Question

The items below were found while reviewing internal control during your evaluation. Consider whether the item is a significant deficiency or a material weakness based on the other facts presented in the case and the materiality limits set in Milestone Two:

 There were several instances of transactions that were not properly recorded in subsidiary ledgers; transactions were not material, either individually or in aggregate.

 There are a significant number of intercompany transactions monthly. The transactions are related to transfers of inventory between warehouses and the allocation of marketing costs between the business units. The intercompany transactions are frequently material. There is a formal management policy that requires monthly reconciliation of the intercompany accounts; however, there is no process to ensure that the procedures are performed consistently. The result is a lack of timely reconciliations, and differences in intercompany accounts that are frequent and significant.

 Accounts receivable subsidiary ledgers are not reconciled to the general ledger account in a timely and accurate manner. There is a formal policy, however, there is no formal process or procedure that is followed to complete this task. The differences between the subsidiaries and ledger accounts required an audit adjustment of $376,000.

 There was a lack of adequate cut-off procedures to ensure the timely recording of certain period-end accruals. This resulted in an audit adjustment of $3,578,000.

Specifically, the following critical elements must be addressed:

Required:

Evaluate the following components within an organization for gaps in internal controls, and explain how each can be improved:

A. Control environment

B. Risk assessment

C. Information system

D. Control activities

E. Monitoring activities

Guidelines:

The critical elements that must be addressed in your submission are the key components of the COSO Framework: control environment, risk assessment, information system, control activities and monitoring activities. You need to evaluate the transactions in each of these critical elements. This means you should provide examples (real examples - more than the standard) and apply the concept. I do not need you to define each of these areas, but you need to know what each definition means. You must demonstrate how to strengthen and improve the controls in each of these areas with better control procedures – not filler information. You may need to refer to your text to gain an understanding of what these components mean to formulate your argument and provide support. If you just provide a definition of these five components, it will not be sufficient

Answer 1

• Transactions not recorded properly in ledger is a significant deficiency, this is due to weakness in control environment and control activities. Even though the transactions are not material, there is an internal control weakness and it should be avoided by doing weekly, monthly or quarterly audit of transactions.
• Inter company transactions are very important and should be handled properly. It is a material weakness in the company because it may lead to huge frauds in the company. This is due to lack of monitoring activities and control activities. So timely reconciliation should be done by the management and procedures should be implemented in order to maintain the accounts properly and reconciliation should be made in timely manner.
• Reconciliation of ledgers should be done in timely manner. Here due to lack of control activities and monitoring activities. Procedures should be laid in order to make timely reconciliation and audit should be carried out.
• Cut off Procedures are very important in financials and should be maintained accurately. This is due to lack of proper information systems. So Systems should be properly fixed to avoid wrong financials.
• Controls should be properly fixed and risk assessment procedures should be properly carried, in order to provide accurate financials.