Exercise 2

Following are typical questions that might be appear on an internal control questionnaire for
investments in marketable securities.

1. Is custody of investment securities maintained buy an employee who does not maintain
the detailed records of the securities?
2. Or securities registered in the company name?
3. Our investment activities reviewed by an investment committee of the board of
directors?

Required:
c. Assuming that the operating effectiveness of each of the above procedures is found to
be inadequate, describe how the auditors might their substantive procedures to
compensate for the increased level of control risk.