Dunbar Camera Manufacturing, Inc., is a manufacturer of high-priced precision motion picture cameras in which the specifications of component parts are vital to the manufacturing process. Dunbar buys valuable camera lenses and large quantities of sheetmetal and screws.

Screws and lenses are ordered by Dunbar and are billed by the vendors on a unit basis. Sheetmetal is ordered and billed by the vendors on the basis of weight. The receiving clerk is responsible for documenting the quality and quantity of merchandise received, Your understanding of internal control indicates that the following procedures are being followed:
Receiving Report: Properly approved purchase orders, which are prenumbered, are filed numerically. The copy sent to the receiving clerk is an exact duplicate of the copy sent to the vendor. Receipts of merchandise are recorded on the duplicate copy by the receiving clerk.

Sheetmetal: The company receives sheetmetal by railroad. The railroad independently weighs the sheetmetal and reports the weight and date of receipt on a bill of lading that accompanies all deliveries. The receiving clerk checks the weight on the bill of lading against the purchase order.
Screws: The receiving clerk opens cartons containing screws, then inspects and weighs the contents. The weight is converted to number of units by means of conversion charts. The receiving clerk then checks the computed quantity against the purchase order.
Camera Lenses: Each camera lens is delivered in a separate corrugated carton. Cartons are counted as they are received by the receiving clerk and the number of cartons is checked against purchase orders.
Required:

a. Explain why the internal control procedures as they apply individually to receiving reports and the receipt of sheetmetal, screws, and camera lenses are adequate or inadequate.

b. What financial statement misstatements may arise because of the inadequacies in Dunbar's internal control procedures, and how may they occur?

c. What tests of controls could be performed?

d. At what level (quantitative or qualitative) would you assess control risk? Why?

Transcribed Image Text:

BOTTOM MANUFACTURING CORPORATION Flowchart of Credit Sales Activities SALES ORDER CRED T FINISHED GOODS Stat Customer purchase ordar Code: A-Customer Sales order Sales order SHIPPING Sales crce 2 BILLING ACCOUNTS RECEIVABLE Approve sales order Approved sa ordar Sels order Approved certar Sales order Approved sales crear : Bill of Sales invoice Bill of ading voice Safety Sales journal Accounts receivable ledger M Sales Invoice