Part 2 Planning the Audit 6.9 The following short cases describe some specific internal control weaknesses. Required: For each case, determine whether the weakness is relevant to an independent financial audit. If a weakness is relevant to an audit, identify the financial statement assertion(s) af fected by the weakness and how they are affected. Use the following format in addressing each weakness: How Affected? Relevant to Audit? Assertion Affected a. In choosing among alternative long-term investment opportunities, Dowley, Ltd., selects those projects that promise the highest accounting rate of return. Discounted cash flow and payback methods are ignored. b. Jackson, Inc., does not utilize a set of standard journal entries or journal vouchers for recording monthly allocations and accruals. c. All Hardware Corp. sells hardware and small appliances to selected retailers throughout the United States and Canada. Terms are 2/10; n/30. In addition to customer accounts, All Hardware's accounts receivable includes employee receivables, customer credit bal- ances, and other nontrade receivables, such as returnable container deposits, utility de posits, and amounts receivable from sale of assets other than inventory. These other amounts are considered material, but no effort is made to identify them separately for either monthly or annual financial statement purposes. d. Although Jupiter Warehouses, Ltd., maintains perpetual inventory records, monthly counts and comparisons are not made. To satisfy the independent auditors, a thorough physical inventory is taken annually and the perpetual records are adjusted to agree with the physical inventory. e. Ovally, Inc., makes and sells unassembled silos to farm supply distributors in the mid- west. Upon credit approval and determination of available inventory, Ovally bills the dis tributor. The sales invoice, together with customer order and evidence of credit approval, are filed in an open invoice file awaiting payment by the customer. f. Barnes, Inc., a small manufacturer of water pumps, does not formally train its account ing personnel. Moreover, although the company has a chart of accounts, accounting manuals describing appropriate debits and credits to the various accounts have not been developed. g. Although Discovery, Inc., has embarked on several new ventures in recent years, the company does not have a formal strategic planning function in place. As a result, some of the endeavors have resulted in significant losses. h. Litehouse Pools, Inc., manufactures and sells in-ground pools, pumps, filters, and sup- plies to retailers east of the Mississippi River. All sales are on open account, and cus tomer checks are received through the mail on a daily basis. The checks are forwarded to data processing where they are posted to the general ledger and to individual cus tomer accounts by computer. The checks then are transferred to the corporate tred- surer where the daily deposits are prepared and sent to the bank. i. All payments to vendors for purchases of goods and services by Grambling, Inc., require a properly approved voucher. Although the vouchers are prenumbered, the numeric se- quence of used vouchers is not monitored and neither used vouchers nor paid invoices are canceled
