Handout #5 Learning objectives addressed by this exercise: Chapter 5-Learning Objective(s) 1 and 3 1. Following are descriptions of fifteen internal controls. 1. The companys personnel input information manually. Afterwards, the computer system tracks individual transactions and automatically accumulate transactions to create a trial balance. 2. The company actively trains managers to ensure that they are up-to-date on current issues in financial reporting. 3. Internal auditors verify that the companys human resources department receives university transcripts documenting all college degrees earned before an individual can begin their first day of employment with the company. 4. Senior management obtains and evaluates information about international events that might affect the entity and evaluates the impact of that information on the companys operations. 5. Each quarter, department managers are perform bank reconciliations for the bank account assigned to their respective functional area. 6. Each subsidiary is evaluated by the companys controller with regard to their adherence to company mandated protocols for authorization of transactions. 7. Before a cash disbursement can be processed, a voucher package must be submitted to the accounts payable department. 8. The system automatically reconciles subsidiary ledger to the accounts receivable general ledger account and control accounts on a daily basis. 9. The company actively promotes a commitment to integrity and competence throughout the organization. 10. The company periodically assesses the design of the organizational chart that establishes the formal lines of reporting and authorization protocols to identify incompatible duties and possible opportunities or incentives to commit fraud. 11. Audit committee members are evaluated to ensure that they are financially literate in addition to understanding their general stewardship role with the firm. 12. The compensation committee reviews compensation plans for senior executives to ensure that both monetary and equity-based pay totals are consistent with contracts approved by the board of directors. 13. Prior to sales transactions, the credit department assesses the credit worthiness of potential customers. 14. Management periodically assesses the companys preparedness for actual implementation of contingency plans related to off-site and cloud access in the event of a security breach or failure of the accounting system. 15. Sales personnel are restricted by the sales system to authorize sales prices for inventory items to customers at amounts from the companys approved price list via a drop-down menu. Required: Indicate which of the COSO internal control components is best represented by each internal control. A. Control Environment B. Risk Assessment C. Information and Communication D. Control Activities E. Monitoring Handout #5 Learning objectives addressed by this exercise: Chapter 5-Learning Objective(s) 1 and 4 2. Each of the following internal controls has been taken from a standard internal control questionnaire used by a CPA firm for assessing control risk in different transaction cycles. 1. Overall comparisons of purchases and inventory levels are made periodically. 2. Receiving reports are automatically and continuously posted to the perpetual inventory record. 3. The individuals preparing the payroll do not perform other payroll duties (timekeeping, distribution of checks) or have access to payroll data master files or cash. 4. All sale of the companys common stock are approved by the board of directors. 5. All credit sales are posted to customers individual subsidiary accounts. 6. The cost accounting function is kept separate from the inventory and production departments. 7. All significant accounting estimates related to determining fair market value of derivative instruments are reviewed by at least two members of senior management with knowledge and expertise in financial instruments. 8. Recorded sales are supported by sales orders, shipping documents, and invoices. 9. All voided and spoiled payroll checks are properly mutilated and retained. 10. A chart of accounts is used to classify each purchase entry. Required: For each internal control, identify: (1) the transaction-related audit objective(s) to which it applies; and (2) the transaction cycle where the control is most likely to be tested PCAOB Assertion Transaction Cycle l A. Existence or Occurrence I. Revenue and Cash Collection B. Rights and Obligations II. Acquisition and Disbursement C. Completeness III. Payroll and Personnel D. Valuation or Allocation IV. Production E. Presentation and Disclosure V. Finance and Investment