Question

The items below were found while reviewing internal control during your evaluation. Consider whether the item is a significant deficiency or a material weakness based on the other facts presented in the case and the materiality limits set in Milestone Two:

 There were several instances of transactions that were not properly recorded in subsidiary ledgers; transactions were not material, either individually or in aggregate.

 There are a significant number of intercompany transactions monthly. The transactions are related to transfers of inventory between warehouses and the allocation of marketing costs between the business units. The intercompany transactions are frequently material. There is a formal management policy that requires monthly reconciliation of the intercompany accounts; however, there is no process to ensure that the procedures are performed consistently. The result is a lack of timely reconciliations, and differences in intercompany accounts that are frequent and significant.

 Accounts receivable subsidiary ledgers are not reconciled to the general ledger account in a timely and accurate manner. There is a formal policy, however, there is no formal process or procedure that is followed to complete this task. The differences between the subsidiaries and ledger accounts required an audit adjustment of $376,000.

 There was a lack of adequate cut-off procedures to ensure the timely recording of certain period-end accruals. This resulted in an audit adjustment of $3,578,000.

Specifically, the following critical elements must be addressed:

Required: Evaluate the following components within an organization for gaps in internal controls, and explain how each can be improved:

A. Control environment

B. Risk assessment

C. Information system

D. Control activities

E. Monitoring activities

Answer 1

A)The instance of not recording the transactions into subsdiary ledgers is a significant defiency as it effects the financials

Incorrect posting into ledgers will effect profit as well as true and fair view

Ex: suppose the amount of sales of $20000 is posted to purchases account then it will both purchase ledger as it is over valued and sales ledger by undervaluing the sales ledger

B) It is significant event nd a material weakness

To know the correct value of cost of production the overheada nd administration cost should be correctly allocated

Wrong allocation of cost will effect gross profit nd departmental costs.The books of accounts doesnt account for true and fair view and financials might be effected

C)Acccounts receivable is a significant event

Te accounts receivable account should be reconciled regularly,for knowing the receivables in a timely manner.Non-updation leads to over statement of asses/Debtors

The amount 376000$ is a significant amount which materiallly effects Fs

D)Cutoff -procedures-significant and material

Meani g .Recording of transactions of one period in another period

Recording of transactions related to one period in another period will impact the financials and their credibility.To elimainate this the organistion should lay proper internal controls for the transactions related to period end.

The improvements needed for each area are described below and thhese are to followed inorder to eliminate above mentioned deficiencies and weaknesses

CONTROL ENVIRONMENT

The organisation should design proper internal controls in such a way that no individual person has both recording and maintaining controls and they ensure internal controls are working efficiently effectively and updated in a timely manner

RISK ASSESSMENT:

Assess the risk where the internal controls are weak and know the materiality of the assesed risk nd there reasons .

Find the necessary actions to eliminate the risk and make corrective adjustments

Information systems :

Verify whether the information systems meets the respective business objectives and necessary controls are laid to error free flow while recording or processing the transaction

CONTROL ACTIVITIES:

Verify no individual person has full control over any single transaction and ensure whether the duties are seggregated properly

Ensure that no unauthorised person making amendments to data which losses integrity

MINTORING ACTIVITIES:

The day to day activities or transaction are to be montionred by responsible head perodiaclly to ensure corrective adjustments can be made with a reasonable time.The activities are to be updated time to time with the changes in the environment