Question

• Create a scenario where external auditors determined that a company's internal controls were deficient, but such a deficiency might not mean that a material weakness existed. Ascertain the impact on the audit plan if additional deficiencies are discovered on other related internal controls. Support your position.
• Use the Internet or Strayer Library to research at least two (2) accounting scandals within the past five (5) years. Based on the accounting scandals you researched, identify the accounts that the fraud had affected, and analyze the auditor’s responsibility to detect fraud. Next, suggest key internal controls that would have either prevented or detected the fraudulent behavior or transactions.

Answer 1

Let us take a situation like inventory valuation and obsolesence where the external auditors think that the company's internal control process is low as the copany only takes a quarterly physical verification and does the analysis of top 20 high consumption inventory items. However the company investigated the automatic inventory posting system by weighted movong average cost for raw materials and standard cost for Finished goods and WIP. The calculation and posting mechanism is perfectly designed and unless there is data entry error , there is less chance of valuation error. Here the auditors determined that actually no material weakness in inventory valuation system is there but to check and control obsolescence the company must do monthly check lower cost or market value test for the slow moving and hihly price volatile items. Audiotrs may opt for doing some sample checks an this area and allocate suitable time for that.

On the other hand , let us assume that some control deficiencies in Finished Goods inventory valuation for the month end closing found. . Sometimes the goods have been invoiced and shipped but billing has not been done and sometimes billing has been complete but shiiping not done and the FG counted in physical count and stock increased. The auditors found the need to do a deep dive into this area to find out the details of way of working and the internal control present. The auditos will modify the audit paln to devote more time to check the month end FG inventory accounting process flow, check the controls existing and the responsibility matrix for ensuring delivered goods are billed and billed goods are delivered or kept in a segregated area in store to avoid mix up in counting.

The audiotrs will also check the records of each of the month ends for last 12 months to find any material misstatement in inventory valuation of FG. Thus with the discovery of some deficiencies , the whole audit plan needs to be modified to explore the area of possible internal control weakness.