Unit 3 Project

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Part A:

|Ratio |Analysis/Interpretation (Company trends, |High risk of |How does this affect your |
| |comparison to industry) |misstatement? (and in |approach as an auditor as to |
| | |which accounts) |how to test these areas? |
|Inventory Turnover |They are not keeping a lot of ending inventory on |No |Check to see where the sales |
| |hand | |are at & see what ending |
| | | |inventory is like |
|Debt/Equity Ratio |It appears that the company might be in trouble |Yes- |Check to see why their debt |
| |financially |Liabilities & |has gone up in the last 2 |
| | |stockholder’s equity |years. |
|Days’ Sales in inventory |Their inventory is taking longer to turnover but |Yes - inventory |The sales in inventory are |
| |inventory turnover number has dropped | |higher but inventory turnover |
| | | |dropped significantly |
|Times interest earned |They are earning less interest but the days’ sales|Yes- receivables |Check to see what the |
| |in receivable are sustaining | |receivables turnover is |

Part B: Preparing for this audit I would check into Anecillin and see what this particular drug is used for. Then I would do some research as to whether or not this drug is used for a very common symptom that would promote more sales. Since 80% of the company’s sales are prescription drugs I would look at what sort of prescription drug they are targeting. When you research these drugs you can look to see what main ingredients are and see if these drugs seem to be helping for the patients. I would also want to know if most of their drugs are FDA approved.

Part C: It appears that days’ sales in inventory has dropped a little but the other three things stated have maintained very close to where they were in the preceding year.

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Part A and Part B:

1) A risk I would be concerned with would be prime interest rate was at a high of 19.5% but S&L was still servicing mortgages at 7% to 8%. How can S&L still have a low interest rate?

2) The S&Ls attempted to offer variable rates or sell off some of the mortgages to other firms at a substantial loss.

3) It was made easier for an entrepreneur to purchase a savings and loan with no money down loans. So if they had nothing to invest what did they have to lose? This made it a pretty risk free investment.

4) Charles Keating owner of Lincoln Federal S & L, who was also a land development company owner, employed nine of his relatives on the Lincoln payroll and helped in the development of American Continental projects, including the Phoenician Resort in Scottsdale.

Part C: Was the appraisal done by someone that was associated with Lincoln S & L? Was the appraiser returning a favor or did they themselves have a mortgage with S & L? Was the appraiser related to Keating? What were other appraisals like from the same appraiser for different areas?

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Part A: Monitoring is an important process that provides feedback on the effectiveness of the other four components of internal control. Some examples of monitoring controls are security badges, keys to restricted areas, and in some cases passwords.

Part B: A monitoring control over revenue recognition at a convenience store would be the cash register reports compared to the cash drawer. If failures would happen you would be missing money that is reported on the register reports.

Chain restaurant such as Olive Garden: All of the orders are being punched into the computer system then the cooks have to weigh and measure all food for preparation. If failures occur then the inventory will be off.

Manufacturing division making rubberized containers: Monitors its inventory by weights. If there are failures in the control process then they will run out of material to produce the containers.

Part C: The auditor would test the internal control process by asking questions, shadowing individuals to see how the control process works and how effective it actually is. If you follow the internal control process and find errors you need to come up with a solution to avoid the problem.

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Hint: Each scenario has at least one segregation of duties deficiency, so none of your answers should have “no deficiency.” You only need to list one for each situation though, even if you recognize more than one. Set up a table as follows:

|Deficiency |Potential Misstatements |Mitigating Controls |Audit Test |
|One person in charge of all payroll|Wrong information could be entered |2 people should be doing this. One|Check to see if employee’s wages |
|system and change company personnel|for personnel |to enter pay wage & hours another |are correct. |
| | |to double check everything for | |
| | |accuracy | |
|Same employee should not be in |This employee could be making false|Have the same person do cash |See if a false receipt gets caught |
|charge of cash receipt and |transactions and covering them up. |receipts and disbursements and |by the person recording the |
|reconcile the monthly bank account| |someone else record them. |transactions. |
|3. One person should be in charge |The amount of change given or |If more than one person is allowed |See what happens if you try to put |
|of the register |amount of money received could be |to use the register they should |in false information. |
| |incorrect. |have to put in a code so you know | |
| | |who did each transaction | |
|4.Her pricing should be set by the |She could be marking things up |Items should be priced by the |Send the items in that are ordered |
|company |significantly to show a higher |corporation |already marked for sale. |
| |profit margin | | |
|5.The conversation should be |Employee could order things and |The company can have a computer |Type in an employee’s address and |
|recorded to ensure the order is |have them shipped to themselves |system set up that does not allow |see what happens. |
|correct and the supervisor can go |while the customer is paying for |the phone operator to input any | |
|over all the information |the items |changes without a supervisor | |
| | |present | |
|6.Receiving department could say |You could have more inventory than |The purchasing agent should do a |Have the purchasing agent order |
|they received something that they |you think out on the shop floor |physical inventory and order what |what they need. |
|did not | |they need. | |
|7.Accounting may make an error and |Wrong sales price could be getting |Make sure that there are certain |Check to see what happens when the |
|the sales person might get paid |put in |limits of pricing that they can go |wrong amount gets entered by the |
|less or more | |between (parameters). |accounting department. |

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Again, use a table to format your answer. You can combine parts A and B this way:

|Control |A: Test of Control |B: Modification of Audit Procedures if Control is not |
| | |Effective |
|1. Credit Approval |I would run a test of a customer that I know has an |a. The customer gets approved for more credit. |
| |order of more than $15,000 and I would also check a |b. What is the magic number before they do not receive|
| |customer that has a balance higher than $22,000 |more credit? |
|2. Pre-numbered Receiving |I would check to see if they are sequential numbered |a. you could miss receiving product loads |
|Slips |slips and signed by receiving personnel and the |b. verify actual goods received |
| |delivery personnel | |
|3. Payments require P.O. and |Receiving personnel verifies the shipment accuracy and |a. the quantity amount or pricing could have been |
|Receiving Document |document accuracy |wrong |
| | |b. verify the shipping company and point of origin |
| | |documents with the goods received |
|4. Credit Memos not Allowed by|Verify all shipping and goods received documents are |a. inventory inaccuracy |
|A/R Bookkeeper |accurate |b. verify inventory quantities |
|5. Cash Receipts and Cash |Verify mail clerk remittance against accounts |a. your cash account will be inaccurate |
|Remittance Advices |receivable records |b. I would verify calibration and accuracy of software|
| | |used for credibility |
|6. Adding Employees to Payroll|Review written authorization forms distributed by the |a. employees may not get paid or withholdings could be|
|Master File |personnel department |wrong |
| | |b. verification of employee information |
|7. Password Protection of |Attempt to access the payroll master file using |a. payroll fraud |
|Payroll File |multiple password options |b. verify automated password reset option is |
| | |functioning |
|8. Edit Limit Tests |Test input an employee id with 53.1 hours and 4 |a. computerized payroll program accepts test |
| |different job classifications within one week |information |
| | |b. if the system processes inaccurate payroll to |
| | |completion |
|9. Issuance of Credit Memos |Verify issuance of receipts internally and at customer |a. over credits to receiving customer |
| |accounts receivable |b. verify credit memos against sales department |
| | |adjustments |
|10. Approval of Price |Verify total sales to any specific customer does not |a. give a customer additional discounts for the year |
|Adjustments >6% of Purchases |exceed 6% of base price adjustment per year |b. verify the divisional sales manager adjustments |
| | |and/or approvals |