1) This question is based on Tom’s Trailer Sales case included at the end of this assignment. The text lists nine IT duties roles (Figure 12-2)[1]. Without adding any new employees but including Carla, describe how you would segregate these duties for Tom. Tom does not have the resources to develop an MIS internally and will need to outsource part of the process to Carla. Your plan should provide as much control as possible while being practical for an operation as small as Tom’s Trailer Sales. You will not be able to segregate all the duties completely for a firm as small as Tom’s. In addition, you need to consider how Tom operates and realize that all the employees run the computer system for some tasks.
| Person | Duties | Reason Duties are assigned to this person |
| Carla | ||
| Tom | ||
| Bookkeeper | ||
| Other Staff members |
2) Segregation of duties is only one form of controls over information production and distribution. Describe four additional general controls related to information systems that Tom should consider implementing and explain why you would recommend the control. Do not include any application controls.
| Control Description | Purpose |
3) The following are several multiple choice questions adapted from the CPA exam that cover types of audit tests. For each question, selected the best answer and then explain why it is better than all the alternatives. Your explanations should address all the possible alternatives presented in the question.
- The auditor looks for an indication on duplicate sales invoices to see whether the accuracy of invoices has been verified. This is an example of
- a test of details of balances.
- a test of control.
iii) a substantive test of transactions
- both a test of control and a substantive test of transactions
Answer:
Explanation:
- A conceptually logical approach to the auditor’s evaluation of internal controls consists of the following four steps:
- Determining the internal controls that should prevent or detect errors or fraud
- Identifying control deficiencies to determine their effect on the nature, timing, or extent of auditing procedures to be applied and suggestions to be made to the client.
III. Determining whether the necessary internal control procedures and are prescribed and being followed satisfactorily.
- Considering the types of errors and fraud that can occur.
What should be the order in which these four steps are performed?
- I, II, III, IV
- I, III, IV, II
iii) III, IV, I, II
- IV, I, III, II
Answer:
Explanation:
4) The following are several multiple choice questions adapted from the CPA exam that cover tests of controls. For each question, selected the best answer and then explain why it is better than all the alternatives. Your explanations should address all the possible alternatives presented in the question.
- The primary objective of performing tests of controls is to obtain
- a reasonable degree of assurance that the client’s internal controls are operating effectively on a consistent basis throughout the year.
- sufficient, appropriate audit evidence to afford a reasonable basis for the auditor’s opinion, without the need for additional evidence.
iii) assurances that informative disclosures in the financial statements are reasonably adequate.
- knowledge and understanding of the client’s prescribed procedures and methods.
Answer:
Explanation:
- To test the effectiveness of controls, an auditor ordinarily selects from a variety of techniques, including
iii) confirmation
Answer:
Explanation:
- Tests of controls are most likely to be omitted when
- an account balance reflects many transactions.
- control risk is assessed at less than the maximum.
iii) the understanding of the control structure indicates that evaluating the effectiveness of control policies and procedures is likely to be inefficient.
- auditor wishes to increase the acceptable level of detection risk.
Answer:
Explanation:
Tom’s Trailer Sales, Inc. Case Description
Description of Tom’s Trailer Sales
Tom Sullivan owns a small recreational trailer business in a suburban community located close to the mountains. Tom sales are mostly trailers for vacationing and camping, and a variety of accessories for those trailers. Tom’s Trailer Sales (Tom’s) has only one location that includes a parking lot of customers and employees, a sales lot where he stores trailers for resale, and a combine business office, warehouse, and preparation shop. Tom’s engaging in various activities like installing accessories and trailers and doing repairs on trailers in the preparation shop. It stores some accessories and repair parts in the warehouse. The business office portion on the building contains offices for Tom, his bookkeeper, and his sales staff.
In addition to Tom, who is the owner and general manager, Tom’s employs six sales people and three mechanics to do the prep and repair work. The only other employee is the bookkeeper.
Tom’s Information System
Tom’s Trailer does not own a computer, but Tom realizes that he needs one to remain competitive. As a first step to improving their information systems, Tom hired an MIS consultant, Carla Denton, to design and implement of a new MIS for his business. Carla spent her first two weeks talking to Tom and the bookkeeper. In her discussions with the Tom, Carla focused on clarifying Tom’s goals and expectations for the new system and determining how much time and money Tom could afford both for system’s design and implementation and for the system’s on-going operating costs.
Carla’s discussions with the bookkeeper focused on understanding how Tom’s current accounting and reporting functions worked. At the end of the second week, Carla had developed a list of goals and priorities for the new system and had accumulated copies of all forms and reports Tom’s currently generates manually.
Next, Carla built a small, prototype system in Access™ that duplicated the functions of the current manual system and then work on how to modify it to produce the additional detail that Tom wanted. She spent the next three weeks setting up the prototype, which included forms for recording data that looked similar to the manual forms and logs Tom’s currently used and reports that contained the same information as the reports Tom’s currently created. Because Tom’s was such a small operation and she wanted to keep the cost of the new system down, Carla did not produce much documentation of the system or the logic she used to produce it, but depended on the built-in documentation features of Access™. Access™ can produce very detailed listings of the technical specifications of every component in the database but does not have any way to document how those components would be used by Tom’s staff to record information and use reports in their daily activities.
At the end of the Carla’s fifth week, she had created a prototype Access™ database that could record test data and produce reports that duplicated the current, manual system. She spent the next three weeks working with Tom to finalize the systems design.
After two more months of work, Carla was able to present a completed system (i.e., Access™ database) to Tom. She had tested the system with some sample data Tom helped her develop, but felt that running the system in parallel with Tom’s manual system was too expensive for Tom. She felt she had accomplished as much as she could without running up too high consulting fees and turned the system over to Tom along with a list of hardware he would need to purchase to install computers in various locations in Tom’s operations.
In addition to the hardware specifications and Access™ database she produced, Carla spend half a day walking Tom through the system and its various components. She also developed a user’s manual of how each component of the system worked. Finally, she told Tom that she would be available to answer any questions Tom had on the new system.
The hardware configuration that Carla developed for tome included:
- Three small personal computers (PCs) and one larger PC. The three small PCs will be located in the sales area, the warehouse, and in Tom’s office. The larger PC will be located in the business office and will be primarily used by the bookkeeper.
- All four will be networked together with the larger PC acting as the central server. The larger PC will also have high-speed internet access. However, all of the PCs will have internet access through the network linked to the large PC.
Tom reviewed all of Carla’s work, but was concerned about how to control the various activities associated with a computerized environment so he met with Carla again. She prepared a list of the basic activities that IT departments usually engage in and discussed with Tom the nature of each activity and the importance of segregating them from each other. Tom quickly realized that he did not have the staff to handle some of the duties, much less segregate all. Thus, he asked Carla if she would consider working permanently as an IT consultant and developing a plan of how to segregate the IT duties as best they could by including her as part of the IT function.
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