The following two questions are based on the following case. McPeters Case Description McPeters is a regional chain of fast food restaurants operating on the West Coast of the United States. McPeters is publicly owned and its stock is traded on the American Stock Exchange. A Board of Directors, who has appointed a Chief Executive Officer to handle the day-to-day management of the chain, runs McPeters. McPeters offers New Mexican cuisine in a fast food style. Their menu includes tacos, burritos, tostados, enchiladas, fajitas, and salads with a variety of fillings, most of which include green chilies. All restaurants are company owned and operated. Each has a manager who is responsible for the daily operations of the restaurant including hiring and scheduling staff, purchasing food and supplies, and running local promotions. McPeters restaurant #33, located in Lodi California, recently opened and its new manager, Uwe Gonzales, is concerned about competing with established Mexican restaurants and fast food outlets in the area. Lodi is an agricultural community in the middle of the great Central Valley of California and many of its residents are Hispanic. Uwe feels that his customers will be very sensitive to the quality of the ingredients he uses and wants to monitor his food vendors closely. He has established the following purchasing procedures to control interactions with food vendors. Each night, the assistant manager responsible for closing the restaurant takes an inventory of food and supplies on hand and writes up a purchase order to replenish the inventory for these items. (S)he consolidates all items that are ordered from an individual vendor into one order so that there are only one order per vendor. Uwe, who opens up in the morning, reviews the purchase orders and contacts the restaurant's primary vendors to place the orders. He double checks the vendors' files to make sure that there have been no problems with the vendors' delivery speed or product quality before placing the orders. Uwe has established electronic ordering arrangements with all his vendors and so all he has to do is either e-mail the order to the vendor or use the vendor's website, if the vendor maintains one. A copy of all orders is stored in the restaurant's database when they are placed. When shipments arrive, Uwe or the assistant manager on duty receives the shipment by checking in the food and supplies and comparing the items shipped to the order information stored in the restaurant's database system. For control purposes, Uwe insists that only one person, either himself or one of the assistant managers, check in merchandise. The person who checks in the shipment updates the restaurant's database by recording the amount and date of the items received and checking off items from an outstanding order list. Uwe does not allow shipments to be received if they were not ordered. They are not even removed from the vendor's or shipper's truck. Any problems with a vendor's shipments (e.g., late shipments or incomplete shipments, defective items) are logged in the database. Since the restaurant cannot control how the vendors structure their shipments, shipments can be incomplete because the vendor does not have sufficient quantities on hand to fill the order. In addition, more than one order can be combined into one shipment. Because of the perishable nature of food products, Uwe does not allow backorders. If a vendor ships an incomplete order, the missing items are reordered. To maintain consistent receiving policies, he has extended the "no backorder" policy to supplies as well. When invoices arrive from the vendors, the restaurant's bookkeeper compares the information on the invoice to the order and receiving information in the restaurant's database and writes a check for payment but does not sign it. Since Uwe cannot control vendors' billing practices, invoices may cover parts of shipments or more than one shipment. To make the payment, Uwe must sign all checks and he usually double checks, on a sample basis, the bookkeepers' work before signing and mailing the checks. Questions ? For each of the following activities in a typical purchasing cycle, describe the goal of the activities, the typical processes involved, and the documents involved. This part of the question is general and not specific to McPeters. Then find an example from the McPeters case of how they handle and document these activities. Answer the question by filling in the following table. Activity Goal Processes and Documents McPeters' Example Request goods or services Place an order Receive goods or services Request payment Make payment ? Given the description of how McPeters' restaurant #3 orders merchandise, receives shipments, process invoices, and makes payments, identify three potential financial risks to McPeters associated with that event and suggest one control procedure that might mitigate each risk. I am not looking for operating risks like losing a customer, but risks that affect the accuracy of the financial statements or loss of assets. Classify your risks as completeness, existence/occurrence, or valuation/allocation. I want you to ignore other assertions for this question. The control should be new to McPeters and not already be mentioned in the case. Consider all activity from the point that the associate manager takes and inventory and prepares an order until Uwe mails the check. Explain how each control will mitigate the risk it is designed to mitigate and discuss a potential weakness in the control. Your explanation and identification of potential weakness should provide sufficient detail so that I can tell you understand how the control works. For example, "segregation of duties" is not an acceptable explanation. You need to tell me why segregating specific duties would help mitigate the risk you identified. Your answer should include three distinct risks and three distinct controls even if one control would mitigate both risks. Finally, no control is 100% effective. Thus, I want you to identify a weakness in the control you are suggesting they implement. Answer the question by filling in the following table. Risk Controls Explanation Potential Weakness ? For each of the following financial statement assertions, suggest a substantive procedure that could test the fixed asset account balance and explain how your test would provide assurance for the assertion. ? Existence - ? Rights and obligations - ? Completeness - ? Valuation and allocation -

Session 10 Homework Questions The following two questions are based on the following case. McPeters Case Description McPeters is a regional chain of fast food restaurants operating on the West Coast of the United States. McPeters is publicly owned and its stock is traded on the American Stock Exchange. A Board of Directors, who has appointed a Chief Executive Officer to handle the day-to-day management of the chain, runs McPeters. McPeters offers New Mexican cuisine in a fast food style. Their menu includes tacos, burritos, tostados, enchiladas, fajitas, and salads with a variety of fillings, most of which include green chilies. All restaurants are company owned and operated. Each has a manager who is responsible for the daily operations of the restaurant including hiring and scheduling staff, purchasing food and supplies, and running local promotions. McPeters restaurant #33, located in Lodi California, recently opened and its new manager, Uwe Gonzales, is concerned about competing with established Mexican restaurants and fast food outlets in the area. Lodi is an agricultural community in the middle of the great Central Valley of California and many of its residents are Hispanic. Uwe feels that his customers will be very sensitive to the quality of the ingredients he uses and wants to monitor his food vendors closely. He has established the following purchasing procedures to control interactions with food vendors. Each night, the assistant manager responsible for closing the restaurant takes an inventory of food and supplies on hand and writes up a purchase order to replenish the inventory for these items. (S)he consolidates all items that are ordered from an individual vendor into one order so that there are only one order per vendor. Uwe, who opens up in the morning, reviews the purchase orders and contacts the restaurant's primary vendors to place the orders. He double checks the vendors' files to make sure that there have been no problems with the vendors' delivery speed or product quality before placing the orders. Uwe has established electronic ordering arrangements with all his vendors and so all he has to do is either e-mail the order to the vendor or use the vendor's website, if the vendor maintains one. A copy of all orders is stored in the restaurant's database when they are placed. When shipments arrive, Uwe or the assistant manager on duty receives the shipment by checking in the food and supplies and comparing the items shipped to the order information stored in the restaurant's database system. For control purposes, Uwe insists that only one person, either himself or one of the assistant managers, check in merchandise. The person who checks in the shipment updates the restaurant's database by recording the amount and date of the items received and checking off items from an outstanding order list. Uwe does not allow shipments to be received if they were not ordered. They are not even removed from the vendor's or shipper's truck. Any problems with a vendor's shipments (e.g., late shipments or incomplete shipments, defective items) are logged in the database. Since the restaurant cannot control how the vendors structure their shipments, shipments can be incomplete because the vendor does not have sufficient quantities on hand to fill the order. In addition, more than one order can be 1 combined into one shipment. Because of the perishable nature of food products, Uwe does not allow backorders. If a vendor ships an incomplete order, the missing items are reordered. To maintain consistent receiving policies, he has extended the "no backorder" policy to supplies as well. When invoices arrive from the vendors, the restaurant's bookkeeper compares the information on the invoice to the order and receiving information in the restaurant's database and writes a check for payment but does not sign it. Since Uwe cannot control vendors' billing practices, invoices may cover parts of shipments or more than one shipment. To make the payment, Uwe must sign all checks and he usually double checks, on a sample basis, the bookkeepers' work before signing and mailing the checks. Questions 1) For each of the following activities in a typical purchasing cycle, describe the goal of the activities, the typical processes involved, and the documents involved. This part of the question is general and not specific to McPeters. Then find an example from the McPeters case of how they handle and document these activities. Answer the question by filling in the following table. Activity Request goods or services Place an order Receive goods or services Request payment Make payment 2 Goal Processes and Documents McPe 1) Given the description of how McPeters' restaurant #3 orders merchandise, receives shipments, process invoices, and makes payments, identify three potential financial risks to McPeters associated with that event and suggest one control procedure that might mitigate each risk. I am not looking for operating risks like losing a customer, but risks that affect the accuracy of the financial statements or loss of assets. Classify your risks as completeness, existence/occurrence, or valuation/allocation. I want you to ignore other assertions for this question. The control should be new to McPeters and not already be mentioned in the case. Consider all activity from the point that the associate manager takes and inventory and prepares an order until Uwe mails the check. Explain how each control will mitigate the risk it is designed to mitigate and discuss a potential weakness in the control. Your explanation and identification of potential weakness should provide sufficient detail so that I can tell you understand how the control works. For example, "segregation of duties" is not an acceptable explanation. You need to tell me why segregating specific duties would help mitigate the risk you identified. Your answer should include three distinct risks and three distinct controls even if one control would mitigate both risks. Finally, no control is 100% effective. Thus, I want you to identify a weakness in the control you are suggesting they implement. Answer the question by filling in the following table. 3 Risk 4 Controls Explanation Potential Weakness 2) For each of the following financial statement assertions, suggest a substantive procedure that could test the fixed asset account balance and explain how your test would provide assurance for the assertion. a) b) Rights and obligations - c) Completeness - d) 5 Existence - Valuation and allocation