In: Accounting
Internal controls can be categorized using the following
framework:
1. | Control environment | ||
2. | Risk assessment | ||
3. | Control activities | ||
3.1 Authorization | |||
3.2 Performance reviews | |||
3.3 Information-processing controls | |||
3.3.1. IT general controls | |||
3.3.2. IT application controls | |||
3.3.3. IT-dependent manual controls | |||
3.4 Physical controls | |||
3.5 Segregation of duties | |||
4. | Information and communication | ||
5. | Monitoring |
Following is a list of controls implemented by Waterfront,
Inc.:
a. | Management established a code of conduct that includes rules regarding conflicts of interest for purchasing agents. | ||
b. | Waterfront’s management established a disclosure committee to review the selection of new accounting policies. | ||
c. | Any software program revision must be approved by user departments after testing the entire program with test data. | ||
d. | The managers of each of Waterfront’s manufacturing departments must review expenditures charged to their responsibility center weekly. | ||
e. | The CEO, CFO, and controller review the financial consequences of business risks annually to ensure that controls are in place to address significant business risks. | ||
f. | Human resources focuses on ensuring that accounting personnel have adequate qualifications, experience, and training for work performed in billing and accounts receivable. | ||
g. | Security software limits access to programs and data files, and keeps a continuous log of programs and files that have been accessed. The log is reviewed by the security manager daily. | ||
h. | A software program prints a daily report of all shipments that have not yet been billed to customers. | ||
i. | The controller reviews sales and collections bi-monthly. | ||
j. | The software application compares the information on the sales invoice with underlying shipping information for the transaction. | ||
k. | Customer billing complaints are directed to internal audit for follow-up and resolution. | ||
l. | The documentary transaction trail for all credit sales is documented in company policy manuals. | ||
m. | Waterfront uses a Microsoft Excel program to calculate depreciation expense. An accounting manager tests the calculations on a sample basis and evaluates the overall reasonableness of depreciation expense. |
Identify the assertion or assertions to which each procedure pertains: (Existence/Occurrence, Completeness, Valuation/Allocation, Rights/Obligations, Presentation/Disclosure).
Solution | Identification of assertion or assertions to which each procedure pertains: | |
List of Controls | Assertions | |
(a) | Management established a code of conduct that includes rules regarding conflicts of interest for purchasing agents. |
1) Existance- In control
environment 2)Rights/Obligations -of Purchasing agents 3 Disclosure- Of interest of each purchasing agenets |
(b) | Waterfront’s management established a disclosure committee to review the selection of new accounting policies. |
1) Valuation- Itens if asset and
liablity valued as per new accounting policies 2) Disclosure-Disclosure in statement of financial statements |
(c ) | Any software program revision must be approved by user departments after testing the entire program with test data. |
1) Existence- software program
procedure must exist 2) Completeness - testing should be completed for each program tested. 3)Right/ Obligation- Right and obligation should be determined for user deparments who would approve the programm. 4) Disclosure- reason for revision of software progrma must be recorded and disclosed to user deparment. |
(d) | The managers of each of Waterfront’s manufacturing departments must review expenditures charged to their responsibility center weekly. |
1) Existenc/Ocuurrence- Expenditure
must occur and system of review must exist. 2) Allocation - Expenditure appropriatly allocated to each responsibility center 3) Responsibity -Responsibity for not reviewing or inappropriatly reviewing the expenditure by manufecturing department. 4)Presentation/ Dislosure- Disclosure must be given in statement of cost of each responsibity center. |
(e ) | The CEO, CFO, and controller review the financial consequences of business risks annually to ensure that controls are in place to address significant business risks. |
1) Existence/Ocuurrence- system of
review of risk assessment must exist. 2) Obligations- obligation in relation to ineffective or inappropriate control in place. 3)- Presentation/ Disclosure of signigicant business risk. |
(f) | Human resources focuses on ensuring that accounting personnel have adequate qualifications, experience, and training for work performed in billing and accounts receivable. |
1) Existence of review and assessment
procedure. 2)Allocation of work as per qualification and training of personnel. 3)Right/Obligation of accounting personnel for purforming work 4) Disclosure of adequate documentation of qualification and experiences. |
(g) | Security software limits access to programs and data files, and keeps a continuous log of programs and files that have been accessed. The log is reviewed by the security manager daily. |
1) Existence of review and access
controls 2) Obligation of security manager for reviewing the log files. 3) Dislosure of unauthorised access to the program and data files. |
(h) | A software program prints a daily report of all shipments that have not yet been billed to customers. |
1) Completeness- Printing of daily
report must be for all shipments tha have not yet been billed to
customers. 2)Disclosure -all prints out must be presented to appropriate authority. |
(i) | The controller reviews sales and collections bi-monthly. |
1) Existence of review procedure of
slaes and collections by controller. 2) Right/Obligation of controller for reviewing the sales and collections. 3) Disclosure- of inappropriate recording of sales and collections. |
(j) | The software application compares the information on the sales invoice with underlying shipping information for the transaction. |
1) Control must exist. 2) Transaction must be completed 3) variations must be reported and disclosed to appropriate authority. |
(k) | Customer billing complaints are directed to internal audit for follow-up and resolution. |
1) follow-up and resolution procedure
must exist. 2)Right/obligation of internal auditor must be defined and assessed. 3) Unresolved complaints must be presented and disclosed to appropriate authorities. |
(l) | The documentary transaction trail for all credit sales is documented in company policy manuals. |
1) system of documentation of
documentary transaction tail must exist. 2) all credit sales must be completed. |
(m) | Waterfront uses a Microsoft Excel program to calculate depreciation expense. An accounting manager tests the calculations on a sample basis and evaluates the overall reasonableness of depreciation expense. |
1) Valuation- Depreciation expense
must be properly calculated. 2) Depreciation expense disclosed in financial results and financial statements must be correct. |