12-22 (Objective 12-2 ) The following are partial descriptions of internal controls for

companies engaged in the manufacturing business:

1. When Mr. Clark orders materials, an electronic copy of the purchase order is
sent to the receiving department. During the delivery of materials, Mr. Smith,
the receiving clerk, records the receipt of shipment on this purchase order
and then sends the purchase order to the accounting department, where it is
used to record materials purchased and accounts payable. The materials are
transported to the storage area by forklifts. The additional purchased
quantities are recorded on storage records.

a. It was a mistake to send a duplicate copy of the PO to the receiving

department, because the employee will not thoroughly look and count to be
sure that all of the items arrived. The employee will not carefully look and
count because they have the PO to their disposal. They will just bo by what is
on it.

m
er as
b. If there are more items shipped than there were on the PO there would be an

co
increase of theft, and inventory counts would be in accurate.

eH w
c. If the receiving department were given a copy of the PO that didn’t list the
amount of the items that were shipped, they would then have to check to see

o.
what arrived.
rs e
ou urc
2. Every day, hundreds of employees clock in using their employee
identification cards at Generous Motors Corporation. The data on these time
records is used in the preparation of the labor cost distribution records, the
o

payroll journal, and the electronic payments and payroll checks. The
aC s

treasurer, Angela Lee, compares the payroll journal with the payroll records,
vi y re

signs the checks, and returns the payroll notifications and checks to Charles
Strode, the supervisor of the computer department. The payroll checks and
payment notices are distributed to the employees by Strode.
ed d

a. The payroll checks should have been given to someone independent of the
ar stu

department.
b. The supervisor could have manipulated the system and created fake names of
employees, and cashed the checks that were returned to him.
c. Someone independent of the department should distribute the checks.
is
Th

3. The smallest branch of Connor Cosmetics employs Mary Cooper, the branch
manager, and her sales assistant, Janet Hendrix. The branch uses a bank
account to pay expenses. The account is kept in the name of “Connor
Cosmetics—Special Account.” To pay expenses, checks must be signed by
sh

Cooper or by the treasurer, John Winters. Cooper receives the cancelled

checks and bank statements. She reconciles the branch account herself and
files cancelled checks and bank statements in her records. She also
periodically prepares reports of cash disbursements and sends them to the
home office.

This study source was downloaded by 100000775993364 from CourseHero.com on 05-14-2021 08:28:08 GMT -05:00

https://www.coursehero.com/file/38345038/Chapter-12-HWdocx/
 a. The manager should not reconcile the bank statements and cancelled checks.
They should be sent to the home office by the bank and should be compared
against the manager’s report of disbursements.
b. The manager could make checks out to herself or others, with no record of
them, by using the company’s money as her own bank account.
c. The statements should be sent directly to the home office and the manager
should prepare a listing of all disbursements and support to justify the
payments.

Required

a. Required List the deficiencies in internal control for each of these situations.
To identify the deficiencies, use the methodology that was discussed in this
chapter.

b. For each deficiency, state the type(s) of misstatement(s) that is (are) likely to

m
er as
result. Be as specific as possible.

co
eH w
c. How would you improve internal controls for each of the three companies?*

o.
rs e
ou urc
12-25 (Objective 12-5 ) The following are independent situations for which you will
recommend an appropriate audit report on internal control over financial reporting
as required by PCAOB auditing standards:
o
aC s

1. The auditor identified a material misstatement in the financial statements

vi y re

that was not detected by management of the company.

Qualified or disclaimer of opinion on internal control over financial reporting
ed d

2. The auditor was unable to obtain any evidence about the operating
ar stu

effectiveness of internal control over financial reporting.

Qualified or disclaimer of opinion on internal control over financial reporting

3. The auditor identified several significant deficiencies in internal control.

is

Because of these significant deficiencies, the auditor believes that there is a

Th

reasonable possibility that internal control will not prevent or detect material
misstatements on a timely basis.
Adverse opinion on internal control over financial reporting
sh

4. The auditor determined that a deficiency in internal control exists that will
not prevent or detect a material misstatement in the financial statements.
Adverse opinion on internal control over financial reporting

5. During interim testing, the auditor identified and communicated to

management a significant control deficiency. Management immediately

This study source was downloaded by 100000775993364 from CourseHero.com on 05-14-2021 08:28:08 GMT -05:00

https://www.coursehero.com/file/38345038/Chapter-12-HWdocx/
 corrected the deficiency and the auditor was able to sufficiently test the
newly instituted internal control before the end of the fiscal period.
Unqualified opinion on internal control over financial reporting

6. As a result of performing tests of controls, the auditor identified a significant

deficiency in internal control over financial reporting; however, the auditor
does not believe that it represents a material weakness in internal control.
Qualified or disclaimer of opinion on internal control over financial reporting

Required

For each situation, state the appropriate audit report from the following
alternatives:

• Unqualified opinion on internal control over financial reporting

m
er as
• Qualified or disclaimer of opinion on internal control over financial reporting

co
eH w
• Adverse opinion on internal control over financial reporting

o.
rs e
ou urc
12-27 (Objectives 12-2 , 12-7) Most grocery stores use bar code scanning
technologies that interface with cash registers used to process customer purchases.
Cashiers use the scanners to read bar code labels attached to each product, which
the system then uses to obtain unit prices, calculate transaction totals, including
o

sales taxes, and update perpetual inventory databases. Similarly, cashiers scan bar
aC s

codes on coupons or member discount cards presented by the customer to process

vi y re

discounts. Along with the scanning technologies, groceries use point-of-sale

technologies that allow customers to swipe debit and credit cards for payment,
while still maintaining the ability for customers to pay with cash.
ed d

Required
ar stu

a. Which financial statement accounts are impacted by the use of these

technologies in a typical grocery store?
The use in grocery stores of bar code scanning technologies impacts a number of
is

financial statement accounts for grocery. The barcode scanner is used to retrieve
Th

unit prices for each product scanned, which is then used to calculate the amount to
be posted to the revenue, sales tax payable, and cash accounts. Sometimes bar
scanning technologies are used to process coupons and other discounts, which
would be recorded in the sales discount account. Also, when goods are returned by
sh

customers to the store, the bar scanning technology is used to process amounts
recorded in the sales returns account and related credit to the cash account. In
addition to recording the transaction amounts paid by the customer the bar code
scanning technologies are also used to update inventory records for cost amounts,
which would impact the inventory and cost of goods sold accounts.

This study source was downloaded by 100000775993364 from CourseHero.com on 05-14-2021 08:28:08 GMT -05:00

https://www.coursehero.com/file/38345038/Chapter-12-HWdocx/
 b. Identify risks inherent to this business process in a grocery store that might
affect the financial statement accounts identified in part a. For each risk,
describe how these technologies help reduce the inherent risk.
Wrong unit price is used Revenues cash The system automatically
to process sales retrieves the unit retail
price from the approved
price list file.
Calculation of amounts Revenues cash sales taxes The system extends price
due from customer for all payable times quantity and adds
items purchased is each extended amount to
inaccurate calculate the total sales
price, including sales tax
due from customer
Reduction in inventory Inventory cost of goods The system tracks the
accounts for items sold is sold number of units removed

m
inaccurate by product number which

er as
is used to update

co
perpetual inventory

eH w
records
Not all inventory items Revenues cash inventory As the system reads each

o.
rs e
taken by customers are cost of goods sold bar code, it generates a
ou urc
included in the process of sound to indicate to the
the customer’s purchase cashier and customer that
amount each product scanned has
o

been captured by the

system
aC s
vi y re

Coupons and discounts Sales discounts cash The system retrieves

are incorrectly calculated coupon and discount
information from the
master file of current
ed d

promotions and discounts

ar stu

and automatically
calculates discount
amounts.
is
Th

c. How might an auditor use technology to test the operating effectiveness of a

bar code scanner–based check-out system?
The auditor could select a number of different products and use the bar scanning
sh

technology to process the sales amounts for comparison to the auditor’s separate
calculation of transaction amounts based on items processed. The auditor could
perform the same kind of test using coupons and other discount programs. The
auditor may also be able to use audit software to test the accuracy of individual

This study source was downloaded by 100000775993364 from CourseHero.com on 05-14-2021 08:28:08 GMT -05:00

https://www.coursehero.com/file/38345038/Chapter-12-HWdocx/
 customer transactions and to test the summary of all customer transactions
processed by a cash register by day and store.

m
er as
co
eH w
o.
rs e
ou urc
o
aC s
vi y re
ed d
ar stu
is
Th
sh

This study source was downloaded by 100000775993364 from CourseHero.com on 05-14-2021 08:28:08 GMT -05:00

https://www.coursehero.com/file/38345038/Chapter-12-HWdocx/
Powered by TCPDF (www.tcpdf.org)