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Required:a. What specific 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 financial statements of General Department Stores, Inc., a continuing audit entity, which is a chain of medium-sized retail stores. General’s fiscal 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 sufficient time to perform all of the neces-sary fieldwork in July 2013 but will have time to perform most of the field-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 final two months of the year. This will be necessary to extend Cook’s conclusions to the balance sheet date.
222Part 3 Understanding and Auditing Internal ControlRequired: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 final two months of the year.(AICPA, adapted)LO 6-14 6-31 Ken Smith, the partner in charge of the audit of Houghton Enterprises, identified the following significant deficiencies during the audit of the December 31, 2013, financial 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 significant deficiencies.b. Assume that Smith determined that the second item was a material weakness. How would the required communication change?DISCUSSION CASELO 6-5, 6-6 6-32 Preview Company, a diversified manufacturer, has five 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 firm to review the controls in each division.