Jeryll Jones B.

Jamero
Accountancy IV

BS

Problem 1:
a.
i. The management is the one who looks over the assets of
the company, taking into consideration if these assets have
been taken care of and well-protected. Moreover, it is also
concerned with the establishment, maintenance, and
evaluation of the internal control system.
ii. The audit committees main role involves assisting the
board of directors as well as the management. It supports
both in accomplishing their fiduciary and accountability
roles and responsibilities. Further, it also is responsible for
keeping a direct line of communication between the board
and the external and internal auditors.
iii. The external auditor is tasked in the creating of an
opinion whether the financial statements are fairly
presented in conformity with an accepted financial
reporting framework. Also, the external auditor has the
responsibility of communicating any findings of material
weaknesses found during the review.
iv. The internal audit department performs both
operational and financial audits. It investigates and
appraises the effectiveness and efficiency of operations
and internal controls. It also determines Micro Dynamics
compliance with established policies and procedures and
deliver its findings and recommendations to management
or the audit committee in a form of report for evaluation
and corrective action. It has also the role of assisting the
external auditors in reviewing the internal control system.
b. An audit committee is a committee of the board of directors
that focuses on issues relevant to the integrity of the companys
financial reporting. While the existence of an audit committee
does not alter the need for directors to take responsibility for
financial reports, audit committees can play an important role in
the financial reporting process and in supporting and promoting
audit quality. It reviews and recommends to the Board the
approval of the Mico Dynamics interim financial reports and the
annual financial statements. It studies the scope and the results
of the independent audit and ensures compliance with the
independent auditors fee budget. It also ensures that the main
risks associated with the Micro Dynamics activities are identified
and managed by the company itself, notably through the

Jeryll Jones B. Jamero

Accountancy IV

BS

integrity of its internal control and information management

system.

Problem 2:
a. Objectivity is an unbiased mental attitude that allows internal
auditors to perform engagements in such a manner that they
believe in their work product and that no quality compromises
are made. To make unbiased performance and reporting
decisions, internal auditors must be able to manage threats to
objectivity. This ability is also an important signal to governing
boards, shareholders, and external parties that internal audit
activities can be relied on to provide assurance about control,
compliance, and other relevant matters.
b.
i. Objectivity is not impaired in this situation because the
preparation of policy statements to guide other employees
or other organizational bodies of Leigh Industries in the
development and implementation of internal controls is a
duty and responsibility of the internal audit staff.
ii. Objectivity is impaired in this situation because the
internal auditor performed an operational task which is the
regular bank reconciliations. Although the auditor is not
involved in either the receipt or the disbursement of cash,
regular bank reconciliation is not part of his/her job.
iii. Objectivity is not impaired by the review of the budget for
relevance and reasonableness if the internal auditor has no
duty for creating or executing the budget. The situation will
be different though when he/she will also perform the
review of variances and explanations as this will definitely
impair his/her objectivity.
iv. Objectivity is impaired in this situation because of his/her
involvement in the design, installation, and initial operation
of the new computerized system which in turn will produce
low confidence in audit findings.
v. Objectivity is materially impaired in this situation
because the internal auditor is performing part of Leigh
Industries day-to-day operations.

Jeryll Jones B. Jamero

Accountancy IV

BS

c. Yes. The reporting relationship of the director of the internal

audit and corporate controller negatively affects the objectivity
of the internal audit department. Independence and objectivity is
clearly impaired in this situation given that the one who is
responsible for the review and examination of the accounting
system and related operational transactions is the one who
reports to the one who is the subject of the review and
examination.
d. No. My evaluation of the situation in Question in b will not
change if the director of internal audit reports to the audit
committee of the board of directors.

Problem 3:
a. There is no risk from this situation because the treasurer is
simply delegating the task of signing checks to the assistant
treasurer who is not responsible for either authorizing or
recording transactions.
b. There is risk in this situation because of the violation of the
principle of segregation of duties. The warehouse clerk has
custodial responsibility as well as authorization of the disposal of
damaged goods. The clerk might use his/her authorization power
to record the theft of goods as spoilage or damaged goods.
c. There is risk in this situation because of the violation of the
principle of segregation of duties. The sales manager has the
power of credit authorization as well as accounts receivable
record keeping and might approve credit to anyone he/she knows
and write it off.
d. There is risk in this situation because of the violation of the
principle of segregation of duties. The time clerk has record
keeping tasks as well as asset custody and might neglect the
record of the termination of any employee and keep for himself
the paychecks.
e. There is risk in this situation because of the violation of the
principle of segregation of duties. The accounting clerk might
hide errors or conceal balances that do not equal because of
funds he/she has embezzled.
Problem 4:

Jeryll Jones B. Jamero

Accountancy IV

BS

a. There is no need for a separation of tasks because there is

no connection between the two jobs.
b. There is no need for a separation of tasks because both
tasks are not connected to each other.
c. There is no need for a separation of tasks because the
employee does not have access to the assets.
d. There is no need for a separation of tasks because both
tasks are not related to each other.
e. There is a need for a separation of tasks because the
employee might cover up any cash embezzled by erroneously
putting wrong amounts and items the bank reconciliation.
Problem 5
a.
i. Authorization
- A formal system of transaction authorizations allows the
commitment of company resources in accordance with
management goals and objectives. Transactions must
be executed according to the terms of their general or
specific authorizations, by responsible personnel acting
within the scope of their prescribed authority and
responsibility.
- Its objective is to ensure that all transactions are
approved by responsible personnel acting within their
range of knowledge and proper span of control before
the transaction is recorded. Transactions must be
executed according to the terms of their general or
specific authorizations, by responsible personnel acting
within the scope of their prescribed authority and
responsibility.
ii. Complete and accurate record keeping
- This is necessary to assure that prompt, timely, and
accurate recording of transactions or economic events
occurs. The company must make and keep books,
records, and accounts that, in reasonable detail,
accurately reflect the transactions and dispositions of
assets.
iii. Physical controls
- This is necessary to ensure that access to physical
assets and information systems are controlled and
properly restricted to authorized personnel.
- This relates to safeguarding assets, documents, and
records to prevent their loss, destruction, or alteration

Jeryll Jones B. Jamero

Accountancy IV

BS

iv. Internal verification

- This refers to the independent review of the accuracy
and propriety of another partys work, and the testing of
the recorded accountability for assets as compared to
existing assets at reasonable time intervals.
b.
1. The sale of long-term securities based on the presidents
approval when the board of directors approval is required
violates authorization procedures.
2. All diffidence and interest checks are received by the treasurer
and forwarded to the accounting department; no entry is made
in the cash receipts book. It is, therefore, not possible to
determine if all interest and dividend checks have been received
and deposited.
3. The balance in the accounts as of the end of the month closely
approximated the amounts shown on the brokers statements.
4. The treasurer has the authority to buy and sell securities,
receives revenue, and makes journal entries related to securities.
5. Access to short-term securities is unrestricted in the accounting
department.
c.
1. Implement formalized procedures (in addition to the companys
bylaws) reinforcing the policy that only the board of directors can
authorize long-term security purchases, and sales.
2. All checks should be forwarded to the group that normally opens,
stamps and logs incoming checks, and the checks should be
recorded in the cash receipts book at the time of receipt. The
interest and dividend checks (entries) should be reconciled by
the accounting department to the monthly brokers statements.
These statements should be kept on file to assure that all checks
have been received, deposited, and accounted for.
3. The accounting department must undertake the reconciliation of
the differences and implement appropriate procedures to assure
that the accounts and the brokerage statements are reconciles
monthly.
4. Strengthen internal control so that the treasurer does not have
conflicting duties.
5. The short-term securities should be placed in a restricted facility
such as a bank safe deposit box or a company safe. Access to
short-term securities should be limited to a few responsible
personnel and two people should be present each time the
securities are accessed. Additionally, a log-book should be
maintained to record any disposition of securities.

Jeryll Jones B. Jamero

Accountancy IV

BS

Problem 6:
a.
The payroll processing system violates the principle of the
segregation of duties. The same individual verifies the time
cards, inputs payroll information into the master file, prints
the checks, machine-signs the checks, distributes the checks,
and prepares the payroll journal entry, which may lead to
corruption.
There is no authorization of employees time cards by a
supervisor or other objective party, such as a timekeeper.
The payroll checks are not pre-numbered nor are they
properly stored. As a result, there is no audit trail to verify
check usage.
There is no control over the machine-signing of checksno
control of the signature plate by a second party or use of a log
to record activity.
The data processing department appears to have full access
to the payroll files and checks, which could lead to sensitive
payroll information being leaked.
b.
The personnel department determines the wage rate and
initiates the setup of payroll records, which is a good example
of segregation of duties.
A backup of the master file is made after each weekly
processing of the payroll.