Corporate Governance Module 7-10- Question AND Answer PDF

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Performance TasksErrors and irregularities exercise Define what is meant by a control and weakness in internal control. Give two examples of each in the sales and collection cycle. Internal controls are defined as the mechanisms, rules, and procedures implemented by a company to ensure the integrity...

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Performance Tasks Errors and irregularities exercise 1. Define what is meant by a control and weakness in internal control. Give two examples of each in the sales and collection cycle. Internal controls are defined as the mechanisms, rules, and procedures implemented by a company to ensure the integrity of financial and accounting information, promote accountability, and prevent fraud. Thus, weakness in internal control refers to the defect in design or operation of internal controls. For instance, mistakes committed in preparation of financial statements such as mistakes in recording of accounts and the difficulty by an account to understand and implement the general accounting standards in sales and collection cycle that is being used in that company.

2. Frank Dizon, a highly competent employee of Breezewater Sales Corporation, had been responsible for accounting-related matters for two decades. His devotion to the firm and his duties has always been exceptional, and over the years, he had been given increased responsibility. Both the president of Breezewater and the partner of an independent CPA firm in charge of the audit were shocked and dismayed to discover that Dizon had embezzled more than P5,000,000 over a 10-year period by not recording billings in the sales journal and subsequently diverting the cash receipts. What major factors permitted the defalcation to the place? The major factor that drives Frank Dizon to commit defalcation is the multiple responsibilities given to him. It is said that he has been responsible for accounting-related matters for two decades and he had been given increased responsibility. It is also caused by the internal control weakness since this happened due to the improper segregation of the accounting responsibility. For instance, if Dizon is first assigned in recording of bills in the sales journal and company added a custodial responsibility of recording cash receipts to him; if both of this is performed by one person, there will be a possibility that he may misuse the assets for his personal benefit and just adjust the record to relieve him of charge of assets. This should be taken into consideration of the company because no matter what you think the person is, there will always an opportunity to do wrongdoings, or in this case embezzlement.

Understanding Directed Assess The following misstatements are sometimes found in the sales and collection cycle's account balances: Required: For each misstatement, list an internal control that should prevent it. a. Cash received from collections of accounts receivable in the subsequent period is recorded as current period receipts.  There should be a recording cut-off. This means, a policy shall be enacted in which at the end of the accounting period, the recording of receivables will have a cut-off to control the accounts recorded. b. The uncollectible accounts is inadequate because of the client's failure to reflect depressed economic conditions in the allowance.  Have a records of the receipts and try to compare the previous cash receipts from that of the current year if there is changes in collectability reflected. c. Several accounts receivables are in dispute as a result of claims of defective merchandise  The proper and immediate recording is necessary since there are claims of defective merchandise, this will keep the balance of accounts receivable as accurate as possible. d. Goods shipped and included in the current period sales were returned in the subsequent period.  This should be recorded properly upon receiving the returned goods since it will cause a discrepancy if not given a proper accounting treatment immediately. e. Several accounts receivable in the accounts receivable master file are not included in the aged trial balance.  The aged trial balance must be compared with the general ledger and that an independent person/auditor should reconcile the accounts receivable master file. f. One account receivable in the accounts receivable master file is included on the aged trial balance twice.  Same to the previous scenario, the accounts receivable master file should be reconciled by an independent person/auditor and the general ledger should be compared with the aged trial balance. g. Long-term interest-bearing notes receivable from affiliated companies are included in accounts receivable.  To prevent this error, there should be a separate recording in a subsidiary ledger for the affiliated companies aside from the general ledger of the company.

h. The trial balance total does not equal the amount in the general ledger.  The unbalanced journal entry in the general ledger should be located in order to reconcile the trial balance to the general ledger.

Performance Tasks Errors and irregularities exercise 3. Define what is meant by a control and weakness in internal control. Give two examples of each in the sales and collection cycle. Internal controls are defined as the mechanisms, rules, and procedures implemented by a company to ensure the integrity of financial and accounting information, promote accountability, and prevent fraud. Thus, weakness in internal control refers to the defect in design or operation of internal controls. For instance, mistakes committed in preparation of financial statements such as mistakes in recording of accounts and the difficulty by an account to understand and implement the general accounting standards in sales and collection cycle that is being used in that company.

4. Frank Dizon, a highly competent employee of Breezewater Sales Corporation, had been responsible for accounting-related matters for two decades. His devotion to the firm and his duties has always been exceptional, and over the years, he had been given increased responsibility. Both the president of Breezewater and the partner of an independent CPA firm in charge of the audit were shocked and dismayed to discover that Dizon had embezzled more than P5,000,000 over a 10-year period by not recording billings in the sales journal and subsequently diverting the cash receipts. What major factors permitted the defalcation to the place? The major factor that drives Frank Dizon to commit defalcation is the multiple responsibilities given to him. It is said that he has been responsible for accounting-related matters for two decades and he had been given increased responsibility. It is also caused by the internal control weakness since this happened due to the improper segregation of the accounting responsibility. For instance, if Dizon is first assigned in recording of bills in the sales journal and company added a custodial responsibility of recording cash receipts to him; if both of this is performed by one person, there will be a possibility that he may misuse the assets for his personal benefit and just adjust the record to relieve him of charge of assets. This should be taken into consideration of the company because no matter what you think the person is, there will always an opportunity to do wrongdoings, or in this case embezzlement.

Understanding Directed Assess The following misstatements are sometimes found in the sales and collection cycle's account balances: Required: For each misstatement, list an internal control that should prevent it. i. Cash received from collections of accounts receivable in the subsequent period is recorded as current period receipts.  There should be a recording cut-off. This means, a policy shall be enacted in which at the end of the accounting period, the recording of receivables will have a cut-off to control the accounts recorded. j. The uncollectible accounts is inadequate because of the client's failure to reflect depressed economic conditions in the allowance.  Have a records of the receipts and try to compare the previous cash receipts from that of the current year if there is changes in collectability reflected. k. Several accounts receivables are in dispute as a result of claims of defective merchandise  The proper and immediate recording is necessary since there are claims of defective merchandise, this will keep the balance of accounts receivable as accurate as possible. l. Goods shipped and included in the current period sales were returned in the subsequent period.  This should be recorded properly upon receiving the returned goods since it will cause a discrepancy if not given a proper accounting treatment immediately. m. Several accounts receivable in the accounts receivable master file are not included in the aged trial balance.  The aged trial balance must be compared with the general ledger and that an independent person/auditor should reconcile the accounts receivable master file. n. One account receivable in the accounts receivable master file is included on the aged trial balance twice.  Same to the previous scenario, the accounts receivable master file should be reconciled by an independent person/auditor and the general ledger should be compared with the aged trial balance. o. Long-term interest-bearing notes receivable from affiliated companies are included in accounts receivable.

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To prevent this error, there should be a separate recording in a subsidiary ledger for the affiliated companies aside from the general ledger of the company.

p. The trial balance total does not equal the amount in the general ledger.  The unbalanced journal entry in the general ledger should be located in order to reconcile the trial balance to the general ledger.

Performance Tasks Answer the following: 1. What is meant by the control environment? What are the factors the auditor must evaluate to understand it?

Control environment is defined as overall attitude, awareness and actions of directors and management regarding the internal control system and its importance in the entity. In addition, it has an effect on the effectiveness of the specific control procedures. The factors the auditor must evaluate in understanding the control environment are most important subcomponents of it: integrity and ethical values, commitment to competence, board of directors or audit committee participation, management’s philosophy and operating style, organizational structure, assignment of authority and responsibility, and human resource policies and practices. The mentioned functions are reflected in the control environment and those should be evaluated properly by the auditor.

2. What is the relationship among the five components of internal control? In general, an auditor must understand each component of the client’s financial reporting internal controls that includes control environment, risk assessment process, information system, control activities that relate to the audit and the client’s monitoring of the controls. Internal control system is implemented by the management or those charged with governance to assure that entity’s objectives regarding reporting, compliance with applicable laws and effectiveness and efficiency of operations is achieved. Control environment as defined is a set of standards, processes and structures needed to provide the basis for carrying out internal controls across the organization. Risk assessment, from the word itself, is defined as the iterative process to identify stumbling blocks to the achievement of the company’s strategic objectives and determining how risks will be managed. Control activities refer to the policies ad procedures necessary to help ensure the management’s directives to mitigate risks for achieving goals. Information and communication that refers to relevant and quality information that supports the internal control process. Lastly, monitoring that refers to evaluation routine whether each of the five components of internal controls is present and functioning.

Understanding Directed Assess For each of the following, give an example of physical control the client can use to protect the asset or record. a. Petty cash Physical control required to protect the petty cash includes, among others, segregation of roles, defining expense limit, demanding receipts to back up the expenses claimed, review and approval of petty cash reimbursement request and periodic cash counts. b. Cash received by retail clerks To protect cash received by retail clerks, it should be entered into a cash register to be recorded and to prevent information loss. c. Accounts receivable records To protect accounts receivable records, there must be a back up copies stored in the computer and the access should be restricted to the authorized person only. d. Raw materials inventory Just like accounts receivable records, this should be stored in a locked room with only limited access to the authorized person. e. Perishable goods To handle perishable goods, it is important to know the appropriate packing procedures for such product, also temperature control and storeroom under control of a reliable employee. f. Manufacturing equipment To protect a manufacturing equipment, it is important to do regular proper maintenance of equipment such as repair and sterilization of equipment, if necessary. g. Marketable securities The best physical control in marketable securities is storing it in a safety deposit vault....