🏷️ LIMITED TIME OFFER: GET 20% OFF GRADE+ YEARLY SUBSCRIPTION →
Log in
Accounting
1
answer
0
watching
18
views
11 Dec 2019

Test of controls and Error/Frauds. The following four questionsare taken from an internal control questionnaire. For eachquestion, state (a) one test of control procedure you could use tofind out whether the control technique was really functioning and(b) what error or fraud could occur if the question were answeredno or if you found found the control was not effective

Watch
1
answer
0
watching
18
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Unlock all answers

Get 1 free homework help answer.
Get unlimited access
Already have an account? Log in
Share

Related questions

For each of the following independent situations relating to theaudit of ICFR, indicate the reason for and the type of audit reportyou would issue.
a. During the audit of Wood Pharmaceuticals, you are surprised tofind several control deficiencies in the entity's internal control.You determine that there is a reasonable possibility that any oneof them could result in a misstatement that is significant.Although the odds are extremely low that the deficiencies, singlyor taken together, will result in a material misstatement of theentity's financial statements, the large number of problems causesyou concern. Management's written assessment concludes that theentity's ICFR was effective as of the report date.
b. You agreed to perform an audit for Rodriguez & Co., afterthe entity's year- end. Due to time constraints, your audit firmcould not complete a full audit of ICFR. However, the evidence youdid collect suggests that the entity has exceptionally strong ICFR.You seriously doubt that a material weakness would have been foundif time had permitted a more thorough audit. Management's writtenassessment concludes that the entity's ICFR was effective as of thereport date.
c. George & Diana Company's internal audit function identifieda material weakness in the entity's ICFR. The entity corrected thisweakness about four months prior to the end of the annual reportingperiod. Management reassessed controls in the area and found themeffective. After reevaluating and retesting the relevant controls,you believe the controls to have been effective for a sufficientperiod of time to provide adequate evidence that they were designedand operating effectively as of the end of the entity's reportingperiod. Management's written assessment concludes that the entity'sinternal control was effective as of the report date.
d. Reynolds Distilleries identified what you agree is a materialweakness and made an adverse assessment in its report on ICFR. Theentity had not corrected the material weakness as of the end of thereporting period.
e. Cindy & David Company's management identified a materialweakness in the entity's ICFR during its assessment process. Theentity corrected this weakness about a month prior to the end ofthe annual reporting period. Management reassessed controls in thearea and believes they were effective as of the end of thereporting period. After reevaluating and retesting the relevantcontrols, you agree that the new controls are well designed, butsince the controls over this particular area are applied only onceat the end of each month (i. e., the controls have only operatedtwo times since being corrected), you do not believe you havesufficient audit evidence to assess their operating effectiveness.Management's written assessment concludes that the entity'sinternal control was effective as of the report date.
f. During the audit of ICFR for Big Al & Larry Industries, youdiscover several control deficiencies. You determine that there ismore than a reasonable possibility that any one of them couldresult in a financial statement misstatement. Although you do notbelieve that any of the deficiencies taken individually will resultin a material misstatement, you believe there is a moderately lowlikelihood that, taken together, the deficiencies could produce amaterial misstatement. Management's written assessment concludesthat the entity's internal control was effective as of the reportdate

45) Internal Control Questionnaire Items: Possible Error or Fraud Due to Weakness. Refer to the internal control questionnaire for the production cycle (Appendix Exhibit 9A.1) and assume that the answer to each question is “no” Prepare a table matching questions to errors of frauds that could occur because of the absence of the control. Your column headings should be as follows:

Occurrence Yes /No Comments

1) Is cost accounting separate from production, payroll, and inventory control?

2) Is access to blank production order forms restricted to authorized persons?

3) Is access to blank bills of materials and labor requisitions restricted to authorized persons?

4) Is access to blank material requisitions forms restricted to authorized persons?

5) Are production orders prepared by authorized persons?

6) Are bills of materials and labor needs prepared by authorized persons?

7) Are material usage reports compared to job time tickets?

8) Are labor usage reports compared to job time tickets?

9) Are material requisitions and job time tickets reviewed by the production supervisor after the floor supervisor prepares them?

10) Are the weekly direct labor and materials used by the production supervisor after preparation by the floor supervisor?

Completeness

1) Are production orders prenumbered and the numerical sequence checked for missing documents?

2) Are bills of materials and labor needs forms prenumbered and the numerical sequence checked for missing documents?
3) Are materials requisitions and job time tickets prenumbered and the numerical sequence checked for missing documents?

4) Are inventory issue forms prenumbered and the numerical sequence checked for missing documents?

5) Is an accounting notified of terms on purchases agreements

6) Is accounting notified of orders received on consignment?

Accuracy

1) Are difference between inventory issue forms and materials used reports recorded and reported to the costs accounting supervisor?

2) Are differences between job time tickets and the labor report recorded and reported to the cost accounting supervisor?

3) Are standard costs used? If so, are they reviewed and revised periodically?

4) Are reports materials issued to production reconciled with finished goods reports?

Cutoff

1) Does the accounting manual give instructions to date entries on the date of use?

2) Does an accounting supervisor review monthly, quarterly, and year-end costs accruals?

Classification

1) Are summary entries reviewed and approved by the cost accounting supervisor

2) Does the accounting manual give instructions for proper classification of cost accounting transactions?

Ira Icandoit is a staff auditor in the internal audit functionof a small manufacturing company located in western Kansas. Irarecently completed a professional development course on astatistical sampling and is very excited about the new knowledge hehas gained. He decided to apply his newly gained knowledge duringthe audit to which he had just been assigned. He used attributesampling when he performed his tests of controls over the company’sprocurement transactions.

Ira figured that a tolerable deviation rate of 10 percent and a5 percent risk of assessing control risk too low were appropriatefor the tests he planned to perform. He had no idea how manydeviations actually might exist in the population, so he set theexpected deviation rate at 2 percent to be conservative. Iraselected a sample of 100 items.

Because Ira believed larger items deserved more attention thansmaller items, he selected 75 items with values greater than orequal to $2,500 and 25 items with values less than$2,500. Hethought it would be the most appropriate to select transactionsnear the end of the fiscal year, so he randomly selected items fortesting from the last two months.

Ira was relieved when he found only six deviations fromprescribed controls. One deviation was a missing vendor’s invoice,so Ira called the vendor to make sure the transaction was in factvalid. Three deviations were missing signatures by an authorizedmanager. The manager explained that he had not approved theinvoices because he had been out of the office on the date theinvoices were prepared. H reviewed the invoices and told Ira therewere no problems with them. The other two deviations involveddollar errors. One was an error in the extension of an invoice, andthe other was a misclassification error between expenses, which didnot affect net income. Ira considered these two dollar errors to bethe only two actual control deviations. He determined that theachieved upper deviation limit was 7 percent at a 5 percent risk ofassessing control risk too low.

Based on these results, Ira concluded that procurementtransactions for the year were unlikely to contain more deviationsthan the allowable rate. Accordingly, he concluded that controlsover procurement transactions were effective and could be relied onmanagement.

Identify and explain any deficiencies you note in Ira’sattribute sampling application.

Weekly leaderboard

Home
Homework Help 3,900,000
Accounting 580,000
Start filling in the gaps now
Log in