Identifying Internal Control Weaknesses

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Identifying Internal Control Weaknesses

1. 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 CPA’s of documenting internal control by using:

  • An internal control questionnaire
  • A written narrative.
  • A flow chart

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 CPA’s to conduct tests of controls? Explain.

2. Randall, Inc. is a private company that manufactures heavy machinery. The company has an active audit committee and board of directors.The audit committee consist of two outside directors and Howard Kress, the company chief 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 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. Organize your answer as follows:

Weakness Recommended improvement

3. Auditors should be familiar with the terminology employed in IT processing. The following statements contain some of the terminology so employed. Indicate whether each statement is true or false.

  • A recent improvement in computer hardware is the ability to automatically produce error listing. Previously, this was possible only when provisions for such report were included in the program.
  • The control by an independent data control group.
  • An internal-audit computer program that continuously monitors IT processing is a feasible approach for improving internal control in OLRT system.
  • An internal label is one of the control built into magnetic tape drive hardware by the hardware manufactures.
  • A limit test in a computer program id comparable to a decision that an individual makes in a manual system to judge a transaction’s reasonables.
  • A principal advantage of using magnetic tape files is that data need not be recorded sequentially.
  • A major advantage of disk files is the liability to gain random access to data on the disk
  • The term grandfather-father-son refers to a method of protecting computer records rather than to generations in the evolution of computer hardware.
  • When they are not in use, tape and disk files should be stored apart from the computer room under the control of a librarian.

4. Lee Wong, CPA, is auditing the financial statements of the Alexandria Corporation, Which has a batch- processing IT –based system for shipping and invoicing that purchased from a software vendor.The following comments have been extracted from Wong’s notes on IT operations and the processing and control of shipping notices and costumer services.

Each type of computer run is assigned to a specific employed who is responsible for making program changes, running the program, and answering question. This procedure has the advantage of eliminating the need for records of IT operations because each employee is responsible for his or her own computers run. At least one IT department employee remains in the computer during office hours, and only IT department employees have keys to the computer room.

System documentation consists of those materials furnished by the software vendor- a set of record formats and program listing. These and the tape library are kept in a corner of the IT department.

The corporation considered the desirability of program controls, but decided to retain the manual controls in place prior to the conversation to the software vendors system.

Company products are shipped directly from public warehouse, which forward shipping notices to general accounting.There a billing clerk enters the price of the item and accounts for the numerical sequence of shipping notices from each warehouse. The billing clerk also prepares control tapes of the units shipped and the unit price.

Shipping notices and control tapes are forwarded to the IT department form in putting and processing. Extensions are made on the computer. Output consist of invoices (in six copies) and a daily sales register. The daily sales register shows the aggregate totals of units shipped and unit prices, which the computer operator compares to the controls tapes.

All copies of the invoices are returned to the billing clerk. The clerk mails three copies to the costumers, forward one copy to the warehouse, maintains one copy in a numerical file, and retains one copy in an open invoice file that serve as detailed accounts recievable record.

Described weakness in internal control over information and data flows and the procedure for processing shipping notices and costumer invoices and recommend improvements in these controls and processing procedures.Organize your answer sheet as follows.

Weakness Recommend Improvement