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Problem 10.2 10.3

The document describes 10 situations involving internal controls and asks to identify problems and checks needed. It provides explanations for each situation, identifying issues like combining duties, lack of separation of duties, inadequate inventory checks, and lack of oversight. Suggested checks include separating recording and payment functions, authorizing inventory access, and adding staff for oversight duties.

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Ngan Huynh
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177 views

Problem 10.2 10.3

The document describes 10 situations involving internal controls and asks to identify problems and checks needed. It provides explanations for each situation, identifying issues like combining duties, lack of separation of duties, inadequate inventory checks, and lack of oversight. Suggested checks include separating recording and payment functions, authorizing inventory access, and adding staff for oversight duties.

Uploaded by

Ngan Huynh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Problems 10.

2
Explain how independent performance evaluation procedures are either violated or effectively
applied in each of the following situations. Identify the problem and suggest the check required (or
applied) to prevent the identified problem from occurring.

a. The manager who oversees the corporate fleet vehicles signed off on the purchase of 15 luxury
SUVs to expand the company's fleet of cars. As soon as this was done, he instructed that the payment
be made.
>>> Both (authorization )and (custodial) are violated here by combining the function of signing off on
the purchase and handling payment.
b. At a newly opened local restaurant, waiters work six-hour shifts. There are three six- hour shifts
per day, with each shift overlapping the next. The restaurant currently has two cash registers and these
can be operated by any one of the waiters during a shift without them requiring any form of
identification. The new manager has decided that the cash in the cash register box will be checked once
every 24 hours, i.e., in the mornings before the new shift for the day begins.
>>>Independent performance evaluation procedures are effectively applied in this situations
c, A company's financial clerk does a spot check of the account books and finds that there is a
discrepancy between the balances of the checking account and the bank statement
>>> The function of recording and authorization should be separated ( sign the check and record the
payment)
d, In July of the previous year, the inventory clerk suspects that the warehouse inventory level is not
being reflected accurately. When the year end inventory was reviewed at the end of February of this
year, his suspicions were confirmed.
>>> Custodial function has not been implemented effectively. Inventory needs to be checked on every
month e,There was a spike in credit sales that was not picked up by the credit sales controller. When he
was confronted by his line manager about it, he blamed the accounts receivable department for not
identifying the issue earlier. The accounts receivable department denies that there was a spike in credit
sales as their records do not indicate such a change
>>> It is necessary to compare the data of the two departments with the inventory data provided by the
staff performing the inventory recording function and the staff performing the custodial function.
f,A new employee at a company identifies a discrepancy between the total debits and total credits after
payroll entries were finalized.
>>> Both (recording) and (custodial) are violated here by combining the function of recording and
paying paycheck
g, . A client calls up a store to check the availability of a specific product at the store. The client is
informed by the sales manager that he has checked their inventory system and the stock is available for
the specific product. The customer visits the store, only to find that the product is no longer in stock.
Upon querying the cashier, the client is again informed that the inventory system shows a relatively
large quantity of the product stock being available. However, no one at the store is able to locate this
stock
>>> Authorize access to inventory system for inventory staff in order to control the availability of a
specific product at the store more efficiently.
h, . Over a period of five years, one of the managers in a company realizes that the company does not
seem to be performing as well as it forecasts and budgets for. However, he optimistically goes on
believing that things will turn for the better.
>>> Independent performance evaluation procedures are ineffectively applied in this situations. The
manager did not perform a risk assessment
i, In order to speed up the processing of sales transactions, one person was made responsible both for
the sales journal as well as the accounts receivable master file.
>>> The funcions of recording the sales journal and the accounts receivable master file should be
separated
j, The supervisor at a local hypermarket verifies the accuracy of the cash in the cash register box
assigned to a retail clerk. Every so often an internal auditor verifies if the supervisor actually performed
this check
>>> Independent performance evaluation procedures are effectively applied in this situations
k, The payroll clerk realizes that the time sheets and absence records of a specific department in the
organization were not in line with company policy. The supervisor of this specific department has been
on sick leave for the last three months.
>>> More staff is required to perform this specific departmental oversight function

Problems 10.3

1 i Inherent risk - Susceptibility of accounts or transactions to control


problems in the absence of internal control
2 n General authorization - Given to employees to handle routine
transactions without special approval
3 f Control environment - Company culture that is the foundation for
all other internal control components
4 o Corrective controls - Controls that identify and correct problems
and recover from the resulting errors
5 r Risk appetite - Amount of risk a company is willing to accept to
achieve its goals and objectives
6 m Application controls - Controls that prevent, detect, and correct
transaction errors and fraud in transaction processing programs
7 a Systems integrator - Outside party hired to manage systems
development effort
8 t Utilization - Percentage of time a system is used
9 s Security management - Makes sure systems are secure and
protected from internal and external threats
10 y Strategic master plan - Multiple year plan of projects company must
complete to achieve long-range goals
11 e Specific authorization - Special approval need to be handle a
transaction
12 d Collusion - Cooperation between two or more people to thwart
internal controls
13 k Throughput - Amount of work performed during a given time
period
14 p Systems administrator - Responsible for making sure a system
operates smoothly and efficiently
15 c Residual risk - Risk that remains after management implements
internal controls or some other response to risk
16 h Data control - Ensures source data is approved, monitor work flow
and handles input errors
17 b Likelihood - Probability that a threat will come to pass
18 u Analytical review - Examining relationships between different sets
of data
19 v Exposure - Potential dollar loss if a threat becomes a reality
20 z Systems analysts - Help users determine their information needs
and design systems to meet those needs
21 j Audit trail - Path used to trace a transaction from origin to output or
from output to origin
22 w Audit committee - Outside, independent director responsible for
financial reporting, regulatory compliance and internal control
23 l Digital signature - Electronically signing a document with data that
cannot be forged

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