Question

Green Magic Garden Center recently purchased software that compares all bills of lading with sales invoices. The software will generate a report of any differences to enable further review and follow up by the billing department. What type of control did Green Mountain implement?

1) a preventive control that address the valuation assertion
2) a preventive control to address the accuracy assertion
3) a detective control that addresses the completeness assertion
4) a detective control to address the cutoff assertion

Answer 1

Green Magic Garden Center implemented a detective control that compares bills of lading with sales invoices, which serves to detect inaccuracies post-transaction, addressing the accuracy assertion in the financial records. The correct option is B.

Step-by-step explanation:

Green Magic Garden Center implemented a software that compares all bills of lading with sales invoices and generates a report of any differences. This kind of control mechanism is designed to flag any discrepancies between what was shipped and what was billed. Such discrepancies can point towards mistakes or issues within the billing process that need to be resolved to ensure accurate and reliable financial reporting.

Types of Controls

There are typically two broad categories of internal controls:

• Preventive controls are designed to stop errors or fraud before they occur.
• Detective controls are intended to identify errors or fraud after they have occurred.

In this context, the software mentioned functions as a form of detective control because it is identifying discrepancies after transactions have occured rather than preventing them beforehand. Moreover, this type of control is specifically addressing the assertion of accuracy. In accounting, the accuracy assertion is concerned with whether all recorded transactions have been recorded at the correct amounts and that they pertain to the relevant reporting period.

The other assertions mentioned in the options—valuation, completeness, and cutoff—are related but distinct concepts:

• The valuation assertion is about whether assets, liabilities, and equity interests are included at appropriate amounts.
• The completeness assertion is concerned with whether all transactions that should have been recorded have been recorded.
• The cutoff assertion relates to whether transactions and events have been recorded in the correct accounting period.

Therefore, the correct answer to what type of control Green Magic Garden Center implemented is a detective control to address the accuracy assertion (option 2).