For each of the following independent cases, state the highest level of deficiency that you believe the circumstances represent: a control deficiency, a significant deficiency, or a material weakness. Explain your decision in each case. In-Class Team Cases

Case 1:

The company processes a significant number of routine intercompany transactions. Individual intercompany transactions are not material and primarily relate to balance sheet activityfor example, cash transfers between business units to finance normal operations. A formal management policy requires monthly reconciliation of intercompany accounts and confirmation of balances between business units. However, there is not a process in place to ensure performance of these procedures. As a result, detailed reconciliations of intercompany accounts are not performed on a timely basis. Management does perform monthly procedures to investigate page 825selected large-dollar intercompany account differences. In addition, management prepares a detailed monthly variance analysis of operating expenses to assess their reasonableness.

Case 2:

During its assessment of internal control over financial reporting, management identified the following deficiencies. Based on the context in which the deficiencies occur, management and the auditors agree that these deficiencies individually represent significant deficiencies:

Inadequate segregation of duties over certain information system access controls. Several instances of transactions that were not properly recorded in the subsidiary ledgers; the transactions involved were not material, either individually or in the aggregate. No timely reconciliation of the account balances affected by the improperly recorded transactions. Case 3:

The company uses a standard sales contract for most transactions, although sales personnel are allowed to modify sales contract terms as necessary to make a profitable sale. Individual sales transactions are not material to the entity. The companys accounting personnel review significant or unusual modifications to the sales contract terms, but they do not review changes in the standard shipping terms. The changes in the standard shipping terms could require a delay in the timing of revenue recognition. Management reviews gross margins on a monthly basis and investigates any significant or unusual relationships. In addition, management reviews the reasonableness of inventory levels at the end of each accounting period. The company has experienced limited situations in which revenue has been inappropriately recorded in advance of shipment, but amounts have not been material.

Case 4:

The company has a standard sales contract, but sales personnel frequently modify the terms of the contract. Sales personnel frequently grant unauthorized and unrecorded sales discounts to customers without the knowledge of the accounting department. These amounts are deducted by customers in paying their invoices and are recorded as outstanding balances on the accounts receivable aging. Although these amounts are individually insignificant, they are material in the aggregate and have occurred consistently over the past few years.