Accounts Receivable and Internal Control

August 11, 2018 Management

1. The church’s board of trustees has delegated responsibility for financial management and audit of the financial records to the finance committee. This group prepares the annual budget and approves major disbursements but is not involved in collections or recordkeeping. No audit has been considered necessary in recent years because the same trusted employee has kept church records and served as financial secretary for 15 years.

2.The collection at the weekly service is taken by a team of ushers. The head usher counts the collection in the church following each service. He then places the collection and a notation of the amount counted in the church safe. Next morning the financial secretary opens the safe and counts the collection again. She withholds about $100 to meet cash expenditures during the coming week and deposits the remainder of the collection intact. To facilitate the deposit, members who contribute by check are asked to draw their checks to “cash.”

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Required:
Describe the weaknesses and recommend improvements in procedures for collections made at weekly services. Organize your answer using the following format:

Weakness/ Recommended Improvement(s)

Weakness:
This is a revenue recognition issue that affects gross receipts and all round trip transactions not to mention fund manipulation. Every area of the
Auditing Cycle is compromised and carries tremendous inherent risk. The control processes of documents and records along with function and controls activities are jeopardized. All transaction objectives, balance objectives and disclosure objectives need to be re-evaluated. There is not one system that is affected under this scenario. Revenue

Required

a. Calculate the following information and ratios for years 2, 3, 4, and 5: -Purchases
-Accounts Payable turn days
-Cost of goods sold to accounts payable
-Current ratio

b. Describe the implications of the resulting ratios for the auditor’s audit strategy in year 5. What specific audit objectives are likely to be misstated? How should the auditor respond in terms of potential audits tests?

15-27 (Internal control evaluation-Cash disbursements) Management has requested a review of internal control over disbursements for parts and supplies purchased at manufacturing plants. Cash disbursements are centrally processed at corporate headquarters based on disbursement vouchers prepared and approved at the manufacturing plants. Each manufacturing plant purchases parts and supplies for its own production needs. In response to management’s request, a thorough evaluation of internal control over disbursements for manufacturing plant purchases of parts and supplies is being planned. As a preliminary step in planning the engagement, each plant manger has been requested to provide a written description of his or her plant’s procedures for processing disbursement vouchers for parts and supplies. Presented below are some excerpts from one of the written descriptions.

1. The purchasing department acts on purchase requisitions issued by the stores department. 2. A computer system generates prenumbered purchase orders based on information submitted by buyers in purchasing. 3. Receiving has complete access to purchase order information in the computer. 4. When goods are received, the receiving department logs the shipment in the computer by indicating that the purchase order was received and forwards this electronically to accounts payable. 5. When the vendor invoice is received, it is entered into the computer and matched electronically with purchase order and receiving information. Discrepancies are printed on an exception report for follow up by accounts payable personnel. 6. The computer checks the clerical accuracy of information on vendor invoices. Discrepancies are printed on an exception report for follow up by accounts payable personnel. 7. A prenumbered disbursement is prepared and forwarded along with supporting documentation to the plant controller, who reviews and approved the voucher. 8. Supporting documents are returned to accounts payable for filling, and approved disbursement vouchers are forwarded to corporate headquarters for payment. 9. A report listing checks issued by corporate headquarters is received and promptly filed by account payable.

Required:
For each of the disbursement system procedures listed above, state whether the procedure is consistent with good internal controls and describe how each procedure strengthens or weakens internal control.

16-24 (Analytical Procedures) Circuits Technology, Inc. (CTI) resells, installs and provides computer-networking products (client software, gateway hardware and software, and twinax hardware) to other businesses. Exhibit 16-24 provides some summary information from CTI’s financial statements.

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