ASSIGNMENT
Siva Kumar and Vera Collier are friends who are employed by different CPA firms. One day during lunch they are discussing the importance of internal control in determining the amount of audit evidence required for an engagement. Kumar expresses the view that internal control must be evaluated carefully in all companies, regardless of their size or whether they are publicly held, in a similar manner.
His CPA firm requires a standard internal control questionnaire on every audit as well as a flowchart of every transaction area. In addition, he says the firm requires a careful evaluation of the system and a modification in the evidence accumulated based on the controls and deficiencies in the system.
Collier responds by saying she believes that internal control cannot be adequate in many of the small companies she audits; therefore, she simply ignores internal control and acts under the assumption of inadequate controls. She goes on to say, “Why should I spend a lot of time obtaining an understanding of internal control and assessing control risk when I know it has all kinds of weaknesses before I start? I would rather spend the time it takes to fill out all those forms in testing whether the statements are correct.”
a. Express in general terms the most important difference between the nature of the potential controls available for large and small companies.
b. Criticize the positions taken by Kumar and Collier, and express your own opinion about the similarities and differences that should exist in understanding internal control and assessing control risk for different-sized companies.
c. Discuss whether Collier’s approach is acceptable under existing auditing standards for either public or nonpublic companies.
d. Describe what additional procedures Kumar must perform if auditing the financial statements of a large public company.
The following internal controls were identified by the auditor while gaining an understanding of internal control for the sales cycle.
1. Access to the customer master file is restricted to authorized personnel. Customers are added to the master file only after appropriate approval, including adequate back- ground and credit checks.
2. Sales are made only to approved customers. The computer system rejects orders if the customer number is invalid or the order exceeds the customer’s approved credit limit.
3. The computer matches the products and quantities on the customer order, shipping document, and sales invoice and generates an exception report of differences for follow-up in the accounting department.
4. The computer generates a daily list of unmatched shipping documents. The sales clerk follows up on each exception and electronically signs the report when they are resolved.
5. Invoice prices are obtained from the price master file. Any changes to the standard prices on an invoice must be appropriately authorized.
6. Monthly statements are sent by mail or electronically to customers with an outstanding balance.
7. The computer automatically posts sales transactions to the accounts receivable master file and general ledger.
8. The accounts receivable clerk prepares a monthly reconciliation of accounts receiv- able in the general ledger with the accounts receivable master file. He signs and dates the reconciliation and forwards to the controller for review and approval.
a. For each internal control, identify whether the control is an automated control (AC), manual control (MC), or a manual control with an automated component (MAC).
b. For each internal control, identify the transaction-related audit objective(s) to which it applies.
c. For each control, list a specific misstatement that could result from the absence of the control.
d. For each control, identify one audit test that the auditor could use to uncover misstatements resulting from the absence of the control.
