Internal controls 1 through 5 were tested in prior audits. Evaluate each internal control independently and determine which controls must be tested in the current year’s audit of the December 31, 2019, financial statements. Be sure to explain why testing is or is not required in the current year.
1. The general ledger accounting software system automatically reconciles totals in each of the subsidiary master files for accounts receivable, accounts payable, and inventory accounts to the respective general ledger accounts. This control was most recently tested in the prior year. No changes to the software have been made since testing and there are effective controls over IT security and software program changes.
2. The client’s purchase accounting system was acquired from a reputable software vendor several years ago. This system contains numerous automated controls. The auditor tested those controls most recently in the 2018 audit. No changes have been made to any of these controls since testing and the client’s controls over IT security and software program changes are excellent.
3. The accounts payable clerk matches vendor invoices with related purchase orders and receiving reports and investigates any differences noted. This control was tested in
the 2018 fiscal year-end audit. No changes to this control or personnel involved have
occurred since testing was performed.
4. The sales system automatically determines whether a customer’s purchase order and related accounts receivable balance are within the customer’s credit limit. The risk of shipping goods to customers who exceed their credit limit is deemed to be a significant risk. This control was last tested in the December 31, 2017, financial statement audit.
5. The perpetual inventory system automatically extends the unit price times quantity
for inventory on hand. This control was last tested in the audit of December 31, 2017,
financial statements. During 2019, the client made changes to this software system.
12-25 (OBJECTIVES 12-1, 12-2) Anthony Liu, CPA, prepared the flowchart on the next page that portrays the raw materials purchasing function of one of Anthony’s clients, Medium-Sized Manufacturing Company, from the preparation of initial documents through the vouching of invoices for payment in accounts payable. Assume that all documents are prenumbered.
Identify the deficiencies in internal control that can be determined from the flowchart.
Use the methodology discussed in this chapter. Include internal control deficiencies re-
sulting from activities performed or not performed.
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