Вы находитесь на странице: 1из 5

Individual Work Week 2

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. Brown’s new office manager was concerned about the effectiveness of control procedures over sales and cash flow. At the manager’s 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 organization’s processes until it is reflected in the organization’s 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, it’s 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.


Documents are not supported with journal entries.


List at least six elements of effective internal control at Brown Company.


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 3-52: Authorization of transactions is considered a key control in most organizations. Authorizations should not be made by individuals who have incompatible functions. For each transaction (listed as A. through I below), indicate the individual or

function (e.g., the head of a particular department) that should have the ability to authorize that transaction. Briefly provide rationale for your answer.

a. Writing off old accounts receivable.

The head of accounting department should have authorization to write off old accounts receivable; this way, it would lessen errors made by individuals.

b. Committing the organization to acquire another company that is half the size of the

existing company.

I think the function such as management or the head of department should have the ability to

authorize this transaction because committing the organization to get another company is a big deal and a lot of errors can occur if it is handled by an individual.

c. Paying an employee for overtime.

I believe that the (function) payroll managers should only have the authorization to pay the

employee overtime, so it will limit any errors that can occur. If an individual (pretty much everyone) has authorization to pay any employee overtime, that individual has the ability to be comprise such as bribe and they can pin point the mistake to someone else, saying that anyone can do this job.

d. Shipping goods on account to a new customer.

The individuals should be able to handle this transaction because the head of department can do everything; this to me is a lower level decision than hiring a new employee. I was a receiver at

one of the a department store like Wal-Mart, our job is to receives products that is coming in and enter it in the program and the products can be put in the floor to be sold and we have paper works that we have receive the products. We can also have authorization to ship items to a customer with information given to us and we evidence to support that the items has been shipped and we give it to the manager if there is any errors.

e. Purchasing goods from a new vendor.

I believe that the head of the departments should be the only one purchasing goods from the new vendor because they have more knowledge of what the customers wants and needs plus they

have to discuss these decisions to their boss, if they want the new products.

f. Temporarily investing funds in common stock investments instead of money market


Even though, it is only temporarily, this is a major decisions that the head of department should authorize to do so because it can affect the whole company with the decision of investing funds in common stock instead of money market. The stakeholder as well as other investors and creditors would ask why an individual is making a decision without other people’s authorization which can make a bad impression.

g. Purchasing a new line of manufacturing equipment to remodel a production line at one

of the company’s major divisions (the purchase represents a major new investment for the organization).

This is a big decisions, I believe that the head of the department should be the only one to

authorize this transactions because it’s major money coming in and out as well as this a major investment that can affect the whole organization.

h. Replacing an older machine at one of the company’s major divisions.

I believe that this transaction should be authorize by the head of the department as well because

again, this is a big decision, the head of department needs to analyze the budget first and see if they can afford another machine, in this case, it would fall to the manager, if there is a bad judgment call. i. Rewriting the company’s major computer program for processing purchase orders and

accounts payable (the cost of rewriting the program will represent one quarter of the organization computer development budget for the year). (LO.5)

I think that the head of departments should have authorization to do these transactions because they need to analyze the cost and the budget for these programs. These decisions should be present to the head of the purchasing department and then to the technical department for authorization.

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 company’s 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


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


b. There can be a possibility of fraud and theft.

c. Activities should be given to different people instead of just one employee.

C. Nick’s 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 day’s 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 wouldn’t 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 customer’s previous credit history and a list of inventory available for sale. The order clerk has the ability to input all the customer’s 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


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 hasn’t 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 department’s payments on invoices can be added to lessen potential misstatements.


Johnstone, K., Gramling, A., & Rittenberg, L. (2014). Auditing: A Risk-Based Approach to

Conducting a Quality Audit. 9th edition. United States: South-Western, Cengage