TASK
The SEC issues Accounting and Auditing Enforcement Releases (AAERs) summarizing SEC actions concerning civil lawsuits brought by the SEC in federal court and related settlements from administrative proceedings. Visit the SEC’s website (www.sec.gov) and locate the link to Accounting and Auditing Enforcement Releases (AAERs) under the “Enforcement” tab. Locate AAER-3932 involving Maxwell Technologies, Inc. issued on March 27, 2018.
a. Briefly describe how the Maxwell Technologies, Inc. 2011 and 2012 financial statements were misstated.
b. Describe examples of deficiencies in Maxwell Technologies’ control environment.
c. One of the inherent limitations of internal control is management override of internal control procedures. Give an example of management override from the Maxwell Technologies AAER.
d. Maintaining adequate documents and records is an important element of an entity’s control activities. How did the company’s vice president of sales and marketing vio- late this important element of internal control?
e. The risk assessment component of internal control involves a process for identifying and analyzing risks that may prevent the organization from achieving its objectives.
How did the senior financial personnel exhibit deficiencies in risk assessment procedures related to red flags regarding sales and collections from the German distributor?
CASE
The following is the description of sales and cash receipts for the Lady’s Fashion Fair, a retail store dealing in expensive women’s clothing. Sales are mainly on account using the store’s own billing rather than credit cards; however, some customers prefer to pay cash.
Salesclerks assist customers and then direct them to the central desk for payment. The computer used to enter sales is operated by the store supervisor, who has been employed for 10 years by Alice Olson, the store owner. The desk and computer are located at the store entrance to control theft of clothes.
When the sale is for cash, the supervisor enters the sale in the computer and generates
two copies of a receipt, keeping one copy for the store’s records and providing one copy to
the customer. The supervisor also enters the code for the salesclerk who assisted the customer into the computer in order to keep track of the sales by each clerk. If no salesclerk assisted the customer, the supervisor leaves the field blank.
If the customer would like to purchase merchandise on credit, the credit sale is ap-
proved by the supervisor from an approved credit list. The supervisor then enters the sale into the computer, and generates two copies of an invoice, keeping one for the store’s re- cords and giving the second copy to the customer. The supervisor enters the code for the salesclerk, if the customer was assisted.
At the end of the day, the supervisor recaps the sales on credit and cash sales according to the invoice and receipt copies and compares the totals to a daily computer-generated summary. The supervisor deposits the cash at the end of each day in the bank’s deposit
box. The supervisor’s copies of the invoices are sent to the accounts receivable clerk along with copies of the receipts and a summary of the day’s receipts. The bank electronically sends the deposit slip directly to the accounts receivable clerk.
A daily summary of sales for each sales clerk is generated from the computer and is used in part to calculate employees’ sales commissions. Marge, the accountant, who is prohibited from handling cash, receives the daily sales summary and the invoice and receipt copies. Daily, she generates a complete printout of all input and summaries. The accounting summary includes sales by salesclerk, cash sales, credit sales, and total sales. Marge
compares this output with the invoice and receipt copies and reconciles all differences.
The computer updates accounts receivable, inventory, and general ledger master files.
After the update procedure has been run on the computer, Marge’s assistant files all sales in-
voices and receipts by customer number. A list of the invoice numbers in numerical sequence, and a list of receipt numbers in numerical sequence, are included in the sales printout.
The mail is opened each morning by a secretary in the owner’s office. All correspondence and complaints are given to the owner. The secretary prepares a prelist of cash receipts. He totals the list, prepares a deposit slip, and deposits the cash daily. A copy of theprelist, the emailed deposit slip, and all remittances returned with the cash receipts are given to Marge. She uses this list and the remittances to record cash receipts and update accounts receivable, again by computer. She reconciles the total receipts on the prelist to the deposit slip and to her printout. At the same time, she compares the deposit slip
received from the bank for cash sales to the cash receipts journal. A weekly aged trial balance of accounts receivable is automatically generated by the computer. A separate listing of all unpaid bills over 60 days is also automatically prepared. These are given to Mrs. Olson, who acts as her own credit collector. She also approves all write-offs of uncollectible items and forwards the list to Marge, who writes them off. Each month Marge mails statements generated by the computer to customers.
Complaints and disagreements from customers are directed to Mrs. Olson, who resolves them and informs Marge in writing of any write-downs or misstatements that require correction.
The computer system also automatically totals the journals and posts the totals to the general ledger. A general ledger trial balance is printed out, from which Marge prepares financial statements. Marge also prepares a monthly bank reconciliation and reconciles the general ledger to the aged accounts receivable trial balance.
Because of the importance of inventory control, Marge prints out the inventory perpetual totals monthly, on the last day of each month. Salesclerks count all inventory after store hours on the last day of each month for comparison with the perpetuals. An inventory shortages report is provided to Mrs. Olson. The perpetuals are adjusted by Marge after Mrs. Olson has approved the adjustments.
a. For each sales transaction-related management assertion based on AICPA auditing standards (see Table 6-3, p. 166), identify one or more existing controls.
b. For each cash receipts transaction-related management assertion based on AICPA auditing standards (see Table 6-3, p. 166), identify one or more existing controls.
c. Identify deficiencies in internal control for sales and cash receipts
