Reporting on Internal Control

Internal Control Reporting Cases

Case 1:   

The company processes a significant number of routine intercompany transactions.  Individual intercompany transactions are not material and primarily relate to balance sheet activity, for example, cash transfers between business units to finance normal operations.  A formal management policy requires monthly reconciliation of intercompany accounts and confirmation of balances between business units. However, there is not a process in place to ensure performance of these procedures. As a result, detailed reconciliations of intercompany accounts are not performed on a timely basis.  Management does perform monthly procedures to investigate selected large-dollar intercompany account differences. In addition, management prepares a detailed monthly variance analysis of operating expenses to assess their reasonableness.  

Highest Level of Deficiency this case represents: significant deficiency

Reason:

1. Detailed reconciliations of intercompany accounts are not performed on a timely basis. Not in the entity level antifraud list, figure 18.6.
2. Possible material weakness. Those deficiencies could possibly be material weakness (initial worry about being the material possible misstatements has input deficiency to not material).
3. Compensating control: management are performing controls monthly and regular procedures; investigate selected large-dollar intercompany account differences.

Conclusion: significant deficiency

Case 2   

During its assessment of internal control over financial reporting, management identified the following deficiencies. Based on the context in which the deficiencies occur, management and the auditor agree that these deficiencies individually represent significant deficiencies:

•        Inadequate segregation of duties over certain information system access controls.

•        Several instances of transactions that were not properly recorded in subsidiary ledgers; the transactions involved were not material, either individually or in the aggregate.

•         No timely reconciliation of the account balances affected by the improperly recorded transactions.  

Highest Level of Deficiency this case represents: material weakness

Reason:

1.  The proper process of duties was not adequately segregated could resulted in transactions not being properly recorded in the appropriate ledger. This deficiency represents a significant deficiency.
2. The deficiency about the misstatements were not caught in a timely manner which resulted in transactions being improperly recorded; no timely reconciliation, which are significant deficiencies.
3. The likelihood of a material misstatement may occur with the combination of all the significant deficiencies. No detections or preventions.
4. Conclusion: all the significant deficiencies come together could affect the accounts and represent a material weakness.

Case 3: 

The company uses a standard sales contract for most transactions, although sales personnel are allowed to modify sales contract terms as necessary to make a profitable sale.  Individual sales transactions are not material to the entity.  The company's accounting function reviews significant or unusual modifications to the sales contract terms, but it does not review changes in the standard shipping terms. The changes in the standard shipping terms could require a delay in the timing of revenue recognition. Management reviews gross margins on a monthly basis and investigates any significant or unusual relationships. In addition, management reviews the reasonableness of inventory levels at the end of each accounting period. The company has experienced limited situations in which revenue has been inappropriately recorded in advance of shipment, but amounts have not been material.