Case study Assignment (100 marks) Mesmerize, Inc., is a subsidiary of Solomon Publishing and specializes in the publication and distribution of reference books. Mesmerize's sales for the past year exceeded N$18 million, and the company employed an average of 65 employees. Solomon periodically sends a member of the internal audit department to audit the operations of each of its subsidiaries, and Katherine Ford, Mesmerize's treasurer, is currently working with Ralph Johnson of Solomon's internal audit staff. John-son has just completed a review of Mesmerize's investment cycle and prepared the following report. General Throughout the year, Mesmerize has made both short-term and long-term investments in securities; all securities are registered in the company's name. According to Oak-dale's bylaws, its board of directors must approve long-term investment activity, whereas either the president or the treasurer may approve short-term investment activity. Transactions The treasurer made all purchases and sales of short-term securities. The board approved the long-term security purchases, whereas the president approved the long-term security sale. Because the treasurer is listed with the broker as the company's contact, this individual received all revenue from these investments (dividends and interest) and then forwarded the checks to accounting for processing. Documentation The treasurer maintains purchase and sale authorizations, along with the broker's advices. The certificates for all long-term investments are kept in a safe deposit box at the local bank; only the president of Mesmerize has access to this box. An inventory of this box was made, and all certificates were accounted for. Certificates for short-term investments are kept in a locked metal box in the accounting office. Other documents, such as long-term contracts and legal agreements are also kept in this box. The president, the treasurer, and the accounting manager have the three keys to the box. The accounting manager's key is available to all accounting personnel should they require documents kept in this box. Documentation for two of the current short-term investments could not be located in this box; the accounting manager explained that some of the investments are for such short periods of time that the broker does not always provide formal documentation. 1.1. Describe the purpose of each of the four controls listed here. (30 marks) 1.2. Identify an area in Mesmerize's investment procedures that violates each of the four controls listed here. (20 marks) 1.3. For each of the violations identified, describe how Mesmerize can correct each weakness. (20 marks) 1.4. Discuss the concept of exposure and explain why f Mesmerize may tolerate some exposure (15 marks) 1.5. When a company has a strong internal control structure, stockholders can expect the elimination of fraud. Comment on the soundness of this statement.(15 Marks) Accounting Records The accounting department records deposits of checks for interest and dividends earned on investments, but these checks could not be traced to the cash receipts journal, which is maintained by the individual who normally opens, stamps, and logs incoming checks. These amounts are journalized monthly in an account for investment revenue. The treasurer authorizes checks drawn for investment purchases. Both the treasurer and the president must sign checks in excess of N$15,000. When securities are sold, the broker deposits the proceeds directly in Mesmerize's bank account by an electronic funds transfer. Each month, the accounting manager and the treasurer prepare the journal entries required to adjust the short-term investment account. There was insufficient backup documentation attached to the journal entries reviewed to trace all transactions; however, the balance in the account at the end of last month closely approximates the amount shown on the statement received from the broker. The amount in the long-term investment account is correct, and the transactions can be clearly traced through the documentation attached to the journal entries. There are no attempts made to adjust either account to the lower of aggregate cost or market. Required To achieve Solomon Publishing's objective of sound internal control, the company believes the following four controls are basic for an effective system of accounting control: Authorization of transactions Complete and accurate record keeping Access control Independent verification Case study Assignment (100 marks) Mesmerize, Inc., is a subsidiary of Solomon Publishing and specializes in the publication and distribution of reference books. Mesmerize's sales for the past year exceeded N$18 million, and the company employed an average of 65 employees. Solomon periodically sends a member of the internal audit department to audit the operations of each of its subsidiaries, and Katherine Ford, Mesmerize's treasurer, is currently working with Ralph Johnson of Solomon's internal audit staff. John-son has just completed a review of Mesmerize's investment cycle and prepared the following report. General Throughout the year, Mesmerize has made both short-term and long-term investments in securities; all securities are registered in the company's name. According to Oak-dale's bylaws, its board of directors must approve long-term investment activity, whereas either the president or the treasurer may approve short-term investment activity. Transactions The treasurer made all purchases and sales of short-term securities. The board approved the long-term security purchases, whereas the president approved the long-term security sale. Because the treasurer is listed with the broker as the company's contact, this individual received all revenue from these investments (dividends and interest) and then forwarded the checks to accounting for processing. Documentation The treasurer maintains purchase and sale authorizations, along with the broker's advices. The certificates for all long-term investments are kept in a safe deposit box at the local bank; only the president of Mesmerize has access to this box. An inventory of this box was made, and all certificates were accounted for. Certificates for short-term investments are kept in a locked metal box in the accounting office. Other documents, such as long-term contracts and legal agreements are also kept in this box. The president, the treasurer, and the accounting manager have the three keys to the box. The accounting manager's key is available to all accounting personnel should they require documents kept in this box. Documentation for two of the current short-term investments could not be located in this box; the accounting manager explained that some of the investments are for such short periods of time that the broker does not always provide formal documentation. 1.1. Describe the purpose of each of the four controls listed here. (30 marks) 1.2. Identify an area in Mesmerize's investment procedures that violates each of the four controls listed here. (20 marks) 1.3. For each of the violations identified, describe how Mesmerize can correct each weakness. (20 marks) 1.4. Discuss the concept of exposure and explain why f Mesmerize may tolerate some exposure (15 marks) 1.5. When a company has a strong internal control structure, stockholders can expect the elimination of fraud. Comment on the soundness of this statement.(15 Marks) Accounting Records The accounting department records deposits of checks for interest and dividends earned on investments, but these checks could not be traced to the cash receipts journal, which is maintained by the individual who normally opens, stamps, and logs incoming checks. These amounts are journalized monthly in an account for investment revenue. The treasurer authorizes checks drawn for investment purchases. Both the treasurer and the president must sign checks in excess of N$15,000. When securities are sold, the broker deposits the proceeds directly in Mesmerize's bank account by an electronic funds transfer. Each month, the accounting manager and the treasurer prepare the journal entries required to adjust the short-term investment account. There was insufficient backup documentation attached to the journal entries reviewed to trace all transactions; however, the balance in the account at the end of last month closely approximates the amount shown on the statement received from the broker. The amount in the long-term investment account is correct, and the transactions can be clearly traced through the documentation attached to the journal entries. There are no attempts made to adjust either account to the lower of aggregate cost or market. Required To achieve Solomon Publishing's objective of sound internal control, the company believes the following four controls are basic for an effective system of accounting control: Authorization of transactions Complete and accurate record keeping Access control Independent verification