Question

One of your Firm’s Managers, Colin Cronen is responsible for the auditing the financial statements

of the Roman Corporation, which has a batch-processing IT-based system for shipping and invoicing that
it purchased from a software vendor. The following comments have been extracted from Cronen’s notes
on IT operations and the processing and control of shipping notices and customer invoices. Each type of
computer run is assigned to a specific employee who is responsible for making program changes,
running the program, and answering questions. This procedure has the advantage of eliminating the
need for records of IT operations because each employee is responsible for his or her own computer
runs. At least one IT department employee remains in the computer room during office hours, and only
IT department employees have keys to the computer room. The corporation considered the desirability
of program controls but decided to retain the manual controls in place prior to the conversion to the
software vendor’s system. Company products are shipped directly from public warehouses, which
forwards shipping notices to general accounting. There a billing clerk enters the price of the item and
accounts for the numerical sequence of shipping notices from each warehouse. Mathematical
extensions are made by the computer. Output consists of invoices (in six copies) and a daily sales
register. The daily sales register shows the aggregate totals of units shipped and unit prices, which the
computer operator compares to the control tapes. All copies of the invoice are returned to the billing
clerk. The clerk mails three copies to the customer, forwards one copy to the warehouse, maintains one
copy in a numerical file, and retains one copy in an open invoice file that serves as a detailed accounts
receivable record.
Required:
a. Based on your review of Cronen’s notes, describe weaknesses in internal control over
information and data flows and the procedures for processing shipping notices and
customer invoices, and your recommend improvements in these controls and processing
procedures. Organize your answer using the following format:
1.Weakness
2.Recommended Improvement

Answer 1

The weaknesses identified include a lack of segregation of duties, the absence of IT operations logs, reliance on manual controls, and single-handed management of invoices. Recommended improvements are to segregate duties, maintain IT operation logs, implement automated controls, and have invoice distribution managed independently.

Step-by-step explanation:

Weaknesses and Recommended Improvements in Internal Controls

Reviewing the notes provided by the firm's manager, there are several identified weaknesses in the internal control over information and data flows concerning the processing of shipping notices and customer invoices.

1. Weakness: An individual employee is responsible for making program changes, running the program, and answering questions related to their specific computer runs. This centralization of duties creates a significant risk of errors or fraud going undetected due to a lack of segregation of duties.
2. Recommended Improvement: Implement a segregation of duties where different individuals or departments are responsible for authorizing transactions, recording these transactions, and maintaining custody of the assets involved. This will help prevent errors and reduce potential for unauthorized actions.
3. Weakness: The absence of records for IT operations due to the reliance on individual responsibility can lead to accountability issues and a lack of traceability, making it difficult to identify the source of errors or unauthorized alterations.
4. Recommended Improvement: Establish an IT operations log to record activities, including program changes and processing details. This will provide an audit trail that enhances accountability and facilitates error detection and prevention.
5. Weakness: Manual controls were retained after conversion to the new IT-based system, which may not be optimal and could be less efficient or reliable compared to automated controls that could be integrated into the system.
6. Recommended Improvement: Assess and implement appropriate automated controls that complement the IT-based system, ensuring that the control environment keeps pace with technological advancements and process enhancements.
7. Weakness: All invoice copies are returned to the billing clerk, who then is solely responsible for distribution and filing. This creates risk as the clerk can manipulate records without detection.
8. Recommended Improvement: Invoices should be distributed by an independent person or department who does not have the ability to alter the records, discouraging manipulation and enabling a better audit trail.