Internal Control Understanding and Assessment. LO1, LO3, LO4, LO5 Assume that when conducting procedures to obtain an understanding of the internal control structure in the Denton Seed Company, you checked "No" to the following internal control questionnaire items (based on those illustrated in the chapter): Does access to online files require specific passwords to be entered to identify and validate the terminal user? Are control totals established by the user prior to submitting data for processing? (Order entry application subsystem) Are input control totals reconciled to output control totals? (Order entry application subsystem) EP 9-1 Required: a. Describe the misstatements due to error or fraud that could occur because of the weaknesses indicated by the lack of controls. b. Explain the impact these control weaknesses would have on the audit approach selected and on the design of the audit programs. EP 9-4 Online Sales, Audit Procedures. LO3, LO4, LO5, LO6 Online retailers, such as Amazon.ca and Grocerygate way.com, make use of online customer order forms to allow customers to input all the required sale, delivery, and payment data. Required: a. Identify control procedures that can be used in an online sales order system, and the risk(s) each addresses. b. How would the revenue control objectives be audited in an online retail sales business? Page 377 EP 9-6 Control Objectives, Procedures, Assertions, and Tests. LO3, LO4, LO5, LO6 Exhibit EP 9-6 contains an arrangement of examples of transaction errors (lettered a-g) and a set of auditee control procedures and devices (numbered 1-15). You should photocopy the exhibit to complete the requirements of this question. EXHIBIT EP 9-6 Direction of Control Testing a. Sales recorded, goods not shipped b. Goods shipped, sales not recorded c. Goods shipped to a bad credit risk customer d. Sales billed at the wrong price or wrong quantity e. Product line A sales recorded as Product line B f. January sales recorded in December Control Procedures 1. Sales order approved for credit 2. Prenumbered shipping document prepared, sequence checked Page 378 3. Shipping document quantity compared to sales invoice 4. Prenumbered sales invoices, sequence checked 5. Sales invoice checked to sales order 6. Invoiced prices compared to approved price list 7. General ledger code checked for sales product lines 8. Sales dollar batch totals compared to sales journal 9. Periodic sales total compared to same-period accounts receivable postings 10. Accountants given instructions to date sales on the date of shipment 11. Sales entry date compared to shipping document date 12. Accounts receivable subsidiary totalled and reconciled to accounts receivable control account 13. Intercompany accounts reconciled with subsidiary company records 14. Credit files updated for customer payment history 15. Overdue customer accounts investigated for collection Required: a. Opposite the examples of transaction errors lettered a-f in Exhibit EP 9-6, write the name of the control objective that organizations wish to achieve to prevent, detect, or correct the error. b. Opposite each numbered control procedure, place an X in the column that identifies the error(s) the procedure is likely to control by prevention, detection, or correction. c. For each error/control objective, identify the financial statement assertion most benefited by the control. d. For each company control procedure numbered 1-15 in Exhibit EP 9-6, write an auditor's control test that could produce evidence on the question of whether the company's control procedure has been installed and is operating effectively. EP 9-7 Controls and Control Weaknesses in Purchasing System. LO3, LO4, LO5, LO6, LO7 Part A The following are internal control procedures found in the purchases and payment process of your auditee, Integrated Measurement Systems Inc. (IMS). Required: For each control procedure: a. Explain the type of control that is being applied. b. Identify the control objective(s) that the control procedure meets. c. Describe in detail one test of controls the auditor could perform to test the effectiveness of the control. Control 1 Purchase requests (PRs) from operating departments are authorized by the appropriate person in the requesting department. Control 2 The purchasing clerk verifies that there is a signature on the PR and then issues a prenumbered purchase order (PO) for the items required. The purchasing clerk retains copies of the PR and the PO and files them by PO number. Control 3 The purchasing manager reviews the PO to see whether the PR is authorized and, if so, approves it and forwards it to the buyer. Control 4 Page 379 The Buyer must select a vendor from a preapproved list for all POs over $5,000. For POS under $5,000, the Buyer can select any vendor. Control 5 The receiver who accepts the goods into the warehouse verifies that the quantity received matches the bill of lading (BL) and signs on behalf of IMS for receipt of the goods listed on the BL. If there is a discrepancy in the quantity received, the receiver does not sign the BL; the BL is sent to the buyer to resolve the problem with the vendor. Control 6 The purchasing clerk matches the signed BL with the filed copies of the PO and PR. Part B The following are internal control weaknesses found in the purchases and payment process of your auditee, IMS. Required: For each control weakness: a. Describe the control risk that exists because of the weakness-what could go wrong? b. Explain whether a monetary financial statement misstatement could result because of the weakness, and, if so, what it would be. c. Describe in detail the impact the weakness will have on your other audit procedures. Control Weakness 1 The purchasing clerk does not verify that the PRs are authorized by an appropriate person in the operating department but only checks that there is a signature on the document. Control Weakness 2 Access to the warehouse is not controlled and anyone can enter and leave at any time. Control Weakness 3 The receiver does not match the BL to an authorized PO. Internal Control Understanding and Assessment. LO1, LO3, LO4, LO5 Assume that when conducting procedures to obtain an understanding of the internal control structure in the Denton Seed Company, you checked "No" to the following internal control questionnaire items (based on those illustrated in the chapter): Does access to online files require specific passwords to be entered to identify and validate the terminal user? Are control totals established by the user prior to submitting data for processing? (Order entry application subsystem) Are input control totals reconciled to output control totals? (Order entry application subsystem) EP 9-1 Required: a. Describe the misstatements due to error or fraud that could occur because of the weaknesses indicated by the lack of controls. b. Explain the impact these control weaknesses would have on the audit approach selected and on the design of the audit programs. EP 9-4 Online Sales, Audit Procedures. LO3, LO4, LO5, LO6 Online retailers, such as Amazon.ca and Grocerygate way.com, make use of online customer order forms to allow customers to input all the required sale, delivery, and payment data. Required: a. Identify control procedures that can be used in an online sales order system, and the risk(s) each addresses. b. How would the revenue control objectives be audited in an online retail sales business? Page 377 EP 9-6 Control Objectives, Procedures, Assertions, and Tests. LO3, LO4, LO5, LO6 Exhibit EP 9-6 contains an arrangement of examples of transaction errors (lettered a-g) and a set of auditee control procedures and devices (numbered 1-15). You should photocopy the exhibit to complete the requirements of this question. EXHIBIT EP 9-6 Direction of Control Testing a. Sales recorded, goods not shipped b. Goods shipped, sales not recorded c. Goods shipped to a bad credit risk customer d. Sales billed at the wrong price or wrong quantity e. Product line A sales recorded as Product line B f. January sales recorded in December Control Procedures 1. Sales order approved for credit 2. Prenumbered shipping document prepared, sequence checked Page 378 3. Shipping document quantity compared to sales invoice 4. Prenumbered sales invoices, sequence checked 5. Sales invoice checked to sales order 6. Invoiced prices compared to approved price list 7. General ledger code checked for sales product lines 8. Sales dollar batch totals compared to sales journal 9. Periodic sales total compared to same-period accounts receivable postings 10. Accountants given instructions to date sales on the date of shipment 11. Sales entry date compared to shipping document date 12. Accounts receivable subsidiary totalled and reconciled to accounts receivable control account 13. Intercompany accounts reconciled with subsidiary company records 14. Credit files updated for customer payment history 15. Overdue customer accounts investigated for collection Required: a. Opposite the examples of transaction errors lettered a-f in Exhibit EP 9-6, write the name of the control objective that organizations wish to achieve to prevent, detect, or correct the error. b. Opposite each numbered control procedure, place an X in the column that identifies the error(s) the procedure is likely to control by prevention, detection, or correction. c. For each error/control objective, identify the financial statement assertion most benefited by the control. d. For each company control procedure numbered 1-15 in Exhibit EP 9-6, write an auditor's control test that could produce evidence on the question of whether the company's control procedure has been installed and is operating effectively. EP 9-7 Controls and Control Weaknesses in Purchasing System. LO3, LO4, LO5, LO6, LO7 Part A The following are internal control procedures found in the purchases and payment process of your auditee, Integrated Measurement Systems Inc. (IMS). Required: For each control procedure: a. Explain the type of control that is being applied. b. Identify the control objective(s) that the control procedure meets. c. Describe in detail one test of controls the auditor could perform to test the effectiveness of the control. Control 1 Purchase requests (PRs) from operating departments are authorized by the appropriate person in the requesting department. Control 2 The purchasing clerk verifies that there is a signature on the PR and then issues a prenumbered purchase order (PO) for the items required. The purchasing clerk retains copies of the PR and the PO and files them by PO number. Control 3 The purchasing manager reviews the PO to see whether the PR is authorized and, if so, approves it and forwards it to the buyer. Control 4 Page 379 The Buyer must select a vendor from a preapproved list for all POs over $5,000. For POS under $5,000, the Buyer can select any vendor. Control 5 The receiver who accepts the goods into the warehouse verifies that the quantity received matches the bill of lading (BL) and signs on behalf of IMS for receipt of the goods listed on the BL. If there is a discrepancy in the quantity received, the receiver does not sign the BL; the BL is sent to the buyer to resolve the problem with the vendor. Control 6 The purchasing clerk matches the signed BL with the filed copies of the PO and PR. Part B The following are internal control weaknesses found in the purchases and payment process of your auditee, IMS. Required: For each control weakness: a. Describe the control risk that exists because of the weakness-what could go wrong? b. Explain whether a monetary financial statement misstatement could result because of the weakness, and, if so, what it would be. c. Describe in detail the impact the weakness will have on your other audit procedures. Control Weakness 1 The purchasing clerk does not verify that the PRs are authorized by an appropriate person in the operating department but only checks that there is a signature on the document. Control Weakness 2 Access to the warehouse is not controlled and anyone can enter and leave at any time. Control Weakness 3 The receiver does not match the BL to an authorized PO