Assume you are considering an entity’s internal controls over credit sales and cash collection. System documentation was accomplished through a questionnaire and written narratives and, in conjunction with a transaction walk-through, revealed the following potential weaknesses in internal control, some of which, depending on their severity, could prompt you to set control risk at the maximum. a. New customers are not approved before ordered good are shipped. b. Sales prices vary from customer to custom. c. No approval is required for returned goods from customers. d. Subsidiary accounts receivable records do not always agree with the general ledger control account. e. Blank checks are left unprotected in an unlocked safe. Required: For each potential weakness, indicate a control or controls that management could implement to reduce the likelihood of errors or frauds. Case 4 (Adapted) During your audit of Grace Company’s December 31, 2013 financial statements, you become aware of the following controls or procedures Grade implemented over credit sales and cash collections. a. Sales terms are approved by supervisory personnel before shipment. b. All credit memoranda are prenumbered sequentially and controlled. C. Shipping documents are prenumbered sequentially and controlled. d. Copies of shipping documents are hand-carried to the Billing Department within one hour after shipment. E. Sales invoices are compared with sales journals and with customers’ individual subsidiary records. f. In contrast to prior years, non-credit (cash) sales are handled in one centralized location, rather than throughout all departments. g. Unused checks are prenumbered and locked in a fireproof vault accessible only to the treasurer, who is one of two endorsers on customers’ checks. Required: For each control or procedure, indicate 1. A potential error or fraud that might circumvent the control or procedure and 2. The internal control objective that is served by the control or procedure
Assume you are considering an entity’s internal controls over credit sales and cash collection. System documentation was accomplished through a questionnaire and written narratives and, in conjunction with a transaction walk-through, revealed the following potential weaknesses in internal control, some of which, depending on their severity, could prompt you to set control risk at the maximum. a. New customers are not approved before ordered good are shipped. b. Sales prices vary from customer to custom. c. No approval is required for returned goods from customers. d. Subsidiary accounts receivable records do not always agree with the general ledger control account. e. Blank checks are left unprotected in an unlocked safe. Required: For each potential weakness, indicate a control or controls that management could implement to reduce the likelihood of errors or frauds. Case 4 (Adapted) During your audit of Grace Company’s December 31, 2013 financial statements, you become aware of the following controls or procedures Grade implemented over credit sales and cash collections. a. Sales terms are approved by supervisory personnel before shipment. b. All credit memoranda are prenumbered sequentially and controlled. C. Shipping documents are prenumbered sequentially and controlled. d. Copies of shipping documents are hand-carried to the Billing Department within one hour after shipment. E. Sales invoices are compared with sales journals and with customers’ individual subsidiary records. f. In contrast to prior years, non-credit (cash) sales are handled in one centralized location, rather than throughout all departments. g. Unused checks are prenumbered and locked in a fireproof vault accessible only to the treasurer, who is one of two endorsers on customers’ checks. Required: For each control or procedure, indicate 1. A potential error or fraud that might circumvent the control or procedure and 2. The internal control objective that is served by the control or procedure
Chapter8: Fraud, Internal Controls, And Cash
Section: Chapter Questions
Problem 6MC: A company is trying to set up proper internal controls for their accounts payable/inventory...
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Assume you are considering an entity’s internal controls over credit sales and cash collection. System documentation was accomplished through a questionnaire and written narratives and, in conjunction with a transaction walk-through, revealed the following potential weaknesses in internal control, some of which, depending on their severity, could prompt you to set control risk at the maximum.
a. New customers are not approved before ordered good are shipped.
b. Sales prices vary from customer to custom.
c. No approval is required for returned goods from customers.
d. Subsidiary accounts receivable records do not always agree with the general ledger control account.
e. Blank checks are left unprotected in an unlocked safe.
Required: For each potential weakness,
indicate a control or controls that management could implement to reduce the likelihood of errors or frauds.
Case 4 (Adapted)
During your audit of Grace Company’s December 31, 2013 financial statements, you become aware of the following controls or procedures Grade implemented over credit sales and cash collections.
a. Sales terms are approved by supervisory personnel before shipment.
b. All credit memoranda are prenumbered sequentially and controlled.
C. Shipping documents are prenumbered sequentially and controlled. d. Copies of shipping documents are hand-carried to the Billing Department within one hour after shipment.
E. Sales invoices are compared with sales journals and with customers’ individual subsidiary records.
f. In contrast to prior years, non-credit (cash) sales are handled in one centralized location, rather than throughout all departments.
g. Unused checks are prenumbered and locked in a fireproof vault accessible only to the treasurer, who is one of two endorsers on customers’ checks.
Required: For each control or procedure, indicate
1. A potential error or fraud that might circumvent the control or procedure and
2. The internal control objective that is served by the control or procedure
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