Accounting
This assignment is worth a total of 30 points allocated as indicated. Please complete your answers in a Word document and submit it using the Assignment 4 dropbox.
This course is geared toward research and communication. That means you will be researching the appropriate standards and communicating your answers. Support all answers with facts and/or examples. Your answers should be original – do not just copy or paraphrase the lecture notes, books, articles, or your classmates. All composition-type responses will be evaluated based on responsiveness to requirements, coherent organization, conciseness, clarity, grammar, and quality of presentation.
For researching your answers, keep in mind that different rules may apply for nonpublic and public companies.
There are 4 parts to this assignment. Relevant professional standards for this assignment are listed below. I suggest you also peruse the links on the readings and websites page when preparing this assignment.
Relevant Standards:
SOX
AICPA ASB Standards: AU-C 315, “Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement.” AU-C 330, “Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence.” AU-C 265,
“Communicating Internal Control Related Matters Identified in an Audit.”
PCAOB Standards: AS5, “An Audit of Internal Control Over Financial Reporting That is Integrated with an Audit of Financial Statements,” and AS12, “Identifying and Assessing Risks of Material Misstatement.” AS8, “Audit Risk,” and AS11, “Consideration of Materiality in Planning and Performing an Audit.”
There are 4 parts to this assignment.
1. (6 pts) Case 3.1, The Trolley Dodgers (to honor World Series Season)
As you may recall, much of payroll testing is done through test of controls.
a. Identify the internal control weaknesses in the Dodger’s payroll system.
b. What audit procedures might have detected the fraudulent scheme?
2. (8 pts) Case 3.7, Foamex International, Inc.
a. What responsibility do auditors have to identify internal control problems in their client’s accounting systems under current professional standards? Answer for both public and private companies. Be specific and reference those standards.
b. To whom and how should these internal control problems be communicated? Answer for both public and private companies. Be specific and reference those standards.
c. Do you believe Foamex was at fault or the SEC was making an example of them? Explain.
3. (11 pts) Case 1.14 Navistar International Corporation
a. Discuss the similarities and differences between management’s and the external auditor’s reporting responsibilities on internal control of public companies.
b. Explain the difference between a ‘significant deficiency” and “material weakness” in internal control. Give an example of each.
c. Exhibit 1 lists the 15 material weaknesses in internal controls over financial reporting that were reported in Navistar’s 2005 10-K. Pick the top five that you believe were the most problematic and explain why.
d. Is it possible for a company with such poor internal controls to be audited? Explain.
4. (5 pts) Case 3.9 Walmart de Mexico
What internal control activities might have reduced the possibility of illegal payments to government officials if they had been in place for Walmart de Mexico and other foreign subsidiaries? Discuss the cost effectiveness.