12-21
12–28 (continued)
4. Access the client’s electronic inventory master file and list
slow–moving items or parts.
5. Access the client’s electronic inventory master file and list all
reviewed for possible slow–moving or obsolete items.
6. Enter the audit test–count quantities onto the cards. Match
differences. This will indicate whether the client’s year–end
agreement.
7. Use the adjusted electronic inventory master file and
calculations performed by the client.
8. Use the client’s electronic inventory master file and list all
9. Use the costs per unit on the client’s electronic inventory
master file, and extend and total the dollar value of the
12-22
12–29
INTERNAL
CONTROL
a.
TYPE OF
CONTROL
b.
TRANSACTION–RELATED
AUDIT OBJECTIVE
c.
OPPORTUNITY TO
RELY ON PRIOR
YEAR TESTING
1
AC
Recorded payroll transactions
exist for valid employees
Yes
2
AC
Recorded payroll transactions
exist (i.e., are for currently
employed personnel)
Yes
3
AC
Recorded payroll transactions
are classified into the correct
accounts
Yes
4
AC
Recorded payroll transactions
are at the correct amounts
Yes
5
AC
Recorded payroll transactions
are summarized and posted
to the correct general ledger
account at the correct amounts
Yes
6
MC
Recorded payroll transactions
exist; existing payroll
transactions are recorded
No, since
manual control
7
AC
Recorded payroll transactions
exist (i.e., are for time actually
worked)
Yes
8
MC
Recorded payroll transactions
exist (i.e., are for time actually
worked)
No, since
manual control
9
MC
Recorded payroll transactions
are at the correct amounts
No, since
manual control
10
AC
Recorded payroll transactions
exist (i.e., for valid work
performed); recorded payroll
transactions are at the correct
amounts
Yes
12–30 a. The following deficiencies in the Parts for Wheels, Inc., online
sales system may lead to material misstatements:
1. Lack of Sales System Interface. The lack of automatic
interface between the online sales ordering system and the
misstatements for sales.
12-23
12–30 (continued)
that sales may be processed or recorded inaccurately.
2. Lack of Inventory System Interface. The lack of automatic
interface between the online sales ordering system and the
inventory accounting records. With manual processing,
there may be some risk that shipments occurred without
completion of a proper bill of lading, which is required to
or are entered more than once. Furthermore, the manual
process of recording inventory transactions increases the
records.
3. Manual Credit Approval. The process of verifying credit
customers. This may lead to an increased risk of collection
problems from credit card receivables.
4. Premature Recording. Currently, sales are entered into the
shipment has occurred. As a result, sales may be recorded
5. Inadequate Tracking of Returns. If systems for tracking and
estimating online sales returns are inadequate, Parts for
shipping costs.
b. Below are suggested changes that could be made to the existing
the online system:
12-24
12–30 (continued)
1. When the accounting department prints submitted orders
should be recorded.
2. Prenumbered bills of lading should be used. All bills of
3. Accounting should match the bills of lading with the accounting
department’s copy of the sales orders before any entries
recording of transactions.
c. For the deficiencies identified in part a, the auditors would be most
concerned about the following transaction–related and balance–
related audit objectives:
1. Lack of Sales System Interface. Auditors would be
concerned about occurrence, completeness, accuracy, and
accuracy, and cutoff of accounts receivable.
2. Lack of Inventory System Interface. Auditors would be
concerned about occurrence, completeness, accuracy, and
completeness, accuracy, and cutoff of inventory.
with realizable value of credit card receivables.
4. Premature recognition. Auditors would be most concerned
receivable.
5. Inadequate Tracking of Returns. The auditor would be
concerned about completeness of sales returns
(occurrence of sales) and shipping costs.
d. Auditors could use generalized audit software in several ways.
First, they could use audit software to match orders made through
the online sales order system to sales recorded manually by
12-25
12–30 (continued)
Audit software could also be used to compare updates to
the inventory system with the sales recorded to ensure all sales
12–31 a. When an organization outsources its information technology functions
to a third party, there are several inherent risks that arise. For First
Community Bank, management is totally reliant on Technology
Solutions’ internal controls designed to protect IT hardware,
Because First Community must transmit transaction related
data between the bank and the Technology Solutions data center,
there is a risk that data may be lost, corrupted, or stolen during the
communication transfer process. Also, like First Community,
b. As noted in the answer to part a., the outsourcing of the IT function
to Technology Solutions means that most of the IT general controls
are now under the direct supervision of management at Technology
c. The use of Technology Solutions is likely to have a significant
effect on the audit of the financial statements of First Community
Bank. Because the bank has outsourced all of the bank’s financial
reporting applications to Technology Solutions, most of the IT–
related controls and underlying applications and data files now
12-26
Copyright © 2017 Pearson Education, Inc.
12–32 a. 1. Automated control embedded in computer software
2. Manual control whose effectiveness is based significantly
on IT–generated information
3. Automated control embedded in computer software
4. Manual control whose effectiveness is based significantly
auditor determines that no changes have been made to the
automated control, the auditor can rely on prior year audit
tests of the controls as long as the control is tested at least
once every third year audit. If the control mitigates a
year’s audit.
2. The extent of testing of this control could be moderately
reduced in subsequent years if effective controls over
program and master file changes are in place. Such controls
would increase the likelihood that the printout of prices
changed without authorization. However, because this
control is also dependent on manager review of computer
subject to an unauthorized change.
12-27
12–32 (continued)
identifies purchases exceeding $10,000 per vendor functions
accurately. However, because this control is also dependent
5. Because this control is not dependent on technology
12–33 Note: The PCAOB reorganized their auditing standards effective
December 31, 2016. Auditing Standard No. 5 is identified in the
reorganized standards as AS 2201.
a. Paragraph .01 of AS 2201 notes that the integrated audit standard
over financial reporting.
b. According to paragraph .07 of the standard, the auditor’s objective
in an audit of internal control over financial reporting is to express
an opinion on the effectiveness of internal controls over financial
to support the assessment of control risk that is relevant to the
financial statement audit.
c. As discussed in paragraphs .10 through .12 of AS 2201, risk
assessment related to the audit of internal control over financial
performed.
12-28
12–33 (continued)
level controls and then work their way down to significant
accounts and then relevant assertions and audit objectives. Both
quantitative and qualitative factors are important in identifying
significant accounts and relevant assertions.
implied.
12–34 1. Students should have located the Form 10–K for Bob Evans
Farms, Inc., for the year ended April 25, 2014. Instructors may
2. Management’s Annual Report on Internal Control Over Financial
Reporting provides the following answers to the questions in a.
through f.:
a. Management is responsible for establishing and
maintaining adequate internal control over financial
reporting.
financial reporting.
c. Management conducted its assessment of the effectiveness
of internal control over financial reporting based on criteria
established in the COSO Internal Control – Integrated
Framework.
accounting and property, plant, and equipment accounting.
f. Management does not disclose any changes in their report,
but discloses additional information in Item 9A of the form
12-29
12–34 (continued)
3. The report of the independent registered public accounting firm
notes the firm audited internal control over financial reporting in
accordance with the standards of the PCAOB. The auditor’s report
also discusses the material weaknesses identified in
financial statements.
Case
12–35 1. Strengths in lines of reporting from IT to senior management at
Jacobsons:
needs.
Melinda’s boss, the COO, has access to the board of
directors and provides periodic updates about IT issues, if
needed.
may place undue pressure on IT to work on IT related projects
that affect the COO’s areas of responsibility. Thus, other
areas, such as those under the chief financial officer’s control
(e.g., the accounting system), may not receive adequate
IT resources.
board of directors.
There does not appear to be a written IT strategic plan that
sets direction for the IT function.
Recommendations related to the lines of reporting from IT to senior
management:
12-30
12–35 (continued)
annually by the board.
Significant hardware and software changes should be approved
by the board or its IT Steering Committee. Other changes
to application software should also be approved by affected
user departments.
including her strengths:
Melinda is actively involved in the IT function and closely
monitors day–to–day IT activities.
Melinda is experienced in Jacobson’s IT function, having been
employed by the company for 12 years. She has served in
the IT function.
Melinda performs extensive background checks before offering
candidates employment in IT functions.
Melinda has successfully maintained a fairly stable IT staff.
Melinda conducts weekly IT departmental meetings to discuss
issues affecting the performance of the department.
board.
Concerns about current management of the IT function:
Melinda may be over–delegating tasks to IT personnel without
maintaining close accountability for employee actions. For
example, programmers are given extensive leeway in
properly followed.
Melinda spends too much of her time in the systems analyst
role, which leaves little time for her to adequately monitor
all IT tasks.
IT department:
Consider assigning systems analyst responsibilities to a
senior programmer.