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Medco Hospital Buyers Group (MHBG)

Medco Hospital Buyers Group (MHBG) processes a significant number
of intercompany transactions each month, mainly transferring cash between business
units to meet the needs of operating cash flows.None of MHBG's intercompany
transactions are material on an individual basis. The intercompany transactions only
affect balance sheet accounts.

Company policy calls for intercompany accounts to be reconciled each month
and for the balances between business units to be confirmed; however, the policy is
not followed. The reconciliations are not performed regularly, and when they are performed,
not in a timely manner.

Management reviews the financial reports of the various business units and follows
up on any large amounts in the intercompany accounts. Management also
reviews the operating expenses of each of the business units each month, using variances
as an indicator of reasonableness. Management consistently investigates any
large intercompany account balances and unusual or large variances that are identified
in this monthly review. (Adapted from AS 2, D1, Scenario A)

Do you believe the lack of monthly intercompany account reconciliation and
confirmation at MHBG is an ICFR deficiency? If you think it is, is it a significant deficiency
or a material weakness, and why?

Solution Preview

The lack of monthly account reconciliation and confirmation at the company is definitely an ICFR deficiency, and has created an ineffective control environment, leading to a high risk area. It is also a significant weakness due to the circumstances. None of the intercompany transactions are material on an individual basis, which ...

Solution Summary

Medco Hospital Buyers Group (MHBG) processes a significant number
of intercompany transactions each month, mainly transferring cash between business
units to meet the needs of operating cash flows.None of MHBG's intercompany
transactions are material on an individual basis. The intercompany transactions only
affect balance sheet accounts.

Company policy calls for intercompany accounts to be reconciled each month
and for the balances between business units to be confirmed; however, the policy is
not followed. The reconciliations are not performed regularly, and when they are performed,
not in a timely manner.

Management reviews the financial reports of the various business units and follows
up on any large amounts in the intercompany accounts. Management also
reviews the operating expenses of each of the business units each month, using variances
as an indicator of reasonableness. Management consistently investigates any
large intercompany account balances and unusual or large variances that are identified
in this monthly review. (Adapted from AS 2, D1, Scenario A)

Do you believe the lack of monthly intercompany account reconciliation and
confirmation at MHBG is an ICFR deficiency? If you think it is, is it a significant deficiency
or a material weakness, and why?

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