Question

The following are misstatements that have occured in Merry Accessories Ltd., a trading company selling handbags and accessories:

1. The order clerk placed purchase orders for accessories items; however, it was discovered that only purchase orders above $3000 required authorization. The order clerk regularly placed order for personal goods up to value of $3000.

2. When goods were received, the warehouse department verified the quantity to the suppliers despatch note and checked the quality of the goods received. The warehouse department, however, did not check against the purchase order as no copy of the purchase order was ever sent to the warehouse department. It was discovered that three batches of handbags, which the company did not order, were received and subsequently paidfor.

3. Purchase invoices were input daily by the purchase ledger clerk. No application control was ever applied over the input process. It was discovered that several mistakes were made during the input process and suppliers were paid incorrectly.

4. The finance director is only provided with the total amount of payments to be made on the payment list for payment approval. It was then discovered that some of the payees were fictitious suppliers.

5. The sales ledger clerk was having a long holiday during Christmas times. Upon return in January, the clerk entered all the unrecorded sales during his leave as January's sales for convenience sake.

6. During the sales ledger clerk's holiday, one of salespersons, a close friend of the sales ledger clerk, helped inputting the sales to the accounting system. It was than discovered that two cash sales transactions marked with "recorded" were not input to the system.

7. When processing orders, the sales clerk entered a discount manually into the invoice. As the sales clerk was a newly recruited member, it was noted that the employee either forgot to enter the discount or entered an incorrect level of discount.

Required:

a. For each misstatement, identify one or more types of controls that were absent.

b. For each misstatement, identify the transaction-related management assertions that have not been met.

c. For each misstatement, suggest a control that may have prevented or detected the misstatement.

Answer 1

1. The order clerk placed purchase orders for accessories items; however, it was discovered that only purchase orders above $3000 required authorization. The order clerk regularly placed order for personal goods up to value of $3000.

Ans

a) Here, the control with respect to Proper Authorization of Transaction and Activities is missing has taken advantage of the loophole in Expense Authorization. In addition to that one more important control is missing that is Independent Check on Performance which is necessary for the continuos verification of other control.

b) The Transaction related Management assertion that is not met is Authorization as it requires that all types of transaction has to be approved by appropriate member of Management.

c) If a proper internal check and verification by an independent person would have been in place i.e. Control with respect to Independent Check on Perfomance. It could have prevented such missatement by the clerk as his activities would have been regulated timely.

2. When goods were received, the warehouse department verified the quantity to the suppliers despatch note and checked the quality of the goods received. The warehouse department, however, did not check against the purchase order as no copy of the purchase order was ever sent to the warehouse department. It was discovered that three batches of handbags, which the company did not order, were received and subsequently paidfor.

Ans

a) Here, the control with respect to Adequate Document as Records has been compramised as vital document such as Purchase Order or its copy is not sent to Warehouse for verification of rate and quantity ordered and received. Apart from this Independent check on performance is also missing.

b) Here, the Transaction related Management assertion that is not met is Occurance which requires that transaction in accounitng records actually took place. In the present case payment has been made for goods which has not been ordered.

c) If a copy of Purchase order was sent to the Warehouse, the would have verified the the quantity mentioned in the dispatch note with the Purchase Order and could have prevented the said misstatment.

3. Purchase invoices were input daily by the purchase ledger clerk. No application control was ever applied over the input process. It was discovered that several mistakes were made during the input process and suppliers were paid incorrectly.

Ans

a) Here, the control with respect to Adequate Segragation of Duties is compramised and there is no application control or Information Proceesing Control with respect to Accounting Information system which can identify duplicate posting of invoices.

b) The Transaction related Management Assertion that is not met are Accuracy and Occurance. Accuracy requires that transaction are precisely entered and occurance required that transaction in accounitng records actually took place. Which in the present case are missing.

c) A system of proper internal check and seperation of duties would have identified the error with respect to invoice posting.

4.The finance director is only provided with the total amount of payments to be made on the payment list for payment approval. It was then discovered that some of the payees were fictitious suppliers.

Ans.

a) Here, the control with respect to Adequate Document and Records is missing as relavant supporting documents is not supplied to the Finance Director for approval.

b) The Transaction related Management Assertion that is not met is Occurance as Fictitous supplier has been paid for.

c) If the Proper supporting document like invoice and Purchase Order is also supplied with the Payment list then the same could have been prevented.

5.The sales ledger clerk was having a long holiday during Christmas times. Upon return in January, the clerk entered all the unrecorded sales during his leave as January's sales for convenience sake.

Ans

a) Here, the control with respect to Information Processing Control is missing as Previous year sales is recorded as current year sales.

b) The Transaction related Management Assertion that is not met is Cut Off as Revenue is moving from one period to another Period.

c) If a Proper Information Proccesing Control of Account Information System in place could prevent such type of Misstatement

7. When processing orders, the sales clerk entered a discount manually into the invoice. As the sales clerk was a newly recruited member, it was noted that the employee either forgot to enter the discount or entered an incorrect level of discount.

Ans

a) Here, the control with respect to Independent Check and Control is Missing. Since the Sales Clerk is new his work should be cross checked by another experienced person.

b)The Transaction related Management Assertion that is not met is Accuracy whict requieres the Transaction to be Precise.

If the proper information processing system would have been in place which could have performed the calculation of Discount automatically, this error could have been prevented. If a proper timely internal check and balance is in place then such error can be detected earlier.