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Evaluating Design and Effectiveness of Internal Controls

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Standard 5 of the Public Company Accounting Oversight Board (PCAOB) requires management to certify the internal controls over financial reporting. The accounting audit team must audit the internal controls to provide assurance to the design and effectiveness of internal controls.

The following information represents factors that were discovered in the investigation of internal controls by the audit team regarding cash. A Y indicates that yes, it was effective, yes it provides internal control, and yes, it is designed correctly. An N indicates that no, it was not effective, no it does not provide internal control, and no, it was not designed correctly.

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In this solution, I help to explain why the controls are strengths or weaknesses based on proper design. I also give the student detailed explanations as to the internal control structure, including why controls that are designed poorly are ineffective and specific information on the redesign process for internal controls.

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There are sixteen internal control areas listed, and out of those sixteen, three areas have weaknesses, which are daily cash control, a restrictive list of who can sign manual checks, and the interdependence of the person in charge of the bank reconciliation/control check. The most significant factor is the internal control weakness identified with daily cash control because it is where any business, including this company, could lose the most ...

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