Question

Exercises E7-12 Understanding the Sarbanes-Oxley Act and identifying internal conte strengths and weaknesses The following situations suggest a strength or a weakness in internal control. a. Top managers delegate all internal control procedures to the accounting department b. Accounting department staff (or the bookkeeper) orders merchandise and approves invoices for payment. c. Cash received over the counter is controlled by the sales clerk, who rings up the sale and places the cash in the register. The sales clerk matches the total recorded by the register to each day's cash sales. d. The employee who signs checks need not examine the payment packet because he is confident the amounts are correct. Requirements 1. Define internal control. 2. The system of internal control must be tested by external auditors. What law or rule requires this testing? 3. Identify each item in the list above as either a strength or a weakness in internal control, and give your reason for each answer. 12 Y 1

Answer 1

Answers:

1. An internal control is a procedure performed with in a company to help to either detect all prevent misstatements.

2. Government auditing standards ( GAS) provide the guidelines for internal control testing; however the writing of an audit openion on the company's internal control is officially required by the sarbanes-oxley act.

3. Top managers delegate all internal control procedure to the accounting department

a. Top managers delegate all internal control procedure to the accounting department (weakness). The accounting department is involved in too many controls, which causes segregation of duties issues.

b. Accounting department staff(are the bookkeeper) orders merchandise and approves invoices for payment ( weakness). The bookkeeper can therefore order merchandise for his personal use and have the company pay for it.

c. Cash receive over the country is controlled by the sales clerk,who rings up the sale and places the cash in the register (weakness). See the explanation below.

The sales clerk matches the total record by the registered to each day's cash sales (weakness). The sales clerk collects the cash and then performa the reconciliation- this provides an opportunity to steal.

d.The employee who signs checks needs not examine the payment packet, because he is confident the amounts are correct (weakness). Not verifying checks begin signed increases the chance of human errors.