ch10 - Chapter 10 Multiple Choice 10-1. c 10-2. a 10-3. b...

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Chapter 10 Multiple Choice 10-1. c 10-2. a 10-3. b 10-4. d 10-5. a 10-6. b 10-7. b 10-8. c 10-9. b 10-10. d 10-11. b 10-12. d 10-13. a 10-14. a 10-15. c 10-16. d 10-17. b 10-18. c 10-19. a 10-20. b Thought/Discussion Questions 10-21 [LO 3, 4, 5] Medco Hospital Buyers Group (MHBG) processes a significant number of intercompany transactions each month, mainly transferring cash between business units to meet the needs of operating cash flows. None of MHBG’s intercompany transactions are material on an individual basis. The intercompany transactions only affect balance sheet accounts. Company policy calls for intercompany accounts to be reconciled each month and for the balances between business units to be confirmed, however, the policy is not followed. The reconciliations are not performed regularly, and when they are performed it is not in a timely manner. Management reviews the financial reports of the various business units and follows up on any large amounts in the intercompany accounts. Management also reviews operating expenses of each of the business units each month, using variances as an indicator of reasonableness. Management consistently investigates any large intercompany account balances and unusual or large variances that are identified in this monthly review. (Adapted from AS 2, D1, Scenario A) 1
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Do you believe the lack of monthly intercompany account reconciliation and confirmation at MHBG is an ICFR deficiency? If you think it is, is a significant deficiency or a material weakness and why? (AS 2, D1, Scenario B, Retrievable online at http://pcaobus.org/Rules/Rulemaking/Docket008/2004-03-09_Release_2004- 001_Appendix_D.pdf ) Solution: This is a significant deficiency. Assuming the company uses a standard sales contract for most transactions, individual sales transactions are not material to the entity. The lack of reconciliations could allow sales personnel to modify sales contract terms. While the company's accounting function reviews significant or unusual modifications to the sales contract terms, it does not review changes in the standard shipping terms. The changes in the standard shipping terms could require a delay in the timing of revenue recognition. Management reviews gross margins on a monthly basis and investigates any significant or unusual relationships. In addition, management reviews the reasonableness of inventory levels at the end of each accounting period. Although the entity has experienced limited situations in which revenue has been inappropriately recorded in advance of shipment, the amounts do not appear to have been material. Based only on these facts, the auditor should determine that this deficiency represents a significant deficiency for the following reasons: The magnitude of a financial statement misstatement resulting from this deficiency would reasonably be expected to be more than inconsequential, but less than material, because individual sales transactions are not material and the compensating detective controls operating monthly and at the end of each
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This note was uploaded on 02/02/2012 for the course BUSINESS 101 taught by Professor - during the Spring '11 term at Mississippi Valley State University.

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ch10 - Chapter 10 Multiple Choice 10-1. c 10-2. a 10-3. b...

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