10-33 (Objective 10-3) Following are descriptions of ten internal controls.
1. The
companyâs computer systems track individual transactions and automatically
accumulate transactions to create a trial balance.
2. The
company must receive university transcripts documenting all college degrees
earned before an individual can begin their first day of employment with the
company.
3. Senior
management obtains data about external events that might affect the entity and
evaluates the impact of that information on its existing accounting processes.
4. Each
quarter, department managers are required to perform a self-assessment of the
departmentâs compliance with company policies. Reports summarizing the results
are to be submitted to the senior executive overseeing that department.
5. Before
a cash disbursement can be processed, all payee information must be verified by
matching the payee to the companyâs approved vendor listing.
6. The system
automatically reconciles the detailed accounts receivable subsidiary ledger to
the accounts receivable general ledger account on daily basis.
7. The
company has developed a detailed series of accounting policy and procedures
manuals to help provide detailed instructions to employees about how controls
are to be performed.
8. The
company has an organizational chart that establishes the formal lines of
reporting and authorization protocols.
9. The
compensation committee reviews compensation plans for senior executives to
determine if those plans create unintended pressures that might lead to
distorted financial statements.
10. On a
monthly basis, department heads review a budget to actual performance report and
investigate unusual differences.
Required
Indicate
which of the five COSO internal control components is best represented by each
internal control.
a. Control environment
b. Risk
assessment
c. Control activities
d. Information
and communication
e. Monitoring
10-41 (Objective 10-7) The following are independent situations for which you
will recommend an appropriate audit report on internal control over financial
reporting as required by PCAOB auditing standards:
1. The
auditor identified a material misstatement in the financial statements that was
not detected by management of the company.
2. The
auditor was unable to obtain any evidence about the operating effectiveness of
internal control over financial reporting.
3. The
auditor determined that a deficiency in internal control exists that will not
prevent or detect a material misstatement in the financial statements.
4. During
interim testing, the auditor identified and communicated to management a
significant control deficiency. Management immediately corrected the deficiency
and the auditor was able to sufficiently test the newly-instituted internal
control before the end of the fiscal period.
5. As a
result of performing tests of controls, the auditor identified a significant
deficiency in internal control over financial reporting; however, the auditor
does not believe that it represents a material weakness in internal control.
Required
For each
situation, state the appropriate audit report from the following alternatives:
⢠Unqualified opinion on internal control over
financial reporting
⢠Qualified or disclaimer of opinion on internal
control over financial reporting
⢠Adverse opinion on internal control over
financial reporting
12-19 (Objectives 12-2, 12-3) The following are misstatements that can occur in the
sales and collection cycle:
1. A
customer number on a sales invoice was transposed and, as a result, charged to
the wrong customer. By the time the error was found, the original customer was
no longer in business.
2. A
former computer operator, who is now a programmer, entered information for a
fictitious sales return and ran it through the computer system at night. When
the money came in, he took it and deposited it in his own account.
3. A
nonexistent part number was included in the description of goods on a shipping
document. Therefore, no charge was made for those goods.
4. A
customer order was filled and shipped to a former customer that had already
filed for bankruptcy.
5. The
sales manager approved the price of goods ordered by a customer, but he wrote
down the wrong price.
6. A
computer operator picked up a computer-based data file for sales of the wrong
week and processed them through the system a second time.
7. For a
sale, a data entry operator erroneously failed to enter the information for the
salesmanâs department. As a result, the salesman received no commission for
that sale.
8.
Several remittance advices were batched together for inputting. The cash receipts
clerk stopped for coffee, set them on a box, and failed to deliver them to the
data input personnel.
Required
a.
Identify the transaction-related audit objective(s) to which the misstatement
pertains.
b.
Identify one automated control that would have likely prevented each
misstatement.
12-26 (Objective 12-4) Following are 10 key internal controls in the payroll
cycle for Gilman Stores, Inc.
Key Controls
1. To
input hours worked, payroll accounting personnel input the employeeâs Social
Security number. The system does not allow input of hours worked for invalid
employee numbers.
2. The
payroll application is programmed so that only human resource personnel are
able to add employee names to the employee master files.
3. Input
menus distinguish executive payroll, administrative payroll, and factory
payroll.
4. The
system automatically computes pay at time and a half once hours worked exceed
80 in a 2-week pay period.
5. The
system accumulates totals each pay period of employee checks processed and
debits the payroll expense general ledger account for the total amount.
6. Each
pay period, payroll accounting clerks count the number of time cards submitted
by department heads for processing and compare that total with the number of
checks printed by the system to ensure that each time card has a check.
7. For
factory personnel, the payroll system matches employee ID numbers with ID
numbers listed on job costing tickets as direct labor per the cost accounting
system. The purpose of the reconciliation is to verify that the amount paid to
each employee matches the amount charged to production during the time period.
8. The
system generates a listing by employee name of checks processed. Department
heads review these listings to ensure that each employee actually worked during
the pay period.
9. On a
test basis, payroll accounting personnel obtain a listing of pay rates and
withholding information for a sample of employees from human resources to
recalculate gross and net pay.
10. The
system automatically rejects processing an employeeâs pay if inputted hours
exceed 160 hours for a 2-week pay period.
Required
For each
control:
a. Identify whether the control is an automated
application control (AC) or a manual control done by Gilman employees (MC).
b.
Identify the transaction-related audit objective that is affected by the
control.
c. Identify which controls, if tested within the
last two prior year audits, would not have to be retested in the current year,
assuming there are effective IT general controls and no changes to the noted
control have been made since auditor testing was completed.
