Sansa, Inc. is a subsidiary of Arya Publishing and specializes in the publication and distribution of reference

books. Sansa's sales for the past year exceeded P20 million, and the company employed an average of

65 employees. Arya periodically sends a member of its internal audit department to audit the operations of

each of its subsidiaries, and Cersei Lannister, Sansa's treasurer, is currently working with Brandon Cruz of

Arya's internal audit staff. Brandon has just completed a review of Sansa's investment cycle and prepared

the following report.

General: Throughout the year, Sansa has made both short-term and long-term investments in securities

registered in the company's name. According to Sansa's bylaws, long-term investment activity must be

approved by its board of directors, while short-term investment activity may be approved by either the

president or the treasurer.

Transactions: Sansa has a computer link with its broker; thus, all buy and sale orders are transmitted

electronically. Only individuals with authorized passwords may initiate certain types of transactions. All

purchases and sales of short-term securities in the year were made by the treasurer. Also, two (2)

purchases and one sale of long-term securities were executed by the treasurer. The long-term security

purchases were approved by the board. The president, having online authorization access to all

transactions, was able to approve a sale of long-term security. The president is given access to authorize

all transactions engaged in by the firm. Because the treasurer is listed with the broker as the company's

contact, all revenue from these investments is received by this individual, who then forwards the checks to

accounting for processing.

Documentation: Purchase and sales authorizations and brokers' advice, are maintained in an electronic

file with authorized access by the treasurer. Brokers' advice is received verbally on the phone, and this

advice is noted on a broker advice form. This form is filed by the treasurer.

The certificates for all long-term investments are kept in a safe deposit box at the local bank; only the

president of Sansa 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. There are

three (3) keys to the box held by the president, treasurer, and the accounting manager.

The accounting manager's key is available to all accounting personnel, should they require documents kept

in this box. Certificates of investments may take up to four (4) weeks to receive after the purchase of the

investment. An electronic inventory list is kept perpetually. The data are keyed in by accounting personnel

who receive a buy/sale transaction sheet from the treasurer. The president, treasurer, and accounting

manager all have passwords to access and update this inventory list. The accounting manager's password

is known by two accounting supervisors in case the inventory list needs to be updated when the accounting

manager is not available. Documentation for two (2) 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 that the broker does not always provide formal documentation

Accounting Records: Deposits of checks for interest and dividends earned on investments are recorded

by the accounting department, but these checks could not be traced to the cash receipts journal maintained

by the individual who normally opens, stamps, and logs incoming checks. These amounts are journalized monthly to account for investment revenue. Electronic payments for investment purchases are authorized

by the treasurer. If the amount is in excess of P15,000, an authorization code given by the treasurer or

president is necessary.

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 traced through the documentation attached to

the journal entries. No attempts are made to adjust either account to the lower between aggregate cost or

market.

To achieve Solomon Publishing's objective of sound internal control, the company believes the following

four (4) controls are the basics for an effective system of accounting control.

Authorization of transactions;

Complete and accurate record-keeping;

Physical control; and

Internal verification.

1. Assess whether the controls above are sufficiently established by Sansa Inc. If not, suggest possible

actions that the company must take.

Authorization of transactions.

Physical control

Internal verification