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Pages:
3 pages/β‰ˆ825 words
Sources:
3 Sources
Style:
APA
Subject:
Accounting, Finance, SPSS
Type:
Research Paper
Language:
English (U.S.)
Document:
MS Word
Date:
Total cost:
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Topic:

Gaps in Internal Controls at EarthWear Clothiers

Research Paper Instructions:

Overview

For the final project, you will work through components of a case study in which you will assume the role of a lead auditor at Willis & Adams. Your firm has been approached by EarthWear Clothiers to perform an audit. In your role as lead auditor, you will evaluate internal and external factors to determine client engagement, develop an audit plan, determine recommendations for improving internal controls, and communicate the audit opinion. For this milestone, you will create the report on internal controls over financial statements.

Prompt

For this milestone, you will evaluate the following components within EarthWear Clothiers for gaps in internal controls and explain how each can be improved: control environment, risk assessment, information system, control activities, monitoring activities. The items below were found while reviewing internal control during your evaluation. Consider whether the item is a significant deficiency or a material weakness based on the other facts presented in the case and the materiality limits set in Milestone Two:

There were several instances of transactions that were not properly recorded in subsidiary ledgers; transactions were not material, either individually or in aggregate. There are a significant number of intercompany transactions monthly. The transactions are related to transfers of inventory between warehouses and the allocation of marketing costs between the business units.The intercompany transactions are frequently material. There is a formal management policy that requires monthly reconciliation of the intercompany accounts; however, there is no process to ensure that the procedures are performed consistently. The result is a lack of timely reconciliations, and differences in intercompany accounts that are frequent and significant.

Accounts receivable subsidiary ledgers are not reconciled to the general ledger account in a timely and accurate manner. There is a formal policy, however, there is no formal process or procedure that is followed to complete this task. The differences between the subsidiaries and ledger accounts required an audit adjustment of $376,000.

There was a lack of adequate cut-off procedures to ensure the timely recording of certain period-end accruals. This resulted in an audit adjustment of $3,578,000. Specifically, the following critical elements must be addressed:

III. Internal Control: Evaluate the following components within an organization for gaps in internal controls, and explain how each can be improved:

A. Control environment

B. Risk assessment

C. Information system

D. Control activities

E. Monitoring activities

What to Submit Your report on internal control must be 2 to 3 pages in length (plus a cover page and references), with double spacing, 12-point Times New Roman font, and one-inch margins. You should use current APA style guidelines for your citations and reference list.

Research Paper Sample Content Preview:


Internal Control Report
Student Name
Institution
Course Name
Instructor
Date
Internal Control Report
The Public Company Accounting Oversight Board (2010) mandates that auditors become knowledgeable about the elements that make up internal control over financial reporting. The EarthWear Clothiers (EWC) study assessed the five internal control components and found multiple weaknesses in the system. It assesses each gap's degree of control insufficiency and generates recommendations to close the gaps.
Control Environment: The company has established a robust control environment. Within a week, the Board of Directors quarterly meetings—convened to evaluate the company's accomplishments—have their proceedings documented. Every quarter, the internal auditors and the Board's Audit Committee convene. The company follows tight accounting regulations and is committed to detecting and preventing inaccuracies caused by errors or fraudulent activities. There are distinct hierarchies of authority within the operational departments of the company's structure. Personnel in the accounting department are highly ethical, well-trained, and have a lot of expertise; turnover over the previous three years has been minimal. The Human Resources Division upholds policies on every facet of the workforce.
However, EarthWear Clothiers failed to adequately organize and prepare for the replacement of leadership (to show a dedication to draw in, nurture, and keep capable people in line with goals). Despite having a solid Board of Directors and minimal high-level position turnover, the company spent most of the year operating without a Controller. In February 2016, the company's prior Controller abruptly quit to accept a position with a rival company. It was not until November 2016 that the new Controller was appointed. As a result, there is a higher chance of discovering inaccuracies because the Controller may not have completed the required control measures over the year. Based on the reasonable expectation that there would be no likelihood of a major misstatement arising from this failure, I concluded that this was a control deficiency. It is recommended that EarthWear Clothier establish and execute leadership succession protocols that encompass cross-

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