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Individual Work Week 2

Problem 3-50: Brown Company provides office support services for more than 100 small
clients. These services include supplying temporary personnel, providing monthly
bookkeeping services, designing and printing small brochures, copying and reproduction
services, and preparing tax reports. Some clients pay for these services on a cash basis,
some use 30 day charge accounts, and others operate on a contractual basis with quarterly
payments. Browns new office manager was concerned about the effectiveness of control
procedures over sales and cash flow. At the managers request, the process was reviewed by
conducting a walkthrough. The following facts were identified. Review the identified facts
(listed s A. through L. below) and complete the following:
a. What is a walkthrough, and why would it be useful for assessing controls over sales and
cash flow?
A walkthrough is a process where the management or auditor to follow the transaction from
beginning through the organizations processes until it is reflected in the organizations financial
records to see if the controls are effective and applied. I believe that this is useful for assessing
controls over sales and cash flow because it gives the users such as management and the
company to see a clearer picture of the transactions made, if they find some errors, it can be
changed if needed.
b. List at least eight elements of ineffective internal control at Brown Company.
1. I believe that Brown company has no segregation of duties, where there is a control activity to
protect clients and the company of fraud.
2. I believe that there is no separation of different services that can be offered to the clients.
3. There are no record payments received from bookkeeping services and the revenue is also no
record at the time the service was performed, basically, its all in cash basis and if not paid in
cash, a copy of financial statement is marked as Unpaid.
4. The person processing cash has access to the pending cash file which can be compromise.
5. The Bank reconciliation was handled using deposit slips as original date instead of bank
statements which can lead to errors.
6. There is a problem with handling of deferred payments.
7. Collections of money from contract are not readily available.
8. Different services are handled like bookkeeping services. For example, design and printing as
well as tax work was handled like bookkeeping services.
9. Documents are not supported with journal entries.
c. List at least six elements of effective internal control at Brown Company.
1. The organization communicates with the objective and responsibilities for their type of
services by having accounts excusive write contacts.
2. Client periodic payments on contracts were identified on the contract, and a payment receipt
was placed in the contract file.
3. Clerks reviewed the contract files to determine their status.
4. The cash receipts are being matched with the evidence of the receivable; they are providing
proofs for the cash receipts being deposited.
5. The company selects and develops control activities that contribute to mitigation of risk to
achieve objectives; for example, a design and printing order form was used to accumulate costs
and compute the charge to be made to the client.
6. Monthly comparisons were made of the costs and revenues of printing, design, bookkeeping,
and tax service. The variations between revenues and costs were investigated.

Problem 3-52: Authorization of transactions is considered a key control in most


organizations. Authorizations should not be made by individuals who have incompatible
functions. For each transaction (listed as A. through I below), indicate the individual or
function (e.g., the head of a particular department) that should have the ability to authorize
that transaction. Briefly provide rationale for your answer.
a. Writing off old accounts receivable.
The head of accounting department should have authorization to write off old accounts
receivable; this way, it would lessen errors made by individuals.
b. Committing the organization to acquire another company that is half the size of the
existing company.
I think the function such as management or the head of department should have the ability to
authorize this transaction because committing the organization to get another company is a big
deal and a lot of errors can occur if it is handled by an individual.
c. Paying an employee for overtime.
I believe that the (function) payroll managers should only have the authorization to pay the
employee overtime, so it will limit any errors that can occur. If an individual (pretty much
everyone) has authorization to pay any employee overtime, that individual has the ability to be
comprise such as bribe and they can pin point the mistake to someone else, saying that anyone
can do this job.
d. Shipping goods on account to a new customer.
The individuals should be able to handle this transaction because the head of department can do
everything; this to me is a lower level decision than hiring a new employee. I was a receiver at
one of the a department store like Wal-Mart, our job is to receives products that is coming in and
enter it in the program and the products can be put in the floor to be sold and we have paper
works that we have receive the products. We can also have authorization to ship items to a
customer with information given to us and we evidence to support that the items has been
shipped and we give it to the manager if there is any errors.
e. Purchasing goods from a new vendor.
I believe that the head of the departments should be the only one purchasing goods from the new
vendor because they have more knowledge of what the customers wants and needs plus they
have to discuss these decisions to their boss, if they want the new products.
f. Temporarily investing funds in common stock investments instead of money market
funds.
Even though, it is only temporarily, this is a major decisions that the head of department should
authorize to do so because it can affect the whole company with the decision of investing funds
in common stock instead of money market. The stakeholder as well as other investors and
creditors would ask why an individual is making a decision without other peoples authorization
which can make a bad impression.
g. Purchasing a new line of manufacturing equipment to remodel a production line at one
of the companys major divisions (the purchase represents a major new investment for the
organization).
This is a big decisions, I believe that the head of the department should be the only one to
authorize this transactions because its major money coming in and out as well as this a major
investment that can affect the whole organization.
h. Replacing an older machine at one of the companys major divisions.
I believe that this transaction should be authorize by the head of the department as well because
again, this is a big decision, the head of department needs to analyze the budget first and see if
they can afford another machine, in this case, it would fall to the manager, if there is a bad
judgment call.
i. Rewriting the companys major computer program for processing purchase orders and
accounts payable (the cost of rewriting the program will represent one quarter of the
organization computer development budget for the year). (LO.5)
I think that the head of departments should have authorization to do these transactions because
they need to analyze the cost and the budget for these programs. These decisions should be
present to the head of the purchasing department and then to the technical department for
authorization.

Problem 3-53: For each of the following situations, evaluate the segregation of duties
implemented by the company and indicate the following:
a. Any deficiency in the segregation of duties described. (Indicate None if no
deficiency is present.)
b. The potential financial statement misstatements that might occur because of the
inadequate segregation of duties.
c. Compensating, or other, controls that might be added to mitigate potential
misstatements. (LO.5)
A. The companys payroll is computerized and is handled by one person in charge of
payroll who enters all weekly time reports into the system. The payroll system is password
protected so that only the payroll person can change pay rates or add/delete company
personnel to the payroll file. Payroll checks are prepared weekly, and the payroll person
batches the checks by supervisor or department head for subsequent distribution to
employees.
a. There is a deficiency in the segregation.
b. There could be miscalculations, excess charging and errors in tax withholding.
c. There should be more than one person with access to the records, and internal review
periodically verifying information. Because with just one person doing a lot of work, she
or he can be burnout which can make errors in calculations.
B. A relatively small organization has segregated the duties of cash receipts and cash
disbursements. However, the employee responsible for handling cash receipts also
reconciles the monthly bank account.
a. I do believe that there is a deficiency in segregation of duties since the same person is
handling incoming and outgoing cash receipts as well as reconciling the monthly bank
accounts.
b. There can be a possibility of fraud and theft.
c. Activities should be given to different people instead of just one employee.
C. Nicks is a small family owned restaurant in a northern resort area whose employees are
trusted. When the restaurant is very busy, any of the servers have the ability to operate the
cash register and collect the amounts due from the customer. All orders are tabulated on
tickets. Although each ticket has a place to indicate the server, most do not bother to do
so, nor does management reconcile the tickets numbers and amounts with total cash
receipts for the day.
a. Yes, there is a major discrepancy in segregation of duties because anyone that has
access to cash has the ability to steal the money, even if it is just a small amount plus
there is no reconciliation of the days sales against cash in drawer.
b. There could be major losses in revenue due to lack of record keeping and sales tax can
be misstated for the day due to lack of record keeping.
c. I have worked in a small restaurant before and to avoid shortage of money, only one
person should be assign in one and at the end of their shift, they should count the money
with a new shift coming in; this way, there wouldnt be any pin pointing (when I got here,
it was already short). Also, transactions should be record and the money should be
matched at the end of each shift tickets.
D. A sporting goods store takes customer orders via a toll free phone number. The order
taker sits at a terminal and has complete access to the customers previous credit history
and a list of inventory available for sale. The order clerk has the ability to input all the
customers requests and generate a sales invoices and shipment with no additional
supervisory review or approval.
a. None
b. The lack of supervisor reviews might have potential in creating errors in the financial
statements.
c. I think that reviewing the daily orders again before shipping the products can prevent
errors or have someone else recheck the orders, a new eyes can catch something that the
order taker hasnt seen yet.
E. The purchasing department of Big Dutch is organized around three purchasing agents.
The first is responsible for ordering electrical gear and motors, the second orders
fabrication material, and the third orders nuts and bolts and other smaller supplies that go
into the assembly process. To improve the accountability to vendors, all receiving slips and
vendor invoices are sent directly to the purchasing agent placing the order. This allows the
purchasing agent to better monitor the performance of vendors. When approved by the
purchasing agent for payment, the purchasing agent must forward (a) a copy of the
purchase order, (b) a copy of the receiving slip, and (c) a copy of the vendor invoice to
accounts payable for payment. Accounts payable will not pay an invoice unless all three
items are present and match as to quantities, prices, and so forth. The receiving
department reports to the purchasing department.
a. None. I believe there is no deficiency in the segregation of duties present.
b. If there is a lot of paper works going on, incorrect record keeping from the purchase
department might occur.
c. I think that by reviewing of purchase departments payments on invoices can be added
to lessen potential misstatements.
Reference

Johnstone, K., Gramling, A., & Rittenberg, L. (2014). Auditing: A Risk-Based Approach to

Conducting a Quality Audit. 9th edition. United States: South-Western, Cengage

Learning