Assignment #3

docx

School

University of Ontario Institute of Technology *

*We aren’t endorsed by this school

Course

3170

Subject

Accounting

Date

Jan 9, 2024

Type

docx

Pages

Uploaded by johnolarewaju77

Assignment #3 Introduction to material weaknesses & deficiencies According to PCAOB, material weaknesses are defined as “a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.” (Campbell, 2021). That means a material misstatement within a company is unlikely to be detected & prevented, which causes a deficiency & material weakness within the company. And any material weaknesses which were found are to be reported to the SEC (US securities & exchange commission). This would downgrade the reputation of the company & increase costs & expenses if material weaknesses were found. More disadvantages of having a material misstatement as a company are: - Stock price reduction due to investors’ lack of confidence in the company’s financial statements. - Increased legal fees costs which reduces the net income of the company. - The chances of the company getting loans would be limited because financial statements are unreliable & risky to rely upon. - External auditors’ fees would be increased to cover procedures or testing that need to be done to fix the material weakness issues. (Campbell, 2021) - Effective strategies to prevent & detect weaknesses. 1. Establishing robust monitoring controls which involves validating their presence and functionality consistently throughout the year, rather than solely at year-end. Early testing allows management ample time to address and rectify any identified control deficiencies. 2. Continuously reinforcing the company's culture and leadership tone is crucial. Executive leaders should emphasize the importance of internal controls, promptly address deviations from company policies, and set a positive example. Management should articulate the value of a control environment, highlighting its benefits beyond regulatory compliance. 3. Conducting ongoing risk assessments is vital, particularly when significant changes occur in people, processes, or systems. This approach helps identify the need for new controls or processes to address emerging risks. In instances of substantial changes, such as implementing a new ERP system, seeking guidance from a third party experienced in process improvement and internal controls is advisable. 4. Providing comprehensive training for company personnel is essential. Clearly communicate expectations and emphasize the reasoning behind policies, procedures, and controls to all individuals responsible for processes and controls. 5. Ensuring strong communication and buy-in from all key stakeholders is critical. Foster alignment and understanding of internal controls across the entire company, incorporating this into company communications, handbooks, and policies. 6. Establishing an effective internal audit function serves to monitor the company consistently and identify process improvements and strategic opportunities throughout the year. 7. Implementing documented policies is crucial. Develop, implement, and educate employees on formal policies to ensure alignment on "ways of doing business" and employee expectations. 8. Considering a third-party diagnostic offers an independent review of internal controls, effectively optimizing their design and efficiency. This process addresses control deficiencies and provides management with guidance on the most effective and efficient ways to remedy identified control gaps. References Campbell, J. (2021, April 19). CFO’s guide to significant deficiencies and material weaknesses . CFGI. https://www.cfgi.com/blog/industry-insights/cfos-guide-to-significant-deficiencies-and-material- weaknesses/

Part 2: Complete the following textbook problems: 9-27 and 12-37 Problem: 9-27 1) The incorrect price was used on sales invoices for billing shipments to customers because the incorrect price was entered into a computer file. a). Identify types of controls that were absent. The type of control that was absent was “recorded sales are supported by authorized shipping documents & approved customers order”. The sales transaction price wasn’t properly documented as the invoice was incorrectly inputted incorrectly. So, the sales invoice should be authorized & approved since the amount is incorrect. The type of control that was lacking in this situation was preventive controls because there was no system in place to stop the incorrect pricing from occurring. b). identify the objectives that have not been met. Accuracy: Transactions were not recorded correctly due to the incorrect price been entered into the system. c). Suggest a control to correct the deficiency. The proper price amount should be inputted in the system and tracking errors notifications should be put in place to trace any amount of deficiency like inaccuracies in transactions figures. These can be done by using preventive controls (e.g., tracking errors) measures to reduce the amount of deficiency. 2 ). A vendor’s invoice was paid twice for the same shipment. The second payment arose because the vendor sent a duplicate copy of the original two weeks after the payment was due. a). Identify types of controls that were absent. Invoices weren’t correctly billed by the vendor & were paid twice. The type of control that was absent was incorrect billing of transaction documents between the vendor & fresh foods grocery store. The type of controls that was lacking in this situation was detection controls because there wasn’t no system put in place to make fresh foods grocery aware of the duplicated documents. b). identify the objectives that have not been met. The objective that wasn’t met was accuracy because the transaction between the vendor and fresh foods grocery store wasn’t properly accounted for and it would been seen has an error in the books. And when the invoice was paid twice, this can inflate the price amount of the

shipment on the balance sheet statement & this can also increase the amount of cash on the credit side of the journal entry which is wrong. c). Suggest a control to correct the deficiency. The controls that can be made to control the deficiency are proper verification of duplicated documents by precise cross checking of information between fresh foods grocery store & the vendors. In this case, detective controls are necessary to be put in place. 3). Employees in the receiving department stole some sides of beef. When a shipment of meat was received, the receiving department filled out a receiving report and forwarded it to the accounting department for the amount of goods actually received. At that time, two sides of beef were put in an employee’s pickup truck rather than in the storage freezer. a). Identify types of controls that were absent. The type of controls that were absent were preventive controls which was supposed to be put in place to stop fraudulent activity within the organization. b). identify the objectives that have not been met. The objective that has not been met is accuracy of transactions weren’t correctly recorded in the system. c). Suggest a control to correct the deficiency. The control, which is best suited to reduce theft, is by employing detective controls e.g., ensuring that accuracy, completeness & proper validation of the correct amount are properly put in place to reduce the amount of theft within the company. 4. During the physical count of inventory of the retail grocery, one counter wrote down the wrong description of several products and miscounted the quantity. a). Identify types of controls that were absent. The controls that were lacking in this situation were lack of manual control because it shows a little bit of incompetent behavior by the employee. b). identify the objectives that have not been met. The objective that wasn’t met in this situation was accuracy of the information that was recorded as a physical count of inventory of the retail grocery store. c). Suggest a control to correct the deficiency. The control which best suites this situation is having better manual controls & detective controls in which the employee is able to properly input the correct & accurate information and have a system that identify incorrect & irregularities information.

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

5 . A salesperson sold several hundred kilograms of lamb at a price below cost because she did not know that the cost of lamb had increased in the past week. a). Identify types of controls that were absent. Manual controls are absent because of the salesperson incompetence professional behavior to keep up with daily updates of cost of lamb which caused a reduced income in revenue due to increased costs prices of kilograms of lamb. Furthermore, the salesperson was supposed to increase sales prices as costs have increased. b). identify the objectives that have not been met. The objective that wasn’t met is completeness- because the transaction wasn’t included & recorded yet. c). Suggest a control to correct the deficiency. The control that needs to be suggested to control this deficiency is having more automated controls & manual controls to constantly receive information about price changes of the lamb. And constantly updated such prices to increase gross margin. 6 . On the last day of the year, a truckload of beef was set aside for shipment but was not shipped. Because it was still on hand, it was counted as inventory. The shipping document. was dated the last day of the year, so it was also included as a current-year sale.- a). Identify types of controls that were absent. The control that was absent in this situation was manual control- because employees made an error that miscounted inventory that were meant to be shipped. b). identify the objectives that have not been met. The objectives that haven't been met is accuracy- because inventory weren’t properly counted & classified. c). Suggest a control to correct the deficiency. The control that can correct this deficiency is manual control- because it competent individual who does their job of keeping proper accounts of all inventory been shipped and on hand. The inadequacy of miscounted inventory wouldn’t take place due to proper staffing.

Problem 12-37 Items 1 through 8 are selected questions of the type generally found in internal control questionnaires used by auditors to obtain an understanding of internal control in the revenue cycle. In using the questionnaire for a particular client, a “yes” response to a question indicates a possible internal control, whereas a “no” indicates a potential weakness. 1. Are sales invoices independently compared with customers’ orders for prices, quantities, extensions, and footings? -YES a. For each of the Items 1 through 8, state the transaction-related audit objectives being fulfilled if the control is in effect. - The audit objective that would be fulfilled is occurrence because there is a record that exist that shows the transaction that took place with the customers. b. For each control, list a test of control to test its effectiveness. - The key test that should be taken to test it effectiveness are to test access controls, take a sample of invoices & trace back to authorized list, test for potential override of changes to price lists. c. For each of the items above, identify the nature of the potential financial misstatements. - Weak controls over the price lists can lead to misappropriation of assets & potential over/understatement of revenue due to errors or potential fictitious customers. d. For each of the potential misstatements in Part c. list an audit procedure to determine whether a material error exists. - Selecting a sample of sales transactions from the sales journal & review the sample such as the sale & purchases agreements to verify if there was an occurrence of sales. - Obtain & Reviewing bank statements & tracing the dollar amount from the sales & purchase agreement to the bank statement to verify that the sales actually happened. 2. Are sales orders, invoices, and credit memoranda issued and filed in numerical sequence, and are the sequences accounted for periodically? -YES a. For each of the Items 1 through 8, state the transaction-related audit objectives being fulfilled if the control is in effect. - The objective to be fulfilled is occurrence because sales orders are recorded by filing. b. For each control, list a test of control to test its effectiveness. - Using test data & observe rejection of invalid customer numbers when entered by client staff into an online system. - Examine customer purchase order for credit approval. - Examine credit limit except for approval.

- Inspect copies of sales invoices for supporting bill of lading & customers purchases orders. c. For each of the items above, identify the nature of the potential financial misstatements. - Sales may be over or understated due to errors & fraudulent activities. OR could be as a result of inventory not be delivered over subsequent period of time and revenue been recorded when it hasn’t occurred. - There is a possibility of understatement of allowance for doubtful debt or returns. - Overstating accounts receivable could occur. d. For each of the potential misstatements in Part c. list an audit procedure to determine whether a material error exists. - Compare sales invoices, orders, & credits as a percentage of gross sales with previous years (by product line). 3. Are the selling function and cash register functions independent of the cash receipts, shipping, delivery, and billing functions?-YES a. For each of the Items 1 through 8, state the transaction-related audit objectives being fulfilled if the control is in effect. - If the control is in effect the control that would be fulfilled is completeness to be sure that all sales that exist are recorded. b. For each control, list a test of control to test its effectiveness. - Inspecting report of missing shipping documents numbers for evidence of independent follow up. c. For each of the items above, identify the nature of the potential financial misstatements. - Overstatement or understatement of sales & accounts receivable. d. For each of the potential misstatements in Part c. list an audit procedure to determine whether a material error exists. - Using the substantive analytical procedure of comparing sales by month (by product line) overt time. 4. Are all COD, scrap, equipment, and cash sales accounted for in the same manner as charge sales, and is the record-keeping independent of the collection procedure?-YES a. For each of the Items 1 through 8, state the transaction-related audit objectives being fulfilled if the control is in effect. - All existing sales transactions are recorded for completeness. b. For each control, list a test of control to test its effectiveness. - Account for integrity of numerical sequence of shipping documents using block test.

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

c. For each of the items above, identify the nature of the potential financial misstatements. - There Could an indicating of unusual sales arrangements & possibility of an over or understatement of revenue d. For each of the potential misstatements in Part c. list an audit procedure to determine whether a material error exists. - Evaluate the ratio of returns and allowances to sales. 5. Is the collection function independent of, and does it constitute a check on, billing and recording sales? -YES a. For each of the Items 1 through 8, state the transaction-related audit objectives being fulfilled if the control is in effect. - The audit object that needs to be fulfilled is accuracy every collection amount needs to be accuracy measured. b. For each control, list a test of control to test its effectiveness. - Examine evidence that accounts receivable master file is reconciled to the general ledger. - Observe whether monthly statements are sent. c. For each of the items above, identify the nature of the potential financial misstatements. - Account receivable could be understated or overstated. - Overstated or understated allowance for uncollectible accounts & bad debts. d. For each of the potential misstatements in Part c. list an audit procedure to determine whether a material error exists. - Compare number of days that accounts receivable are outstanding with that of previous years. 6. Are customer master files balanced regularly to general ledger control accounts by an employee independent of billing functions? -YES a. For each of the Items 1 through 8, state the transaction-related audit objectives being fulfilled if the control is in effect. - Accuracy because employees would need to record customers information accurately to match amount of goods been sold to a specific customer on the file and other information that has to be accurately inputted into that file.

b. For each control, list a test of control to test its effectiveness. - Observe whether monthly statement are sent or not. - Examine if balances on the master file are balanced correctly to the general ledger. c. For each of the items above, identify the nature of the potential financial misstatements. - There could be irregularities between the information between the ledger and the master file. - The account receivable could be misstated due to inadequate bad debt allowance or overstated sales. d. For each of the potential misstatements in Part c. list an audit procedure to determine whether a material error exists. - Compare each individual customers balances over a stated amount with that of previous years. 7. Are cash receipts entered in the accounts receivable system by persons independent of the mail-opening and receipts-listing functions?-YES a. For each of the Items 1 through 8, state the transaction-related audit objectives being fulfilled if the control is in effect. - The audit object was completeness because All cash received where actually recorded by an individual which is recorded in the cash receipts. b. For each control, list a test of control to test its effectiveness. - Substantive test that like discussion with personnel & observation test control, c. For each of the items above, identify the nature of the potential financial misstatements. - if the process is slow it may indicate that a special sales arrangement in place which could lead to potential overstatement of revenue d. For each of the potential misstatements in Part c. list an audit procedure to determine whether a material error exists. - Evaluate cash receipts if they are collected after year end to cash receipts during the year. 8. Are receipts deposited intact on a timely basis?-YES a. For each of the Items 1 through 8, state the transaction-related audit objectives being fulfilled if the control is in effect. - Occurrence & cutoff because having a receipt shows that a transaction occurred & the date on the receipt shows when the transaction took place.

b. For each control, list a test of control to test its effectiveness. - Comparing dates of the receipts with when orders were shipped & when goods/services was delivered. c. For each of the items above, identify the nature of the potential financial misstatements. - Slow process of special sales like consignment & bill & hold or other sales arrangements could cause a potential overstatement or misstatement of revenue if mistakes were made. d. For each of the potential misstatements in Part c. list an audit procedure to determine whether a material error exists. - An audit procedure that can be used to determine if a material error exists is by evaluating receipts that was given to customers and checking through & inspecting if errors were made. - Review journal & master file for unusual transactions & amounts.

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version