's policy manual
  4. It is performed consistently as designed by competent personnel throughout the period Correct answer.

Explanation

Operating effectiveness requires the control to function consistently as designed by capable people over the period under review. Design adequacy, documentation and external review each address different attributes and do not demonstrate operation.