You have discussed with the president of Vista Corporation several material weaknesses in internal control that have come to your attention during your audit. At the conclusion of this discussion, the president states that he will personally take steps to remedy these problems and that there is no reason for you to bring these matters to the attention of the board of directors. He explains that he believes the board should deal with major policy decisions and not be burdened with day-to-day management problems. How would you respond to this suggestion?© BrainMass Inc. brainmass.com October 17, 2018, 10:17 am ad1c9bdddf
The president's opinion doesn't really matter in this case with this particular topic. Current auditing standards and the AICPA require that auditors inform the board of directors of material weaknesses in internal control. One of the main problems is that oftentimes, the president and other executives are aware of the material weaknesses before the auditor discovers the weaknesses, and if there is a misstatement, the president or other executives ...
This solution discusses the situation at Vista Corporation. A detailed suggestion regarding the major policy decisions is presented.
Internal Control and Auditing Standards
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.
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.
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.