Items 1 through 6 are questions typically found in a standard internal control questionnaire used by auditors to obtain an understanding of internal control for notes payable. In using the questionnaire for a client, a yes response indicates a possible internal control, whereas a no° indicates a potential deficiency.

1. Are liabilities for notes payable incurred only after written authorization by a proper company official?
2. Are paid notes cancelled and retained in the company files?
3. Is a notes payable master file maintained?
4. Is a periodic reconciliation made of the notes payable master file with the actual notes outstanding by an individual who ds not maintain the master file?
5. Is the individual who maintains the notes payable master file someone other than the person who approves the issue of new notes or handles cash?
6. Are interest expense and accrued interest recomputed periodically by an individual who ds not record interest transactions?
a. For each of the preceding questions, state the purpose of the control.
b. For each of the preceding questions, identify the type of financial statement misstatement that can occur if the control were not in effect.
c. For each of the potential misstatements in part b., list an audit procedure that can be used to determine whether a material misstatement exists.