Assignment #3

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University of Ontario Institute of Technology *

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3170

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Accounting

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Jan 9, 2024

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docx

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Assignment #3 Introduction to material weaknesses & deficiencies According to PCAOB, material weaknesses are defined as “a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.” (Campbell, 2021). That means a material misstatement within a company is unlikely to be detected & prevented, which causes a deficiency & material weakness within the company. And any material weaknesses which were found are to be reported to the SEC (US securities & exchange commission). This would downgrade the reputation of the company & increase costs & expenses if material weaknesses were found. More disadvantages of having a material misstatement as a company are: - Stock price reduction due to investors’ lack of confidence in the company’s financial statements. - Increased legal fees costs which reduces the net income of the company. - The chances of the company getting loans would be limited because financial statements are unreliable & risky to rely upon. - External auditors’ fees would be increased to cover procedures or testing that need to be done to fix the material weakness issues. (Campbell, 2021) - Effective strategies to prevent & detect weaknesses. 1. Establishing robust monitoring controls which involves validating their presence and functionality consistently throughout the year, rather than solely at year-end. Early testing allows management ample time to address and rectify any identified control deficiencies. 2. Continuously reinforcing the company's culture and leadership tone is crucial. Executive leaders should emphasize the importance of internal controls, promptly address deviations from company policies, and set a positive example. Management should articulate the value of a control environment, highlighting its benefits beyond regulatory compliance. 3. Conducting ongoing risk assessments is vital, particularly when significant changes occur in people, processes, or systems. This approach helps identify the need for new controls or processes to address emerging risks. In instances of substantial changes, such as implementing a new ERP system, seeking guidance from a third party experienced in process improvement and internal controls is advisable. 4. Providing comprehensive training for company personnel is essential. Clearly communicate expectations and emphasize the reasoning behind policies, procedures, and controls to all individuals responsible for processes and controls. 5. Ensuring strong communication and buy-in from all key stakeholders is critical. Foster alignment and understanding of internal controls across the entire company, incorporating this into company communications, handbooks, and policies. 6. Establishing an effective internal audit function serves to monitor the company consistently and identify process improvements and strategic opportunities throughout the year. 7. Implementing documented policies is crucial. Develop, implement, and educate employees on formal policies to ensure alignment on "ways of doing business" and employee expectations. 8. Considering a third-party diagnostic offers an independent review of internal controls, effectively optimizing their design and efficiency. This process addresses control deficiencies and provides management with guidance on the most effective and efficient ways to remedy identified control gaps. References Campbell, J. (2021, April 19). CFO’s guide to significant deficiencies and material weaknesses . CFGI. https://www.cfgi.com/blog/industry-insights/cfos-guide-to-significant-deficiencies-and-material- weaknesses/

Part 2: Complete the following textbook problems: 9-27 and 12-37 Problem: 9-27 1) The incorrect price was used on sales invoices for billing shipments to customers because the incorrect price was entered into a computer file. a). Identify types of controls that were absent. The type of control that was absent was “recorded sales are supported by authorized shipping documents & approved customers order”. The sales transaction price wasn’t properly documented as the invoice was incorrectly inputted incorrectly. So, the sales invoice should be authorized & approved since the amount is incorrect. The type of control that was lacking in this situation was preventive controls because there was no system in place to stop the incorrect pricing from occurring. b). identify the objectives that have not been met. Accuracy: Transactions were not recorded correctly due to the incorrect price been entered into the system. c). Suggest a control to correct the deficiency. The proper price amount should be inputted in the system and tracking errors notifications should be put in place to trace any amount of deficiency like inaccuracies in transactions figures. These can be done by using preventive controls (e.g., tracking errors) measures to reduce the amount of deficiency. 2 ). A vendor’s invoice was paid twice for the same shipment. The second payment arose because the vendor sent a duplicate copy of the original two weeks after the payment was due. a). Identify types of controls that were absent. Invoices weren’t correctly billed by the vendor & were paid twice. The type of control that was absent was incorrect billing of transaction documents between the vendor & fresh foods grocery store. The type of controls that was lacking in this situation was detection controls because there wasn’t no system put in place to make fresh foods grocery aware of the duplicated documents. b). identify the objectives that have not been met. The objective that wasn’t met was accuracy because the transaction between the vendor and fresh foods grocery store wasn’t properly accounted for and it would been seen has an error in the books. And when the invoice was paid twice, this can inflate the price amount of the

shipment on the balance sheet statement & this can also increase the amount of cash on the credit side of the journal entry which is wrong. c). Suggest a control to correct the deficiency. The controls that can be made to control the deficiency are proper verification of duplicated documents by precise cross checking of information between fresh foods grocery store & the vendors. In this case, detective controls are necessary to be put in place. 3). Employees in the receiving department stole some sides of beef. When a shipment of meat was received, the receiving department filled out a receiving report and forwarded it to the accounting department for the amount of goods actually received. At that time, two sides of beef were put in an employee’s pickup truck rather than in the storage freezer. a). Identify types of controls that were absent. The type of controls that were absent were preventive controls which was supposed to be put in place to stop fraudulent activity within the organization. b). identify the objectives that have not been met. The objective that has not been met is accuracy of transactions weren’t correctly recorded in the system. c). Suggest a control to correct the deficiency. The control, which is best suited to reduce theft, is by employing detective controls e.g., ensuring that accuracy, completeness & proper validation of the correct amount are properly put in place to reduce the amount of theft within the company. 4. During the physical count of inventory of the retail grocery, one counter wrote down the wrong description of several products and miscounted the quantity. a). Identify types of controls that were absent. The controls that were lacking in this situation were lack of manual control because it shows a little bit of incompetent behavior by the employee. b). identify the objectives that have not been met. The objective that wasn’t met in this situation was accuracy of the information that was recorded as a physical count of inventory of the retail grocery store. c). Suggest a control to correct the deficiency. The control which best suites this situation is having better manual controls & detective controls in which the employee is able to properly input the correct & accurate information and have a system that identify incorrect & irregularities information.

5 . A salesperson sold several hundred kilograms of lamb at a price below cost because she did not know that the cost of lamb had increased in the past week. a). Identify types of controls that were absent. Manual controls are absent because of the salesperson incompetence professional behavior to keep up with daily updates of cost of lamb which caused a reduced income in revenue due to increased costs prices of kilograms of lamb. Furthermore, the salesperson was supposed to increase sales prices as costs have increased. b). identify the objectives that have not been met. The objective that wasn’t met is completeness- because the transaction wasn’t included & recorded yet. c). Suggest a control to correct the deficiency. The control that needs to be suggested to control this deficiency is having more automated controls & manual controls to constantly receive information about price changes of the lamb. And constantly updated such prices to increase gross margin. 6 . On the last day of the year, a truckload of beef was set aside for shipment but was not shipped. Because it was still on hand, it was counted as inventory. The shipping document. was dated the last day of the year, so it was also included as a current-year sale.- a). Identify types of controls that were absent. The control that was absent in this situation was manual control- because employees made an error that miscounted inventory that were meant to be shipped. b). identify the objectives that have not been met. The objectives that haven't been met is accuracy- because inventory weren’t properly counted & classified. c). Suggest a control to correct the deficiency. The control that can correct this deficiency is manual control- because it competent individual who does their job of keeping proper accounts of all inventory been shipped and on hand. The inadequacy of miscounted inventory wouldn’t take place due to proper staffing.

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