Concept explainers
Internal Control: Internal control refers to the policies, and plans of the business organization along with other measures with a view to safeguard its assets, encourage the employees to adhere to the plans, to improve on the operational efficiency, and to ensure correct and reliable accounting information. Internal control is a process which ensures continuous reliability of accomplishment of a company’s objectives, related to operations, financial reporting, and in conformity with laws and regulations.
The following are the some of the internal control procedures:
- Competent personnel, rotating duties, and mandatory vacations
- Separating responsibilities for related operations
- Separating operations, custody of assets, and accounting
- Proofs and security measures
J’s concern about inventory and accounts receivable turnover ratios.
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Chapter 15 Solutions
Bundle: Financial & Managerial Accounting, Loose-leaf Version, 13th + CengageNOWv2, 1 term (6 months) Printed Access Card Corporate Financial ... Access Card for Managerial Accounting, 13th
- In conducting your audit of Mangatarem Corporation, a company engaged in import and wholesale business, for the fiscal year ended June 30, 2006, you determined that its internal control system was good. Accordingly, you observed the physical inventory at an interim date, May 31, 2006 instead of at June 30, 2006. You obtained the following information from the company's general ledger: Sales for eleven months ended May 31, 2006 (before audit adjustments) P1,615,000 Sales for the fiscal year ended June 30, 2006 (before audit adjustments) 1,843,000 Purchases for eleven months ended May 31, 2006 (before audit adjustments) 1,296,000 Purchases for the fiscal year ended June 30, 2006 1,536,000 Inventory, July 1, 2005 170,200 Physical inventory, May 31, 2006 264,000 Your audit disclosed the following additional information. 1) Shipments costing P12,000 were received in May and included in the physical inventory but recorded as June purchases. 2) Deposit of P4,000 made with vendor and charged…arrow_forwardREFER TO IMAGE FOR NUMBERS Marilyn Terrill is the senior auditor for the audit of Uden Supply Company for the year ended December 31, 20X4. In planning the audit, Marilyn is attempting to develop expectations for planning analytical procedures based on the financial information for prior years and her knowledge of the business and the industry, including these: Based on economic conditions, she believes that the increase in sales for the current year should approximate the historical trend in terms of actual dollar increases. Based on her knowledge of industry trends, she believes that the gross profit percentage for 20X4 should be about 2 percent less than the percentage for 20X3. Based on her knowledge of regulations, she is aware that the effective tax rate for the company for 20X4 has been reduced by 5 percent from that in 20X3. Based on her knowledge of economic conditions, she is aware that the effective interest rate on the company’s line of credit for 20X4 was…arrow_forwardLawrence Company maintains its accounts on the basis of a fiscal year ending October 31. Assume that you were retained by the company in August to perform an audit for the fiscal year ending October 31,20X0. You decide to perform certain auditing procedures in advance of the balance sheet date. Among these interim procedures is the confirmation of accounts receivable, which you perform at September 30. The accounts receivable at September 30 consisted of approximately 200 accounts with balances totaling S956,750. Seventy-five of these accounts with balances totaling $650,725 were selected for confirmation. All but 20 of the confirmation requests have been returned; 30 were signed without comments, 14 had minor differences that have been cleared satisfactorily, and 11 confirmations had the following comments: 1. We are sorry, but we cannot answer your request for confirmation of our account because Moss Company uses a computerized accounts payable voucher system. 2. The balance of…arrow_forward
- During the course of the Year 2 audit of Chester Co., the auditor discovered potential cutoff problems that may or may not require adjusting journal entries. For each of the potential cutoff problems indicated below, complete the required journal entries. To prepare each required journal entry: 1. The company shipped merchandise with a carrying amount of $75,000 FOB destination on December 23, Year 2, and recorded the sale and relief of inventory on that date. The customer received the merchandise on December 31, Year 2. The merchandise has a gross profit margin of 10%. Record the necessary Year 2 adjustments, if any. 2. The company shipped merchandise with a carrying amount of $45,000 to a consignee on December 24, Year 2, and recorded the sale and the relief of inventory on that date. The consignee had not sold the merchandise as of January 5, Year 3. The merchandise has a gross profit margin of 10%. Record the necessary Year 2 adjustments, if any. 3. At the beginning of Year 2, the…arrow_forwardMarilyn Terrill is the senior auditor for the audit of Uden Supply Company for the year ended December 31, 20X4. In planning the audit, Marilyn is attempting to develop expectations for planning analytical procedures based on the financial information for prior years and her knowledge of the business and the industry, including these: Based on economic conditions, she believes that the increase in sales for the current year should approximate the historical trend. Based on her knowledge of industry trends, she believes that the gross profit percentage for 20X4 should be about 2 percent less than the percentage for 20X3. Based on her knowledge of regulations, she is aware that the effective tax rate for the company for 20X4 has been reduced by 5 percent from that in 20X3. Based on a review of the general ledger, she determined that average depreciable assets have increased by 10 percent. Purchases of equipment occurred relatively evenly throughout the year. Based on her knowledge of…arrow_forwardMichael Corporation is on a calendar year basis. The following data were found during your audit:1) An excerpt from the client’s trial balance revealed the following account balances:Accounts receivable P 80,000Inventory, per count 1,200,000Accounts payable 790,000Net sales 6,050,000Net purchases 3,300,000Net income 610,0002) The client conducted an inventory count on December 31, 2021. Michael Corporation normally sells at 30% gross profit based on selling price.3) Goods were in transit FOB destination from a supplier in the amount of P120,000. Further testing revealed that the suppliers invoice pertaining to the delivery was received and recorded on December 28, 2021.4) Good costing P70,000 had been received on December 31, and recorded as a purchase. However, upon your inspection, the goods were found to be defective and would be immediately returned.5) Materials costing P224,000, sold and billed on December 30 under a “bill and hold” agreement, had been segregated in the warehouse…arrow_forward
- Michael Corporation is on a calendar year basis. The following data were found during your audit: 1) An excerpt from the client’s trial balance revealed the following account balances:Accounts receivable P 80,000Inventory, per count 1,200,000Accounts payable 790,000Net sales 6,050,000Net purchases 3,300,000Net income 610,000 2) The client conducted an inventory count on December 31, 2021. Michael Corporation normally sells at 30% gross profit based on selling price. 3) Goods were in transit FOB destination from a supplier in the amount of P120,000. Further testing revealed that the supplier's invoice pertaining to the delivery was received and recorded on December 28, 2021. 4) Good costing P70,000 had been received on December 31 and recorded as a purchase. However, upon your inspection, the goods were found to be defective and would be immediately returned. 5) Materials costing P224,000, sold and billed on December 30 under a “bill and hold” agreement, had been segregated in the…arrow_forwardDiane Smith, CPA, performed tests of controls and substantivetests of transactions for sales for the month of March in an audit of the financialstatements for the year ended December 31, 2013. Based on the excellent results of boththe tests of controls and the substantive tests of transactions, she decided to significantlyreduce her substantive tests of details of balances at year-end. Evaluate this decision.arrow_forwardYou are auditing the financial statements of A Company for the year ended December 31, 2023. The Company's income statements indicated the following net income:2021: P1,200,0002022: P1,490,0002023: P1,325,000An examination of the accounting records for the year ended December 31, 2023 indicates that several errors were made. The following errors were discovered:A. Unused supplies at the end of each year were consistently omitted:2020: P95,000; 2022: P100,000; 2023: P140,000B. The footings and extensions showed that the inventory on December 31, 2022 was understated by P80,000C. P105,000 worth of inventories were received on January 5, 2022 and were not included in the physical count as of December 31, 2021. Upon investigation, however, you discovered that these goods were shipped free-alongside by the supplier on December 28, 2021. The invoice for the goods were received and recorded in the purchase journal on December 29, 2021.D. The following advance payments to suppliers at the…arrow_forward
- Various Completion Matters. For each of the following independent situations, describe the most appropriate course of action that the auditors should take.a. Drew Allison is conducting the audit of Anderson Inc. as of December 31, 2017. At the beginning of the evidence gathering, Allison becomes aware that one of Anderson’s major customers (Jones) is experiencing significant financial difficulties. Jones normally accounts for 5 percent of Anderson’s net sales. After performing the necessary procedures, Allison believes that $2.8 million of Jones’s receivable balance will ultimately become uncollectible. Allison further believes this amount is material to Anderson’s financial condition and results of operations.b. Nagan Carmelo is completing the December 31, 2017, audit of Nugget Company. As part of the final procedures, Carmelo has requested representations from Nugget’s management regarding their assertion as to the fairness of the financial statements and other important matters…arrow_forwardABC Manufactures is a manufacturing company, and your audit team is conducting the annual audit of its financial statements. As part of the audit procedures, you are tasked with testing the accounts receivable balance. ABC Manufactures has a significant accounts receivable balance owing to its diverse customer base. Upon initiating the audit procedures, your team sends out accounts receivable confirmations to one of ABC Manufactures largest customers with a material accounts receivable balance outstanding. However, several weeks have passed, and the confirmation has not been returned. The audit team has made follow-up attempts via phone calls and emails, but there has been minimal response. Considering the lack of responsiveness, the audit team is becoming increasingly skeptical about the effectiveness of the confirmation process in this particular situation. Describe two alternative audit procedures that the audit team may conduct that may assist them in gathering sufficient…arrow_forwardMarilyn Terrill is the senior auditor for the audit of Uden Supply Company for the year ended December 31, 20X4. In planning the audit, Marilyn is attempting to develop expectations for planning analytical procedures based on the financial information for prior years and her knowledge of the business and the industry, including these: 1. Based on economic conditions, she believes that the increase in sales for the current year should approximate the historical trend in terms of actual dollar increases. 2. Based on her knowledge of industry trends, she believes that the gross profit percentage for 20X4 should be about 2 percent less than the percentage for 20X3. 3. Based on her knowledge of regulations, she is aware that the effective tax rate for the company for 20X4 has been reduced by 5 percent from that in 20X3. 4. Based on her knowledge of economic conditions, she is aware that the effective interest rate on the company's line of credit for 20X4 was approximately 12 percent. The…arrow_forward
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