Question

Which of the following is a preventive control in response to the occurrence and accuracy assertions?

1) A computer program will not allow a sale to be processed if a customer has exceeded a credit limit.
2) Employees not on the master file list are not allowed to be paid without matching a valid employee ID number to the employee master file and hours worked to an authorized time sheet.
3) The account coding on each purchase order is checked by the computer to a table of valid account numbers.
4) Sales invoices are automatically priced using information in the price master file.

Answer 1

Sales invoices automatically priced from the price master file represent a preventive control to ensure the accuracy of transaction recording. This process helps mitigate the risk of incorrect pricing due to imperfect information, ensuring accurate financial statements.

Step-by-step explanation:

In the context of internal controls, preventive controls are measures taken to deter the occurrence of errors or fraud. The example provided, where sales invoices are automatically priced using information in the price master file, is a preventive control aimed at addressing the occurrence and accuracy of transaction assertions. When a company uses software to automatically generate prices on sales invoices using pre-established data in the price master file, it reduces the risk of imperfect information affecting the invoice.

This automated pricing helps ensure that sales transactions are recorded at the correct amount, mitigating the potential for human error or manipulation of prices. By having correct prices, the company can maintain accurate revenue reporting and uphold the integrity of its financial statements. To further reduce the risk of imperfect information, companies might implement additional measures such as regular updates and reviews of the master file to ensure its accuracy.

Imperfect information can significantly affect price, quantity, and quality as it leads to misinformed decisions, affecting the market's efficiency. Sellers can reassure buyers by providing warranties, establishing return policies, and being transparent about product information.

Answer 2

The options given are all preventive controls focusing on the prevention of errors or fraud. They include credit limit checks in sales processing, employee payment validation systems, account number verifications, and the use of price master files for invoice pricing.

Step-by-step explanation:

The student's question pertains to preventive controls in the context of financial transactions and accounting systems, specifically relating to occurrence and accuracy assertions. Preventive controls are measures designed to prevent errors or fraud before they occur. The options provided are examples of such controls. Here is an analysis of each option provided:

• A computer program preventing sales processing if a credit limit is exceeded is a preventive control for occurrence, ensuring no sale occurs that would lead to credit issues.
• Requiring matching with a valid employee ID and authorized time sheet to process payments is a preventive control for accuracy by validating that employees are legitimate and worked the claimed hours.
• Checking the account coding against a table of valid account numbers is a preventive control that helps in preventing inaccuracies in account allocation.
• Automatically pricing sales invoices using information from the price master file is a preventive control for accuracy, ensuring that items are billed at the correct prices.

These controls are part of a broader strategy to protect the financial integrity of an organization. For personal financial security, similar principles apply: it is important to protect your credit and debit cards, protect your mailbox from theft, safeguard your wallet, use strong passwords and PINs, employ antivirus software, and monitor your credit history regularly. Additionally, being cautious with the information shared and understanding why it's collected is crucial to preventing identity theft and inaccuracies in your financial records.