Reference no: EM131624818
Question: Study and Evaluation of Management Control. The study and evaluation of management risk control in a governmental or internal audit 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.
Students working on this case usually do not have the experience or theoretical background to determine control standards and audit procedures, so the following scenario gives certain information (in italics) that internal auditors would know about or be able to learn on their own. Fulfilling the requirement thus amounts to taking some information from the scenario and learning 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; it offers no cash discounts. Jerry Clark is the chief financial officer and is concerned about risks related to maintaining control over customer credit. In particular, Clark 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 should be able to hold quantity, unit price, and arithmetic errors down to 3 percent of the sales invoices. Clark considers an invoice error of $1 or less not to matter and believes that 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 and believes the billing department is staffed well enough to be able to handle this workload. The relevant company records consist of an accounts receivable control account; a subsidiary ledger of customers' accounts in which charges are entered by billing (invoice) date, and credits are entered by date of payment receipts; a sales journal that lists invoices in chronological order; and a file of shipping documents cross-referenced 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. Clark 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 that are more than 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 ones 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. You are to 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 . . .