Exam 4: Internal Controls

Consider the following partially completed risk/control matrix as you answer the questions: Assume the risk/control matrix is organized like the one presented in the chapter.Column B is most closely related to the ___ part of the COSO framework.

Carlos is the vice president of finance at PLP Corporation.When he joined the company five years ago, the finance division was organized in two departments: operating transactions and non-operating transactions.Each department had two employees and a manager.The operating transactions department handled all aspects of transactions dealing with inventory, supplies, payroll and other operating expenses; the non-operating transactions department handled all aspects of transactions dealing with short-term investments, long-term debt and shareholders.Any transactions that did not fit one of the two groups were handled by the vice president of finance.The finance division had its own procedures manual, organized into three chapters: operating transactions, non-operating transactions, other transactions.Within the operating transactions department, one employee handled payroll only, while the other employee handled all aspects of non-payroll transactions.Within the non-operating transactions department, one employee handled transactions related to short-term investments.The other employee handled long-term debt transactions, while the department manager handled all aspects of transactions dealing with shareholders.Based on the narrative, identify three risk exposures for the finance department at PLP Corporation.For each risk exposure, suggest two internal controls that would address it.Use the outline below to record your responses.1) Risk exposure: _____________________________________________ a.Control: ________________________________________________ b.Control: ________________________________________________ 2) Risk exposure: _____________________________________________ a.Control: ________________________________________________ b.Control: ________________________________________________ 3) Risk exposure: _____________________________________________ a.Control: ________________________________________________ b.Control: ________________________________________________

Carlos is the vice president of finance at PLP Corporation.When he joined the company five years ago, the finance division was organized in two departments: operating transactions and non-operating transactions.Each department had two employees and a manager.The operating transactions department handled all aspects of transactions dealing with inventory, supplies, payroll and other operating expenses; the non-operating transactions department handled all aspects of transactions dealing with short-term investments, long-term debt and shareholders.Any transactions that did not fit one of the two groups were handled by the vice president of finance.The finance division had its own procedures manual, organized into three chapters: operating transactions, non-operating transactions, other transactions.Within the operating transactions department, one employee handled payroll only, while the other employee handled all aspects of non-payroll transactions.Within the non-operating transactions department, one employee handled transactions related to short-term investments.The other employee handled long-term debt transactions, while the department manager handled all aspects of transactions dealing with shareholders.Risk exposures for the finance division at PLP include: a) Cash dividends being sent to the wrong shareholders b) Dividend miscalculations c) Embezzlement of cash d) Missed payments on long-term debt e) Payroll checks issued to employees no longer working for PLP f) Payroll miscalculations g) Poor choices for short-term investments h) Purchasing supplies and inventory from unauthorized vendors i) Theft of supplies To address those risks, PLP might institute the following internal controls: adequate supervision, segregation of duties, appropriate use of information technology.Divide the risk exposures listed into three groups based on the internal control that would best address the risk; each group must have no fewer than two and no more than four risk exposures.Each risk exposure must be associated with exactly one internal control.

Consider the following partially completed risk/control matrix as you answer the questions: Assume the risk/control matrix is organized like the one presented in the chapter.The best entry for Item G is:

According to the COSO definition, internal control should address objectives in all of the following categories except:

Violating the provisions of the Foreign Corrupt Practices Act most directly subjects an organization to what kind of risk from Brown's taxonomy?

Fill in the blanks below to complete the COSO definition of internal control.Internal control is a (a), effected by an entity's (b), management and other personnel, designed to provide (c), regarding the achievement of objectives relating to (d), (e) and (f). a._______________________________________________________ b._______________________________________________________ c._______________________________________________________ d._______________________________________________________ e._______________________________________________________ f._______________________________________________________

Bumble Beasley was making a presentation on internal control to a group of prospective clients.Which of the following statements is the least appropriate for Bumble to make?

The risk/control matrix illustrated in the chapter contains five columns.Which of the following items is most likely to appear in the third column?

ANF Corporation's company procedures manual is available to all employees on the corporate network, while RSP Corporation distributes a hard copy of its company procedures manual to all new employees.Which of the following statements is most true?

Bonnie is the owner of Doggie Day Care, a pet-sitting service.Pet owners bring their dogs to Bonnie's facility, where they are either given private accommodations or are put in a large pen with other dogs.(Private accommodations are more expensive.) Bonnie and her employees feed the dogs twice a day; those dogs in private accommodations are also given two exercise periods per day.Owners pay half the daily fee at the start of the day, and the other half when they pick up the dog at the end of the day; owners must also certify that their dogs have had all required vaccinations.As Bonnie's company is a day care service, no dogs stay the night in her facility.Bonnie accepts cash, checks and major credit cards in payment.Bonnie is interested in developing a comprehensive internal control plan for Doggie Day Care; she has approached you, as a consultant, for assistance.Use the COSO internal control framework to develop an internal control plan for Bonnie.Ensure that your plan includes sufficient detail that Bonnie can implement it as you intend.

Consider the following examples of risk: i.A corporation is unable to issue bonds because its credit rating is too low.ii.A U.S.auto manufacturer tries to market a car in Mexico.The car does not sell because the Spanish translation of its name means "it doesn't go." iii.An employee receives insufficient training in how to use specialized software.iv.Due to employee theft, a corporation spends more than anticipated buying new tools.The risks listed above contain examples of all the categories in Brown's risk taxonomy except:

CPY Corporation replaces one third of its computers every year; SLP Corporation replaces its computers when employees submit a request, but no more frequently than once every four years.Which of the following statements is most true?

A Place to Rest is a retreat center located just outside Los Angeles; the center's management is interested in developing an internal control plan using the COSO framework.For each item listed below, indicate the framework element that most clearly applies; you must use each element of the COSO framework exactly one time. a.Conducting focus groups where employees talk about problems they observe at the center b.Designating a three-person committee to review and update the plan annually c.Filling out a risk/control matrix d.Inviting a guest speaker to talk to employees about the importance of internal control e.Sending out a monthly e-mail describing some aspect of the center's internal control plan

Differences between legal & regulatory risk and directors' & officers' liability risk in Brown's taxonomy include:

Consider the following partially completed risk/control matrix as you answer the questions: Assume the risk/control matrix is organized like the one presented in the chapter.The best entry for Item F is:

A company's accountant was able to approve payment of invoices and write company checks to a family member, with whom the accountant would split the proceeds.The accountant covered up the theft with journal entries in the AIS.Which duties should be separated to prevent such problems in the future?

Consider the following partially completed risk/control matrix as you answer the questions: Assume the risk/control matrix is organized like the one presented in the chapter.The best entry for Item D is:

Internal control has four major purposes in organizations.Ways to achieve at least one of the four include: (i) requiring supervisory review of how complex transactions are recorded in the journal, (ii) using general ledger software such as Peachtree.

PRL Corporation's internal control plan is based on the COSO framework.It includes five items: (i) conducting ongoing evaluations of internal control during the normal course of operations, (ii) hiring accountants who understand the importance of strong internal control, (iii) including a segment in new employee orientation on the importance of strong internal control, (iv) periodic employee surveys that identify new issues that require internal controls, (v) a quarterly newsletter explaining elements of the internal control plan.Which of the following most appropriately groups two items from PRL's plan with a component of the COSO framework?