Question 1

a. Possible Cause b. Recommendation to Correct

Condition
Daily bank deposits do not always
correspond with cash receipts.

Timing difference between when cash
is received and when deposited in the
bank
- Cash is received after the day’s bank
deposit is prepared and sent to the
bank.
- Bank credits bank deposits received
after a certain hour on the next day.
Cash receipts are being stolen
Make two deposits for each day’s receipts.
An employee who does not handle cash
receipts daily reconciles each day’s cash
receipts per book with deposits per bank
List cash received each day; compare it to
daily cash deposits.
Have 2 people involved in cash receipts if
practical. If only one can be involved,
video tape the receipts process.

Have an employee who does not handle

receipts do all reconciliations.

Bad debt write-offs are prepared

and approved by the same
employee.
Require all bad debt write-offs to be
Collusion between customers and the approved by a second employee.
employee writing off the bad debts.

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Occasional discrepancies between
physical inventory counts and
perpetual inventory records.
Unauthorized access to physical
inventory and/or inventory records.
Inventory theft by employees
Alterations to physical inventory
counts and perpetual inventory
records
Unauthorized access to inventory
records.
Limit physical and logical access to the
inventory records to authorized employees.
Require that all adjustments to inventory
records be approved by a responsible
official.
Count all inventory when received at the
warehouse and at the storeroom; reconcile
the counts.
Count inventory to be shipped before it is
removed from the storeroom, when received
by shipping, and when shipped; reconcile
counts.
Bar codes and RFID tags to facilitate counts
Hold storeroom employees responsible for
all inventory losses.
Limit physical and logical access to the
inventory records to authorized employees.
Require that all adjustments to inventory
records be approved by a responsible
official.
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 Fraud Examine physical inventory counts and
perpetual inventory records for evidence of
fraud

Terminate any employees that commit fraud

Question 2
Answer:
1) control activities
2) monitoring
3) control environment
4) risk assessment
5) information and communication
Question 3
Answer:
1. Internal environment – tone of an organization (tone at the top President, CEO)

2. Objective setting – set objectives, chose objectives support and align with entity’s
mission (follows a top-down model for planning)

3. Event identification – identify internal and external events, which affecting achievement
of objectives (The firm does not use data encryption (加密) in the wireless network);
opportunities are channeled back to management’s strategy or objective-setting
processes

4. Risk response – avoid, accept, reduce, share risk (accept the risk of stock price
decreases); align risks with entity’s risk tolerance and risk appetite

5. Control activities – policies and procedures established and implemented (hold key
employees responsible); risk response effectively carried out

6. Information and communication – relevant information identified, effective

communication occurs (quarterly staff lunches)

7. Monitoring – through ongoing management activities, separate evaluations (feedback on

ERM by external consultant)

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Question 4

Answer
1) Up-to-date credit records must be maintained to control this problem. During the
credit approval process, the credit manager should review the accounts receivable aging
schedule to identify customer’s with past-due balances to prevent additional sales to those
customers. Alternatively, the computer system could be programmed to determine if the
customer had any past due balances over a specified length of time (such as 60 days). If
not, the sale would be approved. If they had a past-due balance, a notice could be sent
to the credit manager who could review the sale and make a decision about extending
additional credit.

2) The problem usually occurs because the same individual writes off accounts and
processes cash payments. Therefore, the best control procedure to prevent this problem is
to separate the function of authorizing write-offs of uncollectible accounts from the
function of handling collections on account.

3) The system should be configured to match shipping information to sales orders and
alert the shipping employees of any discrepancies.

4) In order to cover up this theft, the mailroom clerk has to be able

to alter the accounts receivable records. Otherwise, a customer who
is subsequently notified that they are past due will complain and
provide proof that they sent in payment. Therefore, the critical
control is to segregate duties so that whoever opens the mail does
not have the ability to maintain customer accounts.

If accounts receivable updates the records based on a cash receipts pre-list instead of the
actual checks, the mailroom clerk could conceivably lap payments. To prevent this, the
cash receipts pre-list could be compared to the checks before the list is sent to accounts
receivable. The checks should not be sent to accounts receivable as the accounts
receivable clerk could perform the lapping.

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5) Data: Regular backups with copies being stored off-site.
Hardware and software: Hot or cold site arrangements for both
Recovery: Disaster recovery plan developed, tested, and in place