7e Ch6 Mini Case Controls_solutions
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Transcript of 7e Ch6 Mini Case Controls_solutions
EarthWear Hands-on Mini-caseChapter 6 - Control Environment and Internal Control Documentation© The McGraw-Hill Companies, Inc., 2010
INSTRUCTIONS:
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Fields you are to complete on the questionnaire are colored yellow. The color will disappear when the field is completed.
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In this mini-case you will complete questionnaires for evaluating the corporate governance and internal control environment of EarthWear Clothiers, Inc.
Double-click on the following icons (documents will open in Microsoft Word) and read the memos on Corporate Governance and Control Environment Issues and Internal Control Components. Refer back to these memos as you answer the questionnaires.
The worksheets titled "Control Environ. Questionnaire" and "Internal Control Questionnaires" contain partially completed copies of the questionnaires you are to finish. Scan through the questions that have already been completed.
Using the information outlined in the memos above and answers to other questions in the questionnaires, complete questions 1, 7, 12, 17, 19, and 21 of the Control Environment Questionnaire and questions 1, 3, 9, 12, 14, and 15 of the Internal Control Questionnaire.
When the questionnaires are completed, enter your initials in the yellow boxes with title "Initial Here".
Print the "Print Out" worksheet unless your instructor indicates to submit the completed file electronically. The "Print Out" worksheet contains only those questions you have completed and is formatted to print on two pages.
Internal Control Environment
Corporate Governance
Control Environment Questionnaire
Balance Sheet Date: 12/31/2010
PARTICIPATION OF THE BOARD OF DIRECTORS AND AUDIT COMMITTEE
QuestionYes,
No, N/A Comments
1 Provide Any Additional Comments Here
2 Does an audit committee exist? Yes
3Yes
4Yes
5
Is this evidenced by Yes
MANAGEMENT’S PHILOSOPHY AND OPERATING STYLE
QuestionYes,
No, N/A Comments
6 Are management and operating decisions dominated by one or a few individuals? No
7Are business risks adequately monitored?
Provide Any Additional Comments Here
8Yes
9 Does management adequately consult with its auditors on accounting issues? Yes
10 Has management been responsive to prior recommendations from its auditors? Yes
Client: EarthWear Clothiers
Initial Here
Reviewed by: _____ Date: _______
An entity’s control consciousness is influenced significantly by the entity’s board of directors or audit committee. Attributes include the board or audit committee’s independence from management, the experience and stature of its members, the extent of its involvement and scrutiny of activities, the appropriateness of its actions, the degree to which difficult questions are raised and pursued with management, and its interaction with internal and external auditors.
Are there regular meetings of the board of directors (or comparable bodies) to set policies and objectives, review the entity’s performance, and take appropriate action, and are minutes of such meetings prepared and signed on a timely basis?
Respond Here
Does the audit committee adequately assist the board in maintaining a direct line of communication with the entity’s external and internal auditors?
The audit committee meets with the external and internal auditors on a quarterly basis.
Does the audit committee have adequate resources and authority to discharge its responsibilities?
The audit committee also meets quarterly, just prior to the quarterly board of directors meeting. Minutes are maintained of each meeting. The audit committee consists only of individuals who are not part of management.· Regular meetings?
· The appointment of qualified members?
· Minutes of meetings?
Management’s philosophy and operating style significantly influence the control environment — particularly when management is dominated by one or a few individuals. Management’s philosophy and operating style should create a positive atmosphere that reduces the risk of misstatement and that is conducive to the effective operation of internal control.
Respond Here
Is management willing to adjust the financial statements for misstatements that approach a material amount?
11 Is a high priority given to internal control? Yes
ORGANIZATIONAL STRUCTURE
QuestionYes,
No, N/A Comments
12 Provide Any Additional Comments Here
13Are controls for authorization of transactions established at an adequately high level? Yes
14 Are such controls adequately adhered to? Yes
15 Is the organizational structure appropriate for the size and complexity of the entity? Yes
16Yes
17Is data processing centralized or decentralized?
Provide Any Additional Comments Here
ASSIGNMENT OF AUTHORITY AND RESPONSIBILITY
The methods of assigning authority and responsibility should result in clear understanding of reporting relationships and responsibilities established within the entity.
QuestionYes,
No, N/A Comments
18Yes
19 Provide Any Additional Comments Here
20Yes
21 Provide Any Additional Comments Here
22 Is there adequate documentation of data processing controls? Yes
An entity’s organizational structure provides the framework within which its activities for achieving entity-wide objectives are planned, executed, controlled, and monitored. Establishing a relevant organizational structure includes considering key areas of authority and responsibility and appropriate lines of reporting.
Is the organization of the entity clearly defined in terms of lines of authority and responsibility?
Respond Here
Has management established policies for developing and modifying accounting systems and control activities?
Respond Here
Is there a clear assignment of responsibility and delegation of authority to deal with such matters as organizational goals and objectives, operating functions, and regulatory requirements?
Are employee job responsibilities, including specific duties, reporting relationships, and constraints, clearly established and communicated to employees?
Respond Here
Has management clearly communicated the scope of authority and responsibility to data processing management?
Does adequate computer systems documentation indicate the controls for authorizing transactions and approving systems changes?
Respond Here
HUMAN RESOURCE POLICIES AND PROCEDURES
QuestionYes,
No, N/A Comments
23Yes
24Yes
25 Is the turnover of accounting personnel relatively low? Yes There has been no turnover in the last three years.
26 Does the entity adequately train new accounting personnel? Yes
27Yes
28Yes
© The McGraw-Hill Companies, Inc., 2010
Human resource policies and practices relate to hiring, orientation, training, evaluating, counseling, promoting, compensating, and remedial actions. The entity’s human resource policies and practices should positively influence the entity’s ability to employ sufficiently competent personnel to accomplish its goals and objectives.
Do client accounting personnel appear to have the background and experience for their duties?
Do client accounting personnel understand the duties and procedures applicable to their jobs?
Does the workload of accounting personnel appear to permit them to control the quality of their work?
Does previous experience with the client indicate sufficient integrity on the part of personnel?
Risk Assessment Questionnaire
Balance Sheet Date: 12/31/2010
QuestionYes,
No, N/A Comments
1 Provide Any Additional Comments Here
2Yes
3 Provide Any Additional Comments Here
Control Procedures Questionnaire
Balance Sheet Date: 12/31/2010
QuestionYes,
No, N/A Comments
4Yes
5
Are such objectives: Yes
· Clearly written?
· Actively communicated throughout the entity?
· Actively monitored?
6Does the appropriate level of management: Yes
· Adequately investigate variances?
· Take appropriate and timely corrective actions?
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Client: EarthWear Clothiers
Initial Here
Reviewed by: _____ Date: _______
A risk assessment process should consider external and internal events and circumstances that may occur and adversely affect its ability to initiate, record, process, and report financial data consistent with management’s assertions. Management should initiate plans, programs, or actions to address significant, identified risks or accept the risk because of cost considerations.
Does the entity set entity-wide objectives that state what the entity desires to achieve, and are they supported by strategic plans?
Respond Here
Does the entity have a risk analysis process that includes estimating the significance of the risks, assessing the likelihood of their occurring, and determining the actions needed to respond to the risks?
The company’s business plan and budgeting process includes analyzing risks that might affect the company. Monthly meetings are held by senior management to discuss recent events and how they may affect the company.
Does the entity have mechanisms to identify and react to changes that may dramatically and pervasively affect the entity?
Respond Here
Client: EarthWear Clothiers
Initial Here
Reviewed by: _____ Date: _______
Control procedures include the policies and procedures that ensure that management’s directives are effective in processing and preparing financial statements. Control activities ensure that the entity’s financial reporting objective is carried out.
Does management have clear objectives in terms of budget, profit, and other financial and operating goals?
EarthWear has a very sophisticated budgeting process that includes monitoring activities. All significant budget variances are summarized and explained in a monthly controller’s report. See A20 for extracts of significant items from the controller’s report.
7 YesHas management established procedures to prevent unauthorized access to, or destruction of, documents, records, assets, programs and data files?
See B10 for a description of the IT Department’s controls over access to (1) the computer operations area and (2) data programs and files.
Information and Communication Questionnaire
Balance Sheet Date: 12/31/2010
INFORMATION SYSTEMS
QuestionYes,
No, N/A Comments
8 Yes
9 Provide Any Additional Comments Here
10 Yes
COMMUNICATION
QuestionYes,
No, N/A Comments
11 Yes
12 Are communication channels established for people to report suspected improprieties? Provide Any Additional Comments Here
13 Yes There are good communications channels across departments.
Client: EarthWear Clothiers
Initial Here
Reviewed by: _____ Date: _______
Information systems initiate, record, process, and report information. Relevant information includes industry, economic, and regulatory information obtained from external sources, as well as internally generated information.
Does the information system give management the necessary reports on the entity’s performance relative to established objectives, including relevant external and internal information?
The strategic plan and the budgeting process identify information that is needed to analyze and monitor the entity’s objectives.
Is the information provided to the right people in sufficient detail and in time to enable them to carry out their responsibilities effectively?
Respond Here
Is the development or revision of information systems over financial reporting based on a strategic plan?
There is a strategic plan for updating the information systems over financial reporting that is revised on an annual basis.
Communication includes the extent to which personnel understand how their activities in the financial reporting information system relate to the work of others and the means of reporting exceptions to an appropriate level within the entity.
Does management communicate employees’ duties and control responsibilities in an effective manner?
Employees are provided with information regarding their duties during their initial training.
Respond Here
Does communication flow across the organization adequately to enable people to discharge their responsibilities effectively?
Monitoring Questionnaire
Balance Sheet Date: 12/31/2010
QuestionYes,
No, N/A Comments
14 How many customer complaints are received about billings? Provide Any Additional Comments Here
15 Provide Any Additional Comments Here
16Does the entity have an internal audit function? Yes
17 Yes
18 Does the entity conduct separate evaluations of internal control? Yes
© The McGraw-Hill Companies, Inc., 2010
Client: EarthWear Clothiers
Initial Here
Reviewed by: _____ Date: _______
Management should monitor internal control in the ordinary course of operations. This monitoring includes regular management and supervisory activities and other actions personnel take in performing their duties that assess the quality of internal control.
Respond Here
Are complaints investigated for underlying causes and any internal control deficiencies corrected?
Respond Here
Are internal control recommendations made by internal and external auditors implemented?
Recommendations that management and the board feel are cost beneficial are implemented.
The board of directors focuses on the control environment and monitoring activities. The audit committee meets regularly with the internal and external auditors about control related activities.
Name:
Class:
PRINT OUT OF QUESTIONNAIRE RESPONSES
Yes,No, N/A
CONTROL ENVIRONMENT QUESTIONNAIRE
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7Are business risks adequately monitored?
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17Are accounting and data processing centralized or decentralized?
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21
Client: EarthWear Clothiers
Are there regular meetings of the board of directors (or comparable bodies) to set policies and objectives, review the entity’s performance, and take appropriate action, and are minutes of such meetings prepared and signed on a timely basis?
Incomplete
Incomplete
Is the organization of the entity clearly defined in terms of lines of authority and responsibility? Incomplet
e
Incomplete
Are employee job responsibilities, including specific duties, reporting relationships, and constraints, clearly established and communicated to employees? Incomplet
e
Does adequate computer systems documentation indicate the controls for authorizing transactions and approving systems changes? Incomplet
e
Name:
Class:
PRINT OUT OF QUESTIONNAIRE RESPONSES
Yes,No, N/A
Client: EarthWear Clothiers
INTERNAL CONTROL QUESTIONNAIRES
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3
9
12 Are communication channels established for people to report suspected improprieties?
14 How many customer complaints are received about billings?
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Does the entity set entity-wide objectives that state of what the entity desires to achieve, and are they supported by strategic plans? Incomplet
e
Does the entity have mechanisms to identify and react to changes that may dramatically and pervasively affect the entity? Incomplet
e
Is the information provided to the right people in sufficient detail and in time to enable them to carry out their responsibilities effectively?
Incomplete
Incomplete
Incomplete
Are complaints investigated for underlying causes and any internal control deficiencies corrected?
Incomplete
Name:
Class:
PRINT OUT OF QUESTIONNAIRE RESPONSESBalance Sheet Date: 12/31/2010
CommentsCONTROL ENVIRONMENT QUESTIONNAIRE
Please Complete Control Environment Questionnaire
Please Complete Control Environment Questionnaire
Please Complete Control Environment Questionnaire
Please Complete Control Environment Questionnaire
Please Complete Control Environment Questionnaire
Please Complete Control Environment Questionnaire
Reviewed by: _____ Date: _______
Name:
Class:
PRINT OUT OF QUESTIONNAIRE RESPONSESBalance Sheet Date: 12/31/2010
Comments
Reviewed by: _____ Date: _______
INTERNAL CONTROL QUESTIONNAIRES
Please Complete Internal Control Questionnaire
Please Complete Internal Control Questionnaire
Please Complete Internal Control Questionnaire
Please Complete Internal Control Questionnaire
Please Complete Internal Control Questionnaire
Please Complete Internal Control Questionnaire