Dorcas Torralba (Leader)

Realyn Timogtimog (Member)

Reginald Valencia (Member)
Abygeal Villaruel (Member)

Group 9 302A   
 
INTERNAL CONTROL
 
PSA 315 states that the auditor shall obtain an understanding of control activities relevant to the audit,
being those the auditor judges it necessary to understand in order to assess the risks of material
misstatement at the assertion level and design further audit procedures responsive to assessed risks. An
audit does not require an understanding of all the control activities related to each significant class of
transactions, account balance, and disclosure in the financial statements or to every assertion relevant to
them.
Establishment of responsibility
assigning responsibility to specific employees. Control is most effective when only one person is
responsible for a given task
Documentation procedures
should control systems should require that employees promptly forward source documents for accounting
entries to the accounting department. This control measure helps to ensure timely recording of the
transactions.
Performance Reviews
Thee control activities includes reviews and analyses of actual performance versus budgets forecast and
prior period performance relating different sets of data to one another together with the analyses of the
relationships and investigative and corrective actions 
Information processing
A variety of controls are performed to check accuracy, completeness and authorization of transactions.
When computer processing is used in significant accounting applications, internal control procedures can
be classified into general and application controls.
Physical Control
relates to the safeguarding of assets and enhance the accuracy and reliability of the accounting records.
Independent internal verification
Companies should verify records periodically or on a surprise basis, An employee who is independent of
the personnel responsible for the information should make the verification, Discrepancies and exceptions
should be reported to a management level that can take appropriate corrective action
Segregation of duties
Assigning different people, the responsibilities of authorizing transactions, recording transactions and
maintaining custody of assets is intended to reduce the opportunities to allow any person to be in the
position to both penetrate and conceal errors or fraud in the normal course of a person's duties. Examples
of segregation of duties include reporting, reviewing, and approving reconciliations, and approval and
control of documents.
Documentation procedures
Company’s control systems should require that employees promptly forward source documents for
accounting entries to the accounting department. This control measure helps to ensure timely recording of
the transactions.
 
 
For each of the cases described below, identify the principal control activities that would have prevented
or detected the misstatement.

1. The shipping clerk of Duvinski Enterprises was able to remove goods from the company’s
warehouse by fabricating shipping orders and bills of lading.  An accomplice with a
trucking company was able to pick up the goods during normal business hours and
transport them to warehouse space rented by the duo.  The fraud was detected when the
one of the trucking company dispatchers discovered that the truck was being used for
unscheduled runs.  Further investigation by the firm revealed the delivery destination,
whereupon the driver confessed to the thefts.

Statement of the problem

What internal control activities are essential to Duvinski Enterprises to safeguard it’s interest against
employee fraudulent actions.
                Facts and areas of consideration
The shipping clerk of Duvinski Enterprises was able to remove goods from the company’s warehouse by
fabricating shipping orders and bills of lading. The fraud was detected when the one of the trucking
company dispatchers discovered that the truck was being used for unscheduled runs.  Further
investigation by the firm revealed the delivery destination,
               
 Alternative course of actions

Segregation of duties is one of the most important features of an internal control plan. Its fundamental
premise is that an individual or small group of individuals should not be able to initiate, approve,
undertake, and review the same action. These are called incompatible duties when performed by the
same individual. Examples of incompatible duties include situations where the same individual (or small
group of people) is responsible for:

Managing both the operation of and record keeping for the same activity.
Managing custodial activities and record keeping for the same assets.
Authorizing transactions and managing the custody or disposal of the related assets or records.
  

Conclusion and recommendations

The principal control activities involved in the transaction is there must be segregation of duties in
Duvinski Enterprises. In that way, the shipping clerk would have a difficult time if not completely avoided
performing such indecent transactions. This is particularly important in the financial department and on
inventory procedures; in the case of the financial department, the person authorizing payments must be
different from the person preparing them and recording them in the company books. By separating these
duties, the degree of convolution that must take place for a fraud to be committed is much more complex
and this reduces the motivation to engage in such fraudulent activities.
             
 Plan of Action.
Limit the Authorization to execute transactions: This duty belongs to persons with authority and
responsibility to initiate and execute transactions.
Assign people responsible for recording transactions: This duty refers to the accounting systems or record
keeping function, which in most organizations, is accomplished by entering data into a computer system.
 
 

2. In conducting the annual audit for SINOBAK PHARMA, Inc., the auditors noted that several
monthly and year-end adjustments had not been recorded by the company.  Among the
 omissions were depreciation, interest accruals, and employer payroll taxes.

Statement of the problem.

How can SINOBAK PHARMA, Inc properly resolve the issue of omission of major adjustments entries to
their financial statements?
                
Facts and areas of consideration
The auditors noted that several monthly and year-end adjustments had not been recorded by the
company.  Among the omissions was being used for unscheduled runs.  Further investigation by the firm
revealed the delivery destination,
               
 Alternative course of actions
The principal control activities involved in these transactions is the installation of an accounting
information system. 
When data is processed, a variety of internal controls are performed to check the accuracy, completeness
and authorization of transactions. 
Data entered is subject to edit checks or matching to approved control files or totals. Numerical
sequences of transactions are accounted for, and file totals are controlled and reconciled with prior
balances and control accounts. 
Development of new systems and changes to existing ones are controlled, as is access to data, files and
programs.
 
              Conclusion and recommendations
SINOBAK PHARMA must be vigilant in creating internal controls within the company. The company must
not tolerate mistakes that can be avoided if there is a strong control activities put in place.The company
establish order and organization, help achieve the organization’s goals and objectives efficiently and
effectively prevent fraud and theft and reduce errors
 
               Plan of Action
Before financial statements are prepared, additional journal entries, called adjusting entries, are made to
ensure that the company's financial records adhere to the revenue recognition and matching principles. 
Adjusting entries are necessary because a single transaction may affect revenues or expenses so
additional personnel assigned in this post must be well accounted for and must be able to understand the
company’s perspective why it needs adjusting entries.
 
               3. Although the auditors, by drafting the necessary audit adjustments, provide
reasonable assurance as to the fairness of the annual financial statements, MINAHANExploration
and Development Company’s monthly statements frequently contained material errors due to
improper recording of unique and often complex transactions.

                Statement of the problem.

How can the material errors in relation to complex transactions of MINAHANExploration and Development
Company’s monthly statements be lessen significantly?
               
 Facts and areas of consideration
MINAHANExploration and Development Company’s monthly statements frequently contained material
errors due to improper recording of unique and often complex transactions.

                Alternative course of actions

Small accounting errors may not affect the final numbers in financial statements. Or they might cause
major distortions in the overall figures. These types of errors require lots of time and resources to find and
correct them.
As soon as you spot an error, you should correct it to make sure your financial statements are accurate.
The best way to correct errors in accounting is to add a correcting entry. A correcting entry is a journal
entry used to correct a previous mistake.
It’s better to act preventatively and have a system in place to enter each transaction. Errors of omission
tend to crop up when a company uses petty cash to pay for expenses. Keep your receipts and paperwork
and set up a regular time each week to enter the data.
            
                  Conclusion and recommendations
MINAHANExploration and Development Company must assign persons to identify errors of omission that
are hard to discover. One way to find them is to check if your credits equal your debits in your trial
balance. You may have entered a credit for a transaction but no debit. Doing regular bank reconciliations
will also help you double check your books for accuracy.
  
                  Plan of Action
Financial statements are prepared and presented for external users by many entities around the world.
Although such financial statements may appear similar from country to country, there are differences
which have probably been caused by a variety of social, economic and legal circumstances and by
different countries having in mind the needs of different users of financial statements when setting
national requirements.

The principal control activities involved in these transactions is the Documentation procedures and the
installation of an accounting information system. Because errors and fraud are inevitable to those
transaction involving human intervention, most companies often neglect the importance of putting in place
and investing on accounting information systems.
                 
   4.  Unrecorded customer remittances were misappropriated by an accounts receivable
clerk.  The affected accounts were reduced by a combination of fictitious sales returns, inflated
sales discounts, and write-off of the overstated balances to the allowance for doubtful accounts.

                Statement of the problem.

What internal control activities are necessary to prevent employee involvement in fraudulent acts?
               
 Facts and areas of consideration
Unrecorded customer remittances were misappropriated by an accounts receivable clerk. 
Accounts were reduced by a combination of fictitious sales returns, inflated sales discounts, and write-off
of the overstated balances to the allowance for doubtful accounts.
               
 Alternative course of actions
Periodic reviews and reconciliation of existing assets to recorded amounts: This duty refers to making
comparisons at regular intervals and taking action to resolve differences. The company must have a
centralized human resources function. The company has an effective internal audit staff that monitors
controls on a continuous basis.
                 
 Conclusion and recommendations
The company must adhere to rendering strict measures about safeguarding sales and the interest of the
company. It includes the following:
File of all rejected sales transactions. 
Edit checks test transactions prior to processing. 
Rejected transactions should be recorded in a file for evaluation, correction, and resubmission. Edit
checks are applied to the sales transactions to test for completeness, reasonableness, validity, and other
related issues prior to acceptance. 
A report of missing invoices, a printout of all user code numbers and passwords, and a list of all voided
shipping documents are unlikely to be direct outputs of the edit routine.
                
  Plan of Action
Responsibility for the performance of each duty must be fixed. Effective internal control may be obtained
by decentralization of responsibilities and duties. Fixing the responsibility for each performance or duty
makes it easier to trace problems to the person(s) responsible and hold them accountable for their
actions.
To minimize this kind of internal control issues with respect to employee, these are four kinds of functional
responsibilities that should be performed by different work units, or at a minimum, by different persons
within the same unit:
Authorization to execute transactions: This duty belongs to persons with authority and responsibility to
initiate and execute transactions.
Recording transactions: This duty refers to the accounting systems or record keeping function, which in
most organizations, is accomplished by entering data into a computer system.
Custody of assets involved in the transactions: This duty refers to the actual physical possession or
effective physical control/safekeeping of property.
Periodic reviews and reconciliation of existing assets to recorded amounts: This duty refers to making
comparisons at regular intervals and taking action to resolve differences.