Acct-504

Acct-504

Case Study 2

Internal control is a plan of organization and a system of procedures implemented by company management and the board of directors designed to prevent fraud and unintentional financial statement errors. The five components of internal control are control environment, risk assessment, information system, control procedures, and monitoring of controls.

The control environment is the tone that the owner and top management sets for the company. A key ingredient of this type of environment is a corporate code of ethics that management demonstrates through ethical behavior.

A risk assessment is the way a company identifies business risks. In order to minimize their impacts on the company, procedures are established for dealing with the risks.

Information system is the tracking of accounting information. Every system within the company that processes accounting data should have the ability to record transactions in the journals, summarize those transactions in the ledgers, and report those transactions in the in the financial statements in the form of account balances or footnotes.

Control procedures that are built into the control environment and information system allow companies to gain access to the five objectives of internal controls.

The monitoring of controls is used so that no one person or group of persons can process a transaction from start to finish without being seen or checked by another person or group.

Situation A

In evaluating the internal control over cash payments of Yankee Manufacturing, an auditor learns that the purchasing agent is responsible for purchasing diamonds for use in the company’s manufacturing process, approving the invoices for payment, and signing the checks. No supervisor reviews the purchasing agent’s work.

A violation of internal control is that there is not a separation of duties for the tasks of the purchasing agent. Another violation occurs within comparison and compliance monitoring....