Assignment Questions -
Q1. Adherence to generally accepted auditing standards requires, among other things, a proper understanding of the existing internal control. The most common approaches to documenting the understanding of internal control include the use of a questionnaire, preparation of a written narrative, preparation of a flowchart, or a combination of these methods.
Required:
a. Discuss the advantages to CPAs of documenting internal control by using:
(1) An internal control questionnaire.
(2) A written narrative.
(3) A flowchart.
b. If they are satisfied that no material weaknesses in internal control exist after completing their description of internal control, is it necessary for the CPAs to conduct tests of controls? Explain.
Q2. Randall, Inc., is a private company that manufactures heavy machinery. The company has an active audit committee and board of directors. The audit committee consists of two outside directors and Howard Kress, the company chief financial officer. The audit Page 286committee meets quarterly to provide oversight of financial reporting, including reviewing new accounting policies and unusual transactions. Howard Kress personally reviews and approves any related party transactions. Internal audits of operating units are performed by the internal auditor, who reports directly to Laura Howe, the chief operating officer.
The company has a written code of conduct, and employees agree to adhere to the code when they are hired. The company also has a hotline for confidential reporting of unethical behavior that is staffed by the corporate controller. The audit committee reviews summaries of all incidents and investigations performed.
Required: Identify the weaknesses in Randall's system of corporate governance and provide suggestions for improvement in the system.
Q3. Auditors should be familiar with the terminology employed in IT processing. The following statements contain some of the terminology so employed. Indicate whether each statement is true or false.
a. A recent improvement in computer hardware is the ability to automatically produce error listings. Previously, this was possible only when provisions for such a report were included in the program.
b. The control of input and output to and from the information systems department should be performed by an independent data control group.
c. An internal-audit computer program that continuously monitors IT processing is a feasible approach for improving internal control in OLRT systems.
d. An internal label is one of the controls built into magnetic tape drive hardware by the hardware manufacturers.
e. A limit test in a computer program is comparable to a decision that an individual makes in a manual system to judge a transaction's reasonableness.
f. A principal advantage of using magnetic tape files is that data need not be recorded sequentially.
g. A major advantage of disk files is the ability to gain random access to data on the disk.
h. The term grandfather-father-son refers to a method of protecting computer records rather than to generations in the evolution of computer hardware.
i. When they are not in use, tape and disk files should be stored apart from the computer room under the control of a librarian
Q4. Lee Wong, CPA, is auditing the financial statements of the Alexandria Corporation, which has a batch-processing IT-based system for shipping and invoicing that it purchased from a software vendor. The following comments have been extracted from Wong's notes on IT operations and the processing and control of shipping notices and customer invoices.
Each type of computer run is assigned to a specific employee who is responsible for making program changes, running the program, and answering questions. This procedure has the advantage of eliminating the need for records of IT operations because each employee is responsible for his or her own computer runs. At least one IT department employee remains in the computer room during office hours, and only IT department employees have keys to the computer room.
System documentation consists of those materials furnished by the software vendor-a set of record formats and program listings. These and the tape library are kept in a corner of the IT department.
The corporation considered the desirability of program controls, but decided to retain the manual controls in place prior to the conversion to the software vendor's system.
Company products are shipped directly from public warehouses, which forward shipping notices to general accounting. There a billing clerk enters the price of the item and accounts for the numerical sequence of shipping notices from each warehouse. The billing clerk also prepares control tapes of the units shipped and the unit prices.
Shipping notices and control tapes are forwarded to the IT department for inputting and processing. Extensions are made on the computer. Output consists of invoices (in six copies) and a daily sales register. The daily sales register shows the aggregate totals of units shipped and unit prices, which the computer operator compares to the control tapes.
All copies of the invoice are returned to the billing clerk. The clerk mails three copies to the customer, forwards one copy to the warehouse, maintains one copy in a numerical file, and retains one copy in an open invoice file that serves as a detailed accounts receivable record.
Required: Describe weaknesses in internal control over information and data flows and the procedures for processing shipping notices and customer invoices, and recommend improvements in these controls and processing procedures.