Internal Control Case

For each of the following independent cases, state the highest level of deficiency that you believe the circumstances represent—a control deficiency, a significant deficiency, or a material weakness. Explain your decision in each case.

Case 1: The company processes a significant number of routine intercompany transactions. Individual intercompany transactions are not material and primarily relate to balance sheet activity—for example, cash transfers between business units to finance normal operations. A formal management policy requires monthly reconciliation of intercompany accounts and confirmation of balances between business units. However, there is not a process in place to ensure the performance of these procedures. As a result, detailed reconciliations of intercompany accounts are not performed on a timely basis Management does perform monthly procedures to investigate selected large-dollar intercompany account differences. In addition, management prepares a detailed monthly variance analysis of operating expenses to assess their reasonableness.

Case 2: During its assessment of internal control over financial reporting, management identified the following deficiencies. Based on the context in which the deficiencies occur, management and the auditors agree that these deficiencies individually represent significant deficiencies:

• ·         Inadequate segregation of duties over certain information system access controls.
• ·         Several instances of transactions that were not properly recorded in the subsidiary ledgers: the transactions involved were not material, either individual or in the aggregate.
• ·         No timely reconciliation of the account balances affected by the improperly recorded transactions.

Case 3: The company uses a standard sales contract for most transactions, although sales personnel are allowed to modify sales contract terms as necessary to make a pro