Exercise 6-1B SOX and COSO’s Internal Control Frameworks
Required
a. Explain what the acronym SOX refers to.
b. Define the acronym COSO and explain how it relates to SOX.
c. Name and briefly define the five components of COSO’s internal control framework.
d. Define the acronym ERM and explain how it relates to COSO’s internal control framework.
Exercise 6-2B Internal Control Procedures
Required
a. Name and describe the two categories of internal controls.
b. What is the purpose of internal controls?
Exercise 6-3B Internal Control Procedures
Stan Oden is opening a new business that will sell sporting goods. It will initially be a small operation, and he is concerned about the security of his assets. He will not be able to be at the business all of the time and will have to rely on his employees and internal control procedures to ensure that transactions are properly accounted for and assets are safeguarded. He will have a store manager and two other employees who will be sales personnel and stock personnel and who will also perform any other duties necessary. Stan will be in the business on a regular basis. He has come to you for advice.
Required
Write a memo to Stan outlining the procedures he should implement to ensure his store assets are protected and that the financial transactions are properly recorded.
Exercise 6-4B Internal Controls to Prevent Theft
Sally Knox worked as the parts manager for East River Automobiles, a local automobile dealership. Sally was very dedicated and never missed a day of work. Because East River was a small operation, she was the only employee in the parts department. Her duties consisted of ordering parts for stock and those needed for repairs, receiving the parts and checking them in, distributing them as needed to the shop or to customers for purchase, and keeping track of and taking the year-end inventory of parts.
East River decided to expand and needed to secure additional financing. The local bank agreed to a loan contingent on an audit of the dealership. One requirement of the audit was to oversee the inventory count of both automobiles and parts on hand. Sally was clearly nervous, explaining she had just inventoried all parts in the parts department. She supplied the auditors with a detailed list. The inventory showed parts on hand worth $225,000. The auditors decided they needed to verify a substantial part of the inventory.
When the auditors began their counts, a pattern began to develop. Each type of part seemed to be one or two items short when the actual count was taken. This raised more concern. Although Sally assured the auditors the parts were just misplaced, the auditors continued the count. After completing the count of parts on hand, the auditors could document only $155,000 of actual parts. Suddenly, Sally quit her job and moved to another state.
Required
a. What do you suppose caused the discrepancy between the actual count and the count that Sally had supplied?
b. What procedures could be put into place to prevent this type of problem?
Exercise 6-5B Internal Controls for Equipment
Required
List the internal control procedures that pertain to the protection of business equipment.
Exercise 6-6B Features of Internal Control Procedures for Cash
Required
List and discuss effective internal control procedures that apply to cash.
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