Internal Control Considerations in End-User Computing Environments. Because of theuse of personal computers by many businesses, audit teams must know about the potentialinternal control weaknesses inherent in such an environment. This knowledge is crucial ifaudit teams are to make a proper assessment of the related control risk and to plan an effective and efficient audit approach.Required:In the following case study, assume that you are participating in the audit of Chicago Appliance Company and that the background information was obtained during the planning phaseof the engagement. You have been asked to (a) consider the potential internal control weaknesses that exist in this end-user application and (b) assess how those internal control weaknesses could alter the audit plan for the current year.Background InformationChicago Appliance is a wholesale distributor of electric appliances. Its sales in each of thelast two years have been approximately $40 million. All accounting applications are handledat Chicago’s corporate office.Automated processing operations have historically centered on an onsite mainframe computer.The computer applications include accounts payable and cash disbursements, payroll, inventory,and general ledger. Accounts receivable and fixed asset records have been prepared manually inthe past. Internal controls in all areas have been considered strong in the last few years.During the past year, financial management decided to automate the processing of sales,accounts receivable, and fixed asset transactions and accounting. Management also concluded that purchasing personal computers (PCs) and related available software was morecost effective than increasing the mainframe computer capacity and hiring a second computer operator. The controller and accounting clerks have been encouraged to find additionaluses for the PCs and to “experiment” with them when they are not too busy.The accounts receivable clerk is enthusiastic about the PCs, but the fixed-asset clerkseems somewhat apprehensive about them because he has limited prior experience withcomputers. The accounts receivable clerk explained that the controller had purchased a “veryeasy-to-use” accounts receivable software application program for the PC, which enables herto input the daily information regarding billings and receipts quickly and easily. The controller has added some personally developed programs to the software to give it better reportwriting features.During a recent demonstration, the accounts receivable clerk explained that the programrequired her to input only the customer’s name and invoice amount in the case of billingsor the customer’s name and check amount in the case of receipts. The computer then automatically updates the respective customer’s account balance. At the end of every month, theclerk prints and reconciles the accounts receivable trial balance to the general ledger balanceand the controller reviews the reconciliation.The fixed asset program also was purchased from an outside vendor. The controller indicated that the software package had just recently been put on the market and that it was programmed to compute tax depreciation based on recent changes in the federal tax laws. Thecontroller also stated that, because of the fixed asset clerk’s reluctance to use the computer,information from the manual fixed asset records had been input. The controller indicated,however, that the fixed asset clerk would be responsible for the future processing related tothe fixed asset files and for generating the month-end and year-end reports used to preparethe related accounting entries.All the various accounts receivable and fixed asset files are adequately labeled as to thetype of program or data file. They are arranged in an organized manner near the PC.
Internal Control Considerations in End-User Computing Environments. Because of the
use of personal computers by many businesses, audit teams must know about the potential
internal control weaknesses inherent in such an environment. This knowledge is crucial if
audit teams are to make a proper assessment of the related control risk and to plan an effective and efficient audit approach.
Required:
In the following case study, assume that you are participating in the audit of Chicago Appliance Company and that the background information was obtained during the planning phase
of the engagement. You have been asked to (a) consider the potential internal control weaknesses that exist in this end-user application and (b) assess how those internal control weaknesses could alter the audit plan for the current year.
Background Information
Chicago Appliance is a wholesale distributor of electric appliances. Its sales in each of the
last two years have been approximately $40 million. All accounting applications are handled
at Chicago’s corporate office.
Automated processing operations have historically centered on an onsite mainframe computer.
The computer applications include accounts payable and cash disbursements, payroll, inventory,
and general ledger.
the past. Internal controls in all areas have been considered strong in the last few years.
During the past year,
accounts receivable, and fixed asset transactions and accounting. Management also concluded that purchasing personal computers (PCs) and related available software was more
cost effective than increasing the mainframe computer capacity and hiring a second computer operator. The controller and accounting clerks have been encouraged to find additional
uses for the PCs and to “experiment” with them when they are not too busy.
The accounts receivable clerk is enthusiastic about the PCs, but the fixed-asset clerk
seems somewhat apprehensive about them because he has limited prior experience with
computers. The accounts receivable clerk explained that the controller had purchased a “very
easy-to-use” accounts receivable software application program for the PC, which enables her
to input the daily information regarding billings and receipts quickly and easily. The controller has added some personally developed programs to the software to give it better reportwriting features.
During a recent demonstration, the accounts receivable clerk explained that the program
required her to input only the customer’s name and invoice amount in the case of billings
or the customer’s name and check amount in the case of receipts. The computer then automatically updates the respective customer’s account balance. At the end of every month, the
clerk prints and reconciles the accounts receivable
and the controller reviews the reconciliation.
The fixed asset program also was purchased from an outside vendor. The controller indicated that the software package had just recently been put on the market and that it was programmed to compute tax
controller also stated that, because of the fixed asset clerk’s reluctance to use the computer,
information from the manual fixed asset records had been input. The controller indicated,
however, that the fixed asset clerk would be responsible for the future processing related to
the fixed asset files and for generating the month-end and year-end reports used to prepare
the related accounting entries.
All the various accounts receivable and fixed asset files are adequately labeled as to the
type of program or data file. They are arranged in an organized manner near the PC.
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