Question

For which of the following internal controls would an auditor be least likely to perform tests of internal controls closer to the 'as of' date?

1) Withdrawals from Federal Bank of more than $5 million must include a manager's signature.
2) At the end of each day at Federal Bank, the total cash in the vault is reconciled with daily registers of deposits and withdrawals.
3) Federal Bank has just started establishing trusts for its customers and it has only set up ten such trusts. Before making an investment for a trust, bank employees must verify that the investment is in accordance with stated investment policies.
4) On an annual basis, Federal Bank management performs credit checks on its loan customers before determining the value of loans it will not be able to collect on.

Answer 1

An auditor would perform tests of internal controls closer to the 'as of' date on high-volume or high-risk areas; therefore, the control over the newly established trust is least likely to be tested close to the 'as of' date as only ten trusts have been set up.

Step-by-step explanation:

Among the internal controls listed, an auditor would likely be least concerned with performing tests closer to the 'as of' date for the control related to establishing trusts, given that Federal Bank has only set up a limited number of such trusts (ten in this case). This is because the internal controls related to high-volume or high-risk areas such as large withdrawals or cash reconciliations are more critical to the bank's daily operations and financial reporting, thus requiring closer attention. Moreover, the controls regarding manager's signatures on large withdrawals and daily cash reconciliations are likely to have a greater overall impact on the bank's financial health and operational integrity.