19 Aug 2-22: The following are partial descriptions of internal cont
2-22: The following are partial descriptions of internal controls for companies engaged in the manufacturing business:
- When Mr. Clark orders materials, an electronic copy of the purchase order is sent to the receiving department. During the delivery of materials, Mr. Smith, the receiving clerk, records the receipt of shipment on this purchase order and then sends the purchase order to the accounting department, where it is used to record materials purchased and accounts payable. The materials are transported to the storage area by forklifts. The additional purchased quantities are recorded on storage records.
- Every day, hundreds of employees clock in using their employee identification cards at Generous Motors Corporation. The data on these time records is used in the preparation of the labor cost distribution records, the payroll journal, and the electronic payments and payroll checks. The treasurer, Angela Lee, compares the payroll journal with the payroll records, signs the checks, and returns the payroll notifications and checks to Charles Strode, the supervisor of the computer department. The payroll checks and payment notices are distributed to the employees by Strode.
- The smallest branch of Connor Cosmetics employs Mary Cooper, the branch manager, and her sales assistant, Janet Hendrix. The branch uses a bank account to pay expenses. The account is kept in the name of “Connor Cosmetics—Special Account.” To pay expenses, checks must be signed by Cooper or by the treasurer, John Winters. Cooper receives the cancelled checks and bank statements. She reconciles the branch account herself and files cancelled checks and bank statements in her records. She also periodically prepares reports of cash disbursements and sends them to the home office.
Required:
- Required List the deficiencies in internal control for each of these situations. To identify the deficiencies, use the methodology that was discussed in this chapter.
- For each deficiency, state the type(s) of misstatement(s) that is (are) likely to result. Be as specific as possible.
- How would you improve internal controls for each of the three companies?*
12-25: 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 identified several significant deficiencies in internal control. Because of these significant deficiencies, the auditor believes that there is a reasonable possibility that internal control will not prevent or detect material misstatements on a timely basis.
4. The auditor determined that a deficiency in internal control exists that will not prevent or detect a material misstatement in the financial statements.
5. 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.
6. 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.
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