Chapter 10
10-33 (Objective 10-3) Following are descriptions of ten
internal controls.
1.
The company’s 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
department’s 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 company’s 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.
1.
Control environment
2.
Risk assessment
3.
Control activities
4.
Information and communication
5.
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
Chapter 12
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 salesman’s
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
1.
Identify the transaction-related audit objective(s) to which the
misstatement pertains.
2.
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 employee’s 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 employee’s pay if inputted hours exceed 160
hours for a 2-week pay period.
Required
For each control:
1.
Identify whether the control is an automated application control
(AC) or a manual control done by Gilman employees (MC).
2.
Identify the transaction-related audit objective that is
affected by the control.
3.
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.
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