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other significant information (e.g. engaging in complex transactions that are structured to misrepresent the financial position or financial performance of the entity). •Intentional misapplication of accounting principles relating to amounts, classification, manner of presentation or disclosure such as inappropriately adjusting assumptions and changing judgements used to estimate account balances. B. Safeguards in programmes to prevent employees from changing vendor information are: •Requiring two signatures on checks •Segregation of duties; those who create checks should have no authorisation power. •Increased supervision •Background checks on new employees. •Others Case 7-35: Segregation of duties During your first audit of American Manufacturing Company with approximately 200 production employees, you find all aspects of the factory payroll are handled by one person and that none of the usual controls over payroll are observed. What action will you take?
AC504 (Session 3) – Proposed Solutions Exercises & Problems (Fall 2017)8 - 9(1) Discuss the matter immediately with appropriate client officers. This discussion may precede the formal issuance of a management letter and serves to minimize both the client's exposure to losses and the auditor's potential liability in the event that fraud is later disclosed. (2) Discuss with the client the possibility of either the independent auditors or client staff conducting an investigation to determine whether fraudulent acts have occurred. (3) Expand the scope and intensity of the substantive procedures in all financial statement areas affected by payroll transactions. If the effects of these transactions are pervasive, it may be necessary to advise the client that it will not be possible to issue an unqualified audit report. (4) Disclose the deficiencies relating to payroll procedures and the auditors' recommendations for improving the internal control in a formal report to both senior management and the audit committee of the board of directors. Case 7-37: Internal control weaknesses Montgomery Inc. is a private company that manufactures heavy machinery. The company has an active audit committee and board of directors. The audit committee consists of two outside directors and Howard Kress, the company chief financial officer. The audit committee meets quarterly to provide oversight of financial reporting. The committee reviews new accounting policies and unusual transactions. Howard Kress personally reviews and approves any related party transactions. Internal audits of operating units are performed by the internal auditor, who reports directly to Laura Howe, the chief operating officer.