ACCT 444 Week 4 Homework Solution
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.
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
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.
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 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.
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.
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.
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.