978-0134065823 Chapter 26 Solution Manual Part 2

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26-9

26–21 (continued)

c. The following certifications are available:

1. CIA (Certified Internal Auditor)

2. CCSA (Certification in Control Self–Assessment)

d. The three parts of the CIA Exam are:

Part 1 – Internal Audit Basics

Like the CPA exam, the CIA is a computerized exam, and

candidates may also sit for individual sections of the exam. Like the

CPA exam, the CIA exam is non–disclosed. Part 1 consists of 125

26–22 a. The U.S. Government Accountability Office (GAO) issues Government

Auditing Standards (GAGAS). The financial auditing standards

 Materiality and significance. GAGAS recognize that audit

 Quality control. CPA firms that audit government entities must

have appropriate systems of quality control and participate

 Compliance auditing. GAGAS also require the audit to be

designed to provide reasonable assurance of detecting

26–10

26–22 (continued)

 Reporting. The audit report must state that the audit was

made in accordance with GAGAS and the report must

b. Because the school system receives over $15 million in federal

financial funding, the system would be required to have an audit

conducted in accordance with the Single Audit Act. That would

c. Thresholds related to materiality and audit risk for the school

system may be lower than thresholds in the audit of a commercial

entity due to the sensitive nature and close scrutiny of the school

d. GAGAS would require the auditor to include in its report on

the financial statements a description of the auditor’s tests of

compliance with laws and regulations and internal controls and

auditor to provide the following:

 An opinion as to whether the schedule of federal awards

is presented fairly in all material respects in relation to the

financial statements as a whole.

e. If Waggoner and Allen, LLP, accepts this engagement, the

auditors involved in planning, performing, or reporting for the

26–11

26–22 (continued)

each two–year period. At least 24 of these 80 hours must be in

26–23 a. Issues that must be addressed by Haskin’s Internal Audit

ISSUES

1. The criteria used by the Capital Budgeting Group (CBG) need to be

evaluated to determine whether they are consistent with Haskin’s long–

term goals and objectives.

2. The internal controls in the capital budgeting process need to be

evaluated to determine whether the CBG applied the criteria

consistently.

3. The ROI (hurdle rate) must be tested for reasonableness to be sure the

appropriate projects are selected.

4. The IAD must determine how well the project is now doing as compared

to the original analysis.

capital expenditure project include the following:

PROCEDURES

1. Review Haskin’s long–term goals and objectives to determine the

appropriateness of each evaluation criterion being employed by the

CBG.

2. Review, test, and evaluate the internal controls associated with the

capital budgeting process. This would include a review of the capital

budgeting procedures manual, if one exists, and preparing a flowchart

for the capital budgeting process.

3. Review how the hurdle rate is determined now and was determined in

2015. Determine if a risk adjustment was incorporated into the decision

process by such means as increasing the hurdle rate or decreasing

estimated cash flows.

26-23 (continued)

PROCEDURES

4. Interview and evaluate the competence of the available participants in

the decision, including the originator of the CBG. Read the minutes of

the CBG’s meetings and review all status reports for the project from

inception through its completion. Review the quantitative analysis used

by the CBG to determine if data were valid, assumptions and estimates

reasonable, only relevant costs were considered, and cost behavior

(fixed and variable) was correctly perceived.

5. Review Haskin’s internal accounting controls to assure that all

acquisition and installation costs for the machines are capitalized and

that operating and maintenance costs for the machines are recorded

accurately and expensed. Review documents related to the acquisition

of other machines and determine the actual amount of investment.

Review accounting, maintenance, and production records, and other

documentary evidence, to determine actual operating costs and actual

contribution for each machine.

26–24

DEFICIENCIES/

INEFFICIENCIES

RECOMMENDATIONS

1. Quantities of materials

received are not verified

by the materials

manager.

Besides inspecting all incoming goods to ensure that

quality standards are met, the materials manager

should verify quantities received by actual physical

count. All material receipts do not have to be

counted for a verification program to be effective.

Systematically verifying one or several receipts from

each vendor during a given time period can identify

those receipts that are the most troublesome. Once

identified, efforts can be directed to correcting the

problem. The verification process is performed by

comparing receiving document quantities to actual

physical counts to ensure invoice totals are correct.

26-24 (continued)

DEFICIENCIES/

INEFFICIENCIES

RECOMMENDATIONS

2. The materials manager

prepares purchasing

requests based on

production schedules

and not on requisitions

received from operating

departments.

Purchasing requests prepared by the materials

manager are to be based on requisitions received

from operating departments and not production

schedules for a four–month period. Production

schedules could be outdated and not reflect current

sales trends. Operating departments are constantly

adjusting production levels to account for changes.

To improve budgetary control over expenditures, the

controller’s office also should review the requests in

conjunction with forward planning to ensure

expenditures are consistent with company sales

projections. Once an analysis of inventory flows is

complete the economic order quantity can be

applied to determine the reorder point and to

minimize inventories.

3. The majority of

Lecimore’s requirement

for a critical raw material

is supplied by a single

vendor.

It is best to develop alternate sources of supply for

critical materials. The obvious benefits are reduced

reliance on a single vendor, and the reduced

possibility of lost production because of material

shortages and/or other interruptions in the operation

due to a single vendor. Encouragement of

competition by the effective allocation of material

requirements between vendors is also another

benefit that can be expected to materialize if an

effective program is implemented. Other benefits

such as improved vendor services and technical

assistance may also result as vendors attempt to

gain increased shares of the goods provided the

user company.

4. Rush and expedite orders

are made by production

directly to the purchasing

department without

consulting the materials

managers.

Rush and expedite orders should be reviewed by

the materials manager to determine if any of the

orders can be filled using existing inventories.

26–24 (continued)

DEFICIENCIES/

INEFFICIENCIES

RECOMMENDATIONS

5. The purchasing

department is held

responsible for the cost of

special orders, which can

be clearly identified by

requesting departments.

The direct association of special order costs with

responsible departments is necessary in order to

exercise proper control. Responsibility accounting

obligates departments to exercise judgment and

prudence over those costs they are held

accountable for. Through responsibility reporting,

excessive costs are highlighted so that corrective

actions can be implemented.

6. Engineering changes are

not discussed with other

departments before the

materials needed to

implement the change

are ordered.

A general policy outlining the authority and

responsibility for implementing engineering changes

must be established. The proposed changes should

be reviewed thoroughly by various company

departments before an order is placed. The

controller’s office would review the proposal in light

of incremental costs or cost savings that are

expected to result. The manufacturing departments

would review the change from an adaptability point

of view. Before placing an order, purchasing would

have to receive approval from the reviewing

departments. Once approval is obtained, the vendor

selection process can begin.

7. Accounting is not notified

by the materials manager

of the receipt of partial

shipments.

Besides notifying the purchasing department of the

receipt of partial shipments, the materials manager

should also inform the accounting department so

that vendor invoices can be processed correctly.

Receiving reports clearly identifying the receipt as

a partial shipment is the most effective means of

communicating this information. By appropriately

annotating the receiving report, vendors will not be

paid for materials the company has not received.

26–25

DEFICIENCIES

RECOMMENDATIONS

1. An authorization document

that describes the item to be

acquired, indicates the benefits

to be derived, and estimates

its cost is not prepared and

reviewed with management.

To obtain approval for the purchase of

machinery and equipment, an appropriations

request should be prepared, describing the

item, indicating why it is needed, and

estimating its expected costs and benefits.

The document also could include the item’s

accounting classification, expected useful life,

depreciation method and rate, and the names

of approving company executives.

2. There is no control over

authorized acquisitions. The

purchase requisitions and

purchase orders for fixed assets

are interspersed with other

requisitions and purchase

orders and handled through

normal purchasing procedures.

Authorized acquisitions should be processed

using special procedures and purchase

orders. These purchase orders should be

subjected to numerical control. Copies of

purchase orders should be distributed to all

appropriate departments so that the

acquisition can be monitored.

3. Plant engineering does not

appear to be inspecting

machinery and equipment

upon receipt.

Purchases of machinery and equipment should

be subject to normal receiving inspection

routines. In the case of machinery and

equipment, plant engineering is usually

responsible for reviewing the receipt to make

certain the correct item was delivered and

that it was not damaged in transit. All new

machinery and equipment would be assigned

a control number and tagged at the time of

receipt.

4. The lapse schedules are not

reconciled periodically to

general ledger control accounts

to verify agreement.

At least once each year, machinery and

equipment lapse schedules, which provide

information on asset cost and accumulated

depreciation, should be reconciled to general

ledger control accounts. Furthermore, an

actual physical inventory of existing fixed

assets should be taken periodically and

reconciled to the lapse schedules and general

ledger control account to assure accuracy.

5. Machinery and equipment

accounting policies, including

depreciation, have not been

updated to make certain that

the most desirable methods

Machinery and equipment accounting

procedures, including depreciation, must

be updated periodically to reflect actual

experience, and changes in accounting

pronouncements and income tax legislation.