Assume that management is gathering evidence as part of its process for assessing the effectiveness of internal
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Question:
Assume that management is gathering evidence as part of its
process for assessing the effectiveness of internal control over financial
reporting. The company is a manufacturer of highdollar specialized
machines used in the medical profession. The following table identifies important controls that management is testing regarding accounts
related to revenue recognition, accounts receivable, and other salesrelated activities. The first column describes the control, and the second
column describes the test results. Based on the test results, determine
the conclusion that management should likely make about the deficiency. Is it a control deficiency, a significant deficiency, or a material
weakness?
Control Testing Over Revenue
Control Tested Test Results
A All sales over $ require computer check of outstanding balances to
see if approved balance is exceeded.
Tested throughout year with a
sample size of thirty. Only three
failures, all in the last quarter, and all
approved by sales manager.
B The computer is programmed to
record a sale only when an item is
shipped.
Sampled ten items during the last
month. One indicated that it was
recorded before it was shipped.
Management was aware of the
recording.
C All prices are obtained from a standardized price list maintained within
the computer and accessible only by
the marketing manager.
Management selected forty invoices
and found five instances in which the
price was less than the price list. All
of the price changes were initiated
by salespeople.
D Sales are shipped only upon receiving an authorized purchase order from
customer.
Management selects fifteen transactions near the end of each quarter.
On average, three to four are shipped
each quarter based on salespersons
approval and without a customer
purchase order.
Related Book For
Auditing a risk based approach to conducting a quality audit
ISBN: 978-1133939153
9th edition
Authors: Karla Johnstone, Audrey Gramling, Larry Rittenberg
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