Professional Documents
Culture Documents
Problem 3-50: Brown Company provides office support services for more than 100 small
clients. These services include supplying temporary personnel, providing monthly
bookkeeping services, designing and printing small brochures, copying and reproduction
services, and preparing tax reports. Some clients pay for these services on a cash basis,
some use 30 day charge accounts, and others operate on a contractual basis with quarterly
payments. Browns new office manager was concerned about the effectiveness of control
procedures over sales and cash flow. At the managers request, the process was reviewed by
conducting a walkthrough. The following facts were identified. Review the identified facts
(listed s A. through L. below) and complete the following:
a. What is a walkthrough, and why would it be useful for assessing controls over sales and
cash flow?
A walkthrough is a process where the management or auditor to follow the transaction from
beginning through the organizations processes until it is reflected in the organizations financial
records to see if the controls are effective and applied. I believe that this is useful for assessing
controls over sales and cash flow because it gives the users such as management and the
company to see a clearer picture of the transactions made, if they find some errors, it can be
changed if needed.
b. List at least eight elements of ineffective internal control at Brown Company.
1. I believe that Brown company has no segregation of duties, where there is a control activity to
protect clients and the company of fraud.
2. I believe that there is no separation of different services that can be offered to the clients.
3. There are no record payments received from bookkeeping services and the revenue is also no
record at the time the service was performed, basically, its all in cash basis and if not paid in
cash, a copy of financial statement is marked as Unpaid.
4. The person processing cash has access to the pending cash file which can be compromise.
5. The Bank reconciliation was handled using deposit slips as original date instead of bank
statements which can lead to errors.
6. There is a problem with handling of deferred payments.
7. Collections of money from contract are not readily available.
8. Different services are handled like bookkeeping services. For example, design and printing as
well as tax work was handled like bookkeeping services.
9. Documents are not supported with journal entries.
c. List at least six elements of effective internal control at Brown Company.
1. The organization communicates with the objective and responsibilities for their type of
services by having accounts excusive write contacts.
2. Client periodic payments on contracts were identified on the contract, and a payment receipt
was placed in the contract file.
3. Clerks reviewed the contract files to determine their status.
4. The cash receipts are being matched with the evidence of the receivable; they are providing
proofs for the cash receipts being deposited.
5. The company selects and develops control activities that contribute to mitigation of risk to
achieve objectives; for example, a design and printing order form was used to accumulate costs
and compute the charge to be made to the client.
6. Monthly comparisons were made of the costs and revenues of printing, design, bookkeeping,
and tax service. The variations between revenues and costs were investigated.
Problem 3-53: For each of the following situations, evaluate the segregation of duties
implemented by the company and indicate the following:
a. Any deficiency in the segregation of duties described. (Indicate None if no
deficiency is present.)
b. The potential financial statement misstatements that might occur because of the
inadequate segregation of duties.
c. Compensating, or other, controls that might be added to mitigate potential
misstatements. (LO.5)
A. The companys payroll is computerized and is handled by one person in charge of
payroll who enters all weekly time reports into the system. The payroll system is password
protected so that only the payroll person can change pay rates or add/delete company
personnel to the payroll file. Payroll checks are prepared weekly, and the payroll person
batches the checks by supervisor or department head for subsequent distribution to
employees.
a. There is a deficiency in the segregation.
b. There could be miscalculations, excess charging and errors in tax withholding.
c. There should be more than one person with access to the records, and internal review
periodically verifying information. Because with just one person doing a lot of work, she
or he can be burnout which can make errors in calculations.
B. A relatively small organization has segregated the duties of cash receipts and cash
disbursements. However, the employee responsible for handling cash receipts also
reconciles the monthly bank account.
a. I do believe that there is a deficiency in segregation of duties since the same person is
handling incoming and outgoing cash receipts as well as reconciling the monthly bank
accounts.
b. There can be a possibility of fraud and theft.
c. Activities should be given to different people instead of just one employee.
C. Nicks is a small family owned restaurant in a northern resort area whose employees are
trusted. When the restaurant is very busy, any of the servers have the ability to operate the
cash register and collect the amounts due from the customer. All orders are tabulated on
tickets. Although each ticket has a place to indicate the server, most do not bother to do
so, nor does management reconcile the tickets numbers and amounts with total cash
receipts for the day.
a. Yes, there is a major discrepancy in segregation of duties because anyone that has
access to cash has the ability to steal the money, even if it is just a small amount plus
there is no reconciliation of the days sales against cash in drawer.
b. There could be major losses in revenue due to lack of record keeping and sales tax can
be misstated for the day due to lack of record keeping.
c. I have worked in a small restaurant before and to avoid shortage of money, only one
person should be assign in one and at the end of their shift, they should count the money
with a new shift coming in; this way, there wouldnt be any pin pointing (when I got here,
it was already short). Also, transactions should be record and the money should be
matched at the end of each shift tickets.
D. A sporting goods store takes customer orders via a toll free phone number. The order
taker sits at a terminal and has complete access to the customers previous credit history
and a list of inventory available for sale. The order clerk has the ability to input all the
customers requests and generate a sales invoices and shipment with no additional
supervisory review or approval.
a. None
b. The lack of supervisor reviews might have potential in creating errors in the financial
statements.
c. I think that reviewing the daily orders again before shipping the products can prevent
errors or have someone else recheck the orders, a new eyes can catch something that the
order taker hasnt seen yet.
E. The purchasing department of Big Dutch is organized around three purchasing agents.
The first is responsible for ordering electrical gear and motors, the second orders
fabrication material, and the third orders nuts and bolts and other smaller supplies that go
into the assembly process. To improve the accountability to vendors, all receiving slips and
vendor invoices are sent directly to the purchasing agent placing the order. This allows the
purchasing agent to better monitor the performance of vendors. When approved by the
purchasing agent for payment, the purchasing agent must forward (a) a copy of the
purchase order, (b) a copy of the receiving slip, and (c) a copy of the vendor invoice to
accounts payable for payment. Accounts payable will not pay an invoice unless all three
items are present and match as to quantities, prices, and so forth. The receiving
department reports to the purchasing department.
a. None. I believe there is no deficiency in the segregation of duties present.
b. If there is a lot of paper works going on, incorrect record keeping from the purchase
department might occur.
c. I think that by reviewing of purchase departments payments on invoices can be added
to lessen potential misstatements.
Reference
Johnstone, K., Gramling, A., & Rittenberg, L. (2014). Auditing: A Risk-Based Approach to
Learning