Question

The below control transactions relate to the integrated audit of an issuer. Determine if each control is an entity-level control. If the control is not an entity-level control, determine which cycle the control most likely relates to.

1. Mgmt.’s philosophy and operating style promote effective internal control over financial reporting.
2. Timecards are approved by an employee’s immediate supervisor.
3. All computers have identification plates that are listed in a control account.
4. The purchasing department obtains competitive bids from various suppliers to make sure that the best price is obtained for supplies.
5. The audit committee reviews the annual and quarterly financial statements before filing with the SEC.
6. The shipping department utilizes serially numbered bill of lading.
7. Management signs off that they have read and understood the company’s code of ethics.
8. Shipping documents and sales orders are matched before preparing a customer’s invoice.

Options

*Entity Level Control

*Expenditure Cycle

*PPE Cycle

*Revenue Cycle

*Payroll & Personnel Cycle

Answer 1

Hello! Here is the answer. Hope it helps.

Entity level controls means the internal controls which help to implement the directives issued by the senior management. These are general guidelines and practices which are implemented to ensure true and fair financial statements are prepared.

Mgmt.’s philosophy and operating style promote effective internal control over financial reporting- It is clearly a entity-level control as it talks about the management’s philosophy and promotion of internal controls

Timecards are approved by an employee’s immediate supervisor- As this control is related to specific area of attendance of the employees, it is related to Payroll and personnel cycle.

All computers have identification plates that are listed in a control account- It is regarding the assets of the company. Hence it is PPE cycle.

The purchasing department obtains competitive bids from various suppliers to make sure that the best price is obtained for supplies- As this is related to purchasing of various materials, it is internal control over the expenditures. Hence it is related to Expenditure cycle.

The audit committee reviews the annual and quarterly financial statements before filing with the SEC- this internal control is regarding the review of financial statements. Hence it is related to entity-level control.

The shipping department utilizes serially numbered bill of lading- As it is control on sales of the company, it is related to Revenue cycle.

Management signs off that they have read and understood the company’s code of ethics- Clearly a case of entity level control as the management is taking responsibility for the code of ethics.

Shipping documents and sales orders are matched before preparing a customer’s invoice- As it is control on sales of the company, it is related to Revenue cycle.