TASK

Clerks print submitted orders from the online system. After credit authorization is verified with the credit card agency, the accounting department enters the sale into the sales jour-nal. The accounting department then sends a copy of the order to warehouse personnel, who process the shipment. The inventory system is updated based on bills of lading information forwarded to accounting after shipment. Customers may return parts for full refund if returned within 30 days of submitting the order online. The company agrees to refund shipping costs incurred by the customer for returned goods.
a. Describe deficiencies in Parts for Wheels’ online sales system that may lead to mate-
rial misstatements in the financial statements.
b. Identify changes in manual procedures that could be made to minimize risks, with-
out having to reprogram the current online system.
c. What transaction-related and balance-related audit objectives would the auditors be
most concerned about based on the process currently in place?
d. Explain how auditors might use generalized audit software to address the concerns
identified in part c.

Based on a cost-benefit analysis, management at First Community Bank decided to contract with Technology Solutions, a local data center operator, to host all of the bank’s financial reporting applications. To avoid the significant costs of devel-
oping and maintaining its own data center, First Community contracts with Technology Solutions to provide IT server access in a highly secure, environmentally controlled data center facility owned by Technology Solutions. Similar to First Community, other businesses also contract with Technology Solutions to host applications at the same data center.

The bank is directly linked through highly secure telecommunication lines to the data center, which allows bank personnel to transmit data to and from the data center as if the data center was owned by First Community. For a monthly fee, Technology Solutions supports the server hardware in an environment with numerous backup controls in the event power is lost or other hardware failures occur. Bank personnel are responsible for selecting and maintaining all application software loaded on Technology Solutions servers, and selected bank personnel have access to those servers located at the Technology Solutions data center. Bank personnel enter all data, run applications hosted at Technology Solutions, and retrieve reports summarizing the processing of all bank transactions.
a. What risks might First Community assume with this approach to IT system support?
b. How does the use of Technology Solutions impact First Community’s internal
controls?
c. What impact, if any, does reliance on Technology Solutions as the data center pro-vider have on the audit of First Community’s financial statements?

Beds and Spreads, Inc., specializes in bed and bath furnishings. Its inventory system is linked through the Internet to key suppliers. The auditor identified the following internal controls in the inventory cycle:
1. The computer initiates an order only when perpetual inventory levels fall below pre-
specified inventory levels in the inventory master file.
2. The sales and purchasing department managers review inventory reorder points on
a monthly basis for reasonableness. Approved changes to reorder points are entered
into the master file by the purchasing department manager and an updated print-
out is generated for final review. Both managers verify that all changes were entered
correctly and initial the final printout, indicating final approval. These printouts are
maintained in the purchasing department.
3. The computer will initiate a purchase order only for inventory product numbers
maintained in the inventory master file.
4. The purchasing department manager reviews a computer-generated exception report
that highlights weekly purchases that exceed $10,000 per vendor.

5. Sales clerks send damaged merchandise on the store shelves to the back storage room. The sales department manager examines the damaged merchandise each month and prepares a listing showing the estimated salvage value by product number. The ac- counting department uses the listing to prepare a monthly adjustment to recorded inventory values.
a. Consider each of the preceding controls separately. Identify whether the control is a(n)
(1) automated control embedded in computer software.
(2) manual control with effectiveness based significantly on IT-generated
information.
(3) manual control with effectiveness not significantly reliant on IT-generated information.

b. Describe how the extent of testing of each control will be affected in subsequent years if general controls are effective, particularly controls over program and master file changes.

AU-C 265, “Communicating Internal Control Related Matters Identified in an Audit,” provides guidance to auditors on communicating deficiencies in internal control to management and those charged with governance when performing an audit under AICPA auditing standards. Visit the AICPA website (www.aicpa.org) and select “Research.” Next select “Standards” from the dropdown menu and then “Audit
and Attest Standards.” Use the Clarified Statements on Auditing Standards. Read the
auditing standard to answer the following questions.
a. Does AU-C 265 apply if the auditor is performing an audit of internal control that is
integrated with the audit of the financial statements?
b. To whom should the auditor communicate material weaknesses and significant defi-
ciencies? How and when should these be communicated?
c. To whom should the auditor communicate other deficiencies? How may they be
communicated?
d. Can the auditor communicate that no material weaknesses or significant deficiencies
were identified? Explain