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Internal Control, Auditing , identify control weaknesses

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7-28.
Adherence to generally accepted auditing standards requires, among other things, a proper understanding of the existing internal control. The most common approaches to documenting the understanding of internal control include the use of a questionnaire, preparation of a written narrative, preparation of a flowchart, or a combination of these methods.

a. Discuss the advantages to CPAs of documenting internal control by using:
o (1) An internal control questionnaire.
o (2) A written narrative.
o (3) A flowchart.
b. If they are satisfied that no material weaknesses in internal control exist after completing their description of internal control, is it necessary for the CPAs to conduct tests of controls? Explain.

7-33.
Randall, Inc., is a private company that manufactures heavy machinery. The company has an active audit committee and board of directors. The audit committee consists of two outside directors and Howard Kress, the company chief financial officer. The audit committee meets quarterly to provide oversight of financial reporting, including reviewing new accounting policies and unusual transactions. Howard Kress personally reviews and approves any related party transactions. Internal audits of operating units are performed by the internal auditor, who reports directly to Laura Howe, the chief operating officer.

The company has a written code of conduct, and employees agree to adhere to the code when they are hired. The company also has a hotline for confidential reporting of unethical behavior that is staffed by the corporate controller. The audit committee reviews summaries of all incidents and investigations performed.

Identify the weaknesses in Randall's system of corporate governance and provide suggestions for improvement in the system.

9-29.
CPAs may decide to apply nonstatistical or statistical techniques to audit testing.
a. List and explain the advantages of applying statistical sampling techniques to audit testing.
b. List and discuss the decisions involving professional judgment that must be made by the CPAs in applying statistical sampling techniques to tests of controls.
c. You have applied attributes sampling to the client's pricing of the inventory and discovered from your sampling that the sample deviation rate exceeds your tolerable rate. Discuss the courses of action you take.

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Solution Preview

7-28.
a. Discuss the advantages to CPAs of documenting internal control by using:
(1) An internal control questionnaire.

PRO: This is standard and has all the classic questions already present. So, it is a great "starter set" of questions so that you don't have to build it from scratch.

CON: It will have questions that do not apply and will not have industry specific or client specific questions. So, it still requires review to customize. And the answers can be disjointed and so it is hard to get the "full story" from reading a set of short answers.

(2) A written narrative.

PRO: This is nice because the flow tells the story, likely in a sequence of action. The procedural flow is easy to read and makes sense to the client when they review it for accuracy and update it each year.

CON: A narrative does not organize the information according to the major and minor controls. So, the auditor has to shift through the narrative and identify the major and minor controls or missing controls and document them separately.

(3) A flowchart.

PRO: This is easy to read for both the client and the auditor and easy to update. A visual representation is quicker to review than pages of text.

CON: Not everyone can absorb a "map" presentation because it requires abstract thinking and some facility with reading icons which some client personnel may not be strong enough to use. The map may not contain enough details to get the full story, showing instead just the sequence or flow but not who is doing what and under what circumstances.

b. If they are satisfied that no material weaknesses in ...

Solution Summary

Your discussion is 882 words and two references and gives six weaknesses, five recommendation, three pros and four cons for statistical testing and five decisions requiring judgment in statistical sampling for controls.

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Similar Posting

Identifying internal control deficiencies

18-36.
Your working papers for an integrated audit being performed under PCAOB Standard No. 5 include the narrative description below of the cash receipts and billing portions of internal control of Slingsdale Building Supplies, Inc. Slingsdale is a single-store retailer that sells a variety of tools, garden supplies, lumber, small appliances, and electrical fixtures to the public, although about half of Slingsdale's sales are to construction contractors on account. Slingsdale employs 12 salaried sales associates, a credit manager, three full-time clerical workers, and several part-time cash register clerks and assistant bookkeepers. The full-time clerical workers perform such tasks as cash receipts, billing, and accounting and are adequately bonded. They are referred to in the narrative as "accounts receivable supervisor," "cashier," and "bookkeeper."

Narrative:
Retail customers pay for merchandise by cash or credit card at cash registers when merchandise is purchased. A contractor may purchase merchandise on account if approved by the credit manager, based only on the manager's familiarity with the contractor's reputation. After credit is approved, the sales associate files a prenumbered charge form with the accounts receivable (AR) supervisor to set up the receivable.
The AR supervisor independently verifies the pricing and other details on the charge form by reference to a management-authorized price list, corrects any errors, prepares the invoice, and supervises a part-time employee who mails the invoice to the contractor. The AR supervisor electronically posts the details of the invoice in the AR subsidiary ledger; simultaneously, the transaction's details are transmitted to the bookkeeper. The AR supervisor also prepares a monthly computer-generated AR subsidiary ledger (without a reconciliation with the AR control account) and a monthly report of overdue accounts.
The cash receipts functions are performed by the cashier, who also supervises the cash register clerks. The cashier opens the mail, compares each check with the enclosed remittance advice, stamps each check "for deposit only," and lists checks for deposit. The cashier then gives the remittance advices to the bookkeeper for recording. The cashier deposits the checks daily, separate from the daily deposit of cash register receipts. The cashier retains the verified deposit slips, to assist in reconciling the monthly bank statements, but forwards to the bookkeeper a copy of the daily cash register summary. The cashier does not have access to the journals or ledgers.
The bookkeeper receives the details of transactions from the AR supervisor and the cashier for journalizing and posting to the general ledger. After recording the remittance advices received from the cashier, the bookkeeper electronically transmits the remittance information to the AR supervisor for subsidiary ledger updating. The bookkeeper sends monthly statements to contractors with unpaid balances upon receipt of the monthly report of overdue balances from the AR supervisor. The bookkeeper authorizes the AR supervisor to write off accounts as uncollectible when six months have passed since the initial overdue notice was sent. At this time, the credit manager is notified by the bookkeeper not to grant additional credit to that contractor.

Required:
a. Based only on the information in the narrative, describe the internal control deficiencies in Slingsdale's internal control over the cash receipts and billing functions. Organize the weaknesses by employee job function: Credit manager, AR supervisor, Cashier, and Bookkeeper.
b. Assume that you have performed your audit of internal control in conformity with PCAOB standards. Based on your results for part (a), you believe that several of the deficiencies represent material weaknesses. What effect will this have on your report on Slingsdale's inter.al control? Which types of opinions may be appropriate?
c. What communication responsibilities do you have for any weaknesses that represent significant deficiencies?

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