Reference no: EM131618228
Question: Study and Evaluation of Management Control. The study and evaluation of management risk mitigation control is not easy. First, auditors must determine the risks and the controls subject to audit. Then they must find a standard by which performance of the control can be evaluated. Next they must specify procedures to obtain the evidence on which an evaluation can be based. Insofar as possible, the standards and related evidence must be quantified. The following description gives certain information (in italics) that internal auditors would know about or be able to determine on their own. Fulfilling the requirement thus amounts to taking some information from the scenario and figuring out other things by using accountants' and auditors' common sense.
The Scenario Ace Corporation ships building materials to more than a thousand wholesale and retail customers in a five-state region. The company's normal credit terms are net/30 days and no cash discounts are offered. Fred Clark is the chief financial officer, and he is concerned about risks related to maintaining control over customer credit. In particular, he has stated two management control principles for this purpose.
1. Sales are to be billed to customers accurately and promptly. Clark knows that errors will occur but thinks company personnel ought to be able to hold quantity, unit price, and arithmetic errors down to 3 percent of the sales invoices. He considers an invoice error of $1 or less not to matter. He believes prompt billing is important because customers are expected to pay within 30 days. Clark is very strict in thinking that a bill should be sent to the customer one day after shipment. He believes he has staffed the billing department well enough to be able to handle this workload. The relevant company records consist of an accounts receivable control account; a subsidiary ledger that enters customers' accounts by billing (invoice) date and credits and by date of payment receipts; a sales journal that lists invoices in chronological order; and a file of shipping documents crossreferenced by the number on the related sales invoice copy kept on file in numerical order.
2. Accounts receivable are to be aged and followed up to ensure prompt collection. Clark has told the accounts receivable department to classify all customer accounts in categories of
(a) current,
(b) 31-59 days overdue,
(c) 60-90 days overdue, and
(d) more than 90 days overdue.
He wants this trial balance to be complete and to be transmitted to the credit department within five days after each month-end. In the credit department, prompt follow-up means sending a different (stronger) collection letter to each category, cutting off credit to customers over 60 days past due (putting them on cash basis), and giving the over-90-days accounts to an outside collection agency. These actions are supposed to be taken within five days after receipt of the aged trial balance. The relevant company records, in addition to the others listed, consist of the aged trial balance, copies of the letters sent to customers, copies of notices of credit cutoff, copies of correspondence with the outside collection agent, and reports of results-statistics of subsequent collections.
Required: Take the role of a senior internal auditor and write a memo to the internal audit staff to inform them about comparison standards for the study and evaluation of these two management control policies. You also need to specify two or three procedures for gathering evidence about performance of the controls. The body of your memo should be structured as follows:
1. Control: Sales are billed to customers accurately and promptly.
a. Accuracy. (1) Policy standard . . .
(2) Audit procedures . . .
b. Promptness.
(1) Policy standard . . .
(2) Audit procedures . . .
2. Control: Accounts receivable are aged and followed up to ensure prompt collection. a. Accounts receivable aging.
(1) Policy standard . . .
(2) Audit procedures . . .
b. Follow-up prompt collection.
(1) Policy standard . . .
(2) Audit procedures . . .