Assume that you are participating in the audit of Chicago Appliance Company and that the background information was obtained during the planning phase of the engagement. You have been asked to (a) consider the potential internal control weaknesses that exist in this end-user application and (b) assess how those internal control weaknesses could alter the audit plan for the current year.

BACKGROUND INFORMATION

Chicago Appliance is a wholesale distributor of electric appliances. Its sales in each of the last two years have been approximately $40 million. All accounting applications are handled at Chicago’s corporate office.

Automated processing operations have historically centered on an onsite mainframe computer. The computer applications include accounts payable and cash disbursements, payroll, inventory, and general ledger. Accounts receivable and fixed asset records have been prepared manually in the past. Internal controls in all areas have been considered strong in the last few years.

During the past year, financial management decided to automate the processing of sales, accounts receivable, and fixed asset transactions and accounting. Management also concluded that purchasing personal computers (PCs) and related available software was more cost effective than increasing the mainframe computer capacity and hiring a second computer operator. The controller and accounting clerks have been encouraged to find additional uses for the PCs and to “experiment” with them when they are not too busy.

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The accounts receivable clerk is enthusiastic about the PCs, but the fixed-asset clerk seems somewhat apprehensive about them because he has limited prior experience with computers. The accounts receivable clerk explained that the controller had purchased a “very easy-to-use” accounts receivable software application program for the PC, which enables her to input the daily information regarding billings and receipts quickly and easily. The controller has added some personally developed programs to the software to give it better report-writing features.

During a recent demonstration, the accounts receivable clerk explained that the program required her to input only the customer’s name and invoice amount in the case of billings or the customer’s name and check amount in the case of receipts. The computer then automatically updates the respective customer’s account balance. At the end of every month, the clerk prints and reconciles the accounts receivable trial balance to the general ledger balance and the controller reviews the reconciliation.

The fixed asset program also was purchased from an outside vendor. The controller indicated that the software package had just recently been put on the market and that it was programmed to compute tax depreciation based on recent changes in the federal tax laws. The controller also stated that, because of the fixed asset clerk’s reluctance to use the computer, information from the manual fixed asset records had been input. The controller indicated, however, that the fixed asset clerk would be responsible for the future processing related to the fixed asset files and for generating the month-end and year-end reports used to prepare the related accounting entries.

The various accounts receivable and fixed asset files are all adequately labeled as to the type of program or data file. They are arranged in an organized manner near the PC.