Reference no: EM131487730
Assignment
Illustrative Audit Case: Keystone Computers Networks, Inc.
Part IV: Consideration of Internal Control
This part of the audit case of Keystone Computers ' Networks, Inc. (KCN), illustrates the nature of internal control over the acquisition cycle and the way in which auditors assess control risk for this cycle. The following working papers are included:
• A flowchart description of the acquisition cycle of the company and the related controls prepared by the staff of Adams, Barnes ' Co. (ABC), CPAs. This flowchart focuses on the (accounting) information system and control activities.
• ABC's working paper for the assessment of control risk for accounts payable and purchases as it would appear before any tests of controls are performed. This working paper identifies the prescribed controls and weaknesses for the revenue cycle. It also relates the controls and weaknesses to the various financial statement assertions about accounts payable and purchases.
Below is a list of controlstypicallyimplemented in the processing ofsales transactions.
Required
a. For each control identified, briefly indicate the financial misstatement (or misstatements) that could occur if the controlis not implemented effectively.
b. Identify a test of control that the auditor can do to determine theeffectiveness of the control
A suggestion for the format of the answer is to use a table with two columns, one for each possible misstatement and one for the corresponding test of control.
Controls Typically Found in Sales Processes
1. All transactions under $10,000 may be approved by the computer authorization program. The credit manager must approve all transactions over $10,000.
2. All invoices are priced according to the authorized price list maintained on the computer. Either the regional ordivisional salesmanager must approve anyexceptions.
3. All shipping documents are pre-numbered and periodicallyaccounted for. Shipping document references are noted on all sales invoices.
4. Customer complaints regarding receipt of goods are routed to a customer service representative. Any discrepancies are immediatelyfollowed up to determine the cause of the discrepancy.
5. All merchandise returns must be received by the receiving department and recorded on pre-numbered documents for receipts.A document is created for each item (or batches of like items).
Returns are sent to quality control for testing, and a recommendation for ultimate disposition is made (scrap, rework and sell as a second, or close out as is), noted, and sent to accounting for proper inventorying.
6. The quantity of items invoiced is reconciled with the packingdocumentdeveloped on receipt of the order and the shipping notice by a computer program as the goods are marked for shipment. If discrepancies appear, the shipping documentprevails.A discrepancy report is prepared daily and sent to the warehouse manager for follow-up.
7. The company pays all freight charges, but the customer is charged a freight fee based on a minimum amount and a sliding scale as a percentage of the total invoice. The policy is documented and the computer automatically adds the charge.