Required:
a.
What speci
fi
c issues should the internal auditor be concerned about with
respect to individual entries?
b.
Could the external auditor rely on the internal audit’s work related to
manual journal entries to reduce control risk?
LO 6-11, 6-12
6-30
Cook, CPA, has been engaged to audit the
fi
nancial statements of
General
Department Stores, Inc., a continuing audit entity, which is a chain of
medium-sized retail stores. General’s
fi
scal year will end on June 30, 2013,
and General’s management has asked Cook to issue the auditor’s report by
August 1, 2013. Cook will not have suf
fi
cient time to perform all of the neces-
sary
fi
eldwork in July 2013 but will have time to perform most of the
fi
eld-
work as of an interim date, April 30, 2013.
After the accounts are tested at the interim date, Cook will also perform
substantive procedures covering the transactions of the
fi
nal two months of
the year. This will be necessary to extend Cook’s conclusions to the balance
sheet date.
222
Part 3
Understanding and Auditing Internal Control
Required:
a.
Describe the factors Cook should consider before applying substantive
procedures to General’s balance sheet accounts at April 30, 2013.
b.
For accounts tested at April 30, 2013, describe how Cook should design
the substantive procedures covering the balances as of June 30, 2013, and
the transactions of the
fi
nal two months of the year.
(AICPA, adapted)
LO 6-14
6-31
Ken Smith, the partner in charge of the audit of Houghton Enterprises,
identi
fi
ed the following signi
fi
cant de
fi
ciencies during the audit of the
December 31, 2013,
fi
nancial statements:
1.
Controls for granting credit to new customers were not adequate. In
particular, the credit department did not adequately check the credit-
worthiness of customers with an outside credit agency.
2.
There were inadequate physical safeguards over the company’s inventory.
No safeguards prevented employees from stealing high-value
inventory
parts.
Required:
a.
Draft the required communications to the management of Houghton
Enterprises, assuming that both items are signi
fi
cant de
fi
ciencies.
b.
Assume that Smith determined that the second item was a material
weakness. How would the required communication change?
DISCUSSION CASE
LO 6-5, 6-6
6-32
Preview Company, a diversi
fi
ed manufacturer, has
fi
ve divisions that operate
throughout the United States and Mexico. Preview has historically allowed
its divisions to operate autonomously. Corporate intervention occurred only
when planned results were not obtained. Corporate management has high
integrity, but the board of directors and audit committee are not very active.
Preview has a policy of hiring competent people. The company has a code of
conduct, but there is little monitoring of compliance by employees. Manage-
ment is fairly conservative in terms of accounting principles and practices,
but employee compensation packages depend highly on performance. Pre-
view Company does not have an internal audit department, and it relies on
your
fi
rm to review the controls in each division.
