Question: Randall, Inc., is a private company that
Randall, Inc., is a private company that manufactures heavy machinery. The company has an active audit committee and board of directors. The audit committee consists of two outside directors and Howard Kress, the company chief financial officer. The audit committee meets quarterly to provide oversight of financial reporting, including reviewing new accounting policies and unusual transactions. Howard Kress personally reviews and approves any related party transactions. Internal audits of operating units are performed by the internal auditor, who reports directly to Laura Howe, the chief operating officer.
The company has a written code of conduct, and employees agree to adhere to the code when they are hired. The company also has a hotline for confidential reporting of unethical behavior that is staffed by the corporate controller. The audit committee reviews summaries of all incidents and investigations performed.
Required:
Identify the weaknesses in Randall’s system of corporate governance and provide suggestions for improvement in the system. Organize your answer as follows:
Transcribed Image Text:
Weakness Recommended Improvement
> Give a numerical example to illustrate the difference between complete crowding out and incomplete crowding out.
> Some economists argue for the use of fiscal policy to solve economic problems; some argue against it. What are some of the arguments on both sides?
> Why is crowding out an important issue in the debate over the use of fiscal policy?
> Explain two ways crowding out may occur.
> According to Buchanan and Wagner, why is there a political bias towards expansionary fiscal policy and not contractionary fiscal policy?
> What is the difference between government expenditures and government purchases?
> In the previous chapter you learned about the law of increasing opportunity costs. What does this law have to do with an upward-sloping supply curve?
> Explain the multiplier process.
> Using the Keynesian consumption function, prove numerically that, as the MPC rises, saving declines.
> Look at the Keynesian consumption function: C = C0 + (MPC × Yd). What part of it relates to autonomous consumption? What part of it relates to induced consumption? Define autonomous consumption and induced consumption.
> Given the Keynesian consumption function, how would a cut in income tax rates affect consumption? Explain your answer.
> According to some economists, why might business firms pay wage rates above market-clearing levels?
> How was Keynes’s position different from the classical position with respect to saving and investment?
> Give two reasons explaining the possibility that wage rates may not fall.
> How will a rise in government purchases change the TE curve in Exhibit 12?
> If Real GDP is $10.4 trillion in Exhibit 12, what is the state of business inventories?
> Identify the three states of the economy in terms of TE and TP. 45° Line B. TE = C +1+ G A E Q3 Q2 Real GDP
> What is wrong with this statement? Demand refers to the willingness of buyers to purchase different quantities of a good at different prices during a specific time period.
> What role do inventories play in the equilibrating process in the simple Keynesian model (as described in the TE-TP framework)?
> Explain how to derive a total expenditures (TE) curve.
> Suppose consumption rises while investment and government purchases remain constant. How will the AD curve shift in the simple Keynesian model? Under what condition will the rise in Real GDP be equal to the rise in total spending?
> Classical economists assumed that wage rates, prices, and interest rates were flexible and would adjust quickly. Consider an extreme case: Suppose classical economists believed wage rates, prices, and interest rates would adjust instantaneously. What wou
> “In the simple Keynesian model, increases in AD that occur below Natural Real GDP will have no effect on the price level.” Do you agree or disagree with this statement? Explain your answer.
> What does the aggregate supply curve look like in the simple Keynesian model?
> According to Keynes, can the private sector always remove the economy from a recessionary gap? Explain your answer.
> Can a person believe that wages are inflexible downward for, say, one year and also believe in a self-regulating economy? Explain your answer.
> According to Keynes, an increase in saving and decrease in consumption may lower total spending in the economy. But how could this happen if the increased saving lowers interest rates (as shown in the last chapter)? Wouldn’t a decrease in interest rates
> What factors will shift the AD curve in the simple Keynesian model?
> What does it mean to say that “the market” feeds Cleveland, Austin, Atlanta, or Indianapolis?
> According to Keynes, can an increase in saving shift the AD curve to the left? Explain your answer.
> In which factors will a change lead to a change in consumption?
> Explain how a rise in autonomous spending can increase total spending by some multiple.
> What is the relationship between the MPC and the multiplier?
> How is Keynes’s position different from the classical position with respect to wages, prices, and Say’s law?
> Describe the relationship of the (actual) unemployment rate to the natural unemployment rate in each of the following economic states: (a) A recessionary gap, (b) An inflationary gap, and (c) long-run equilibrium.
> What is the state of the labor market in; (a) A recessionary gap, (b) An inflationary gap, (c) long-run equilibrium?
> What does it mean to say that the economy is in a recessionary gap? In an inflationary gap and In long-run equilibrium?
> According to classical economists, does an increase in saving shift the AD curve to the left? Explain your answer.
> Explain why saving rises as the interest rate rises.
> On most days more people want to see the taping of the The Tonight Show Starring Jimmy Fallon (in New York City) than there are seats in the taping studio. What might explain this shortage?
> Consumers start to expect higher future incomes. The price level will _______________ and Real GDP will _______________.
> Morgan, CPA, is approached by a prospective audit client who wants to engage Morgan to perform an audit for the current year. In prior years, this prospective client was audited by another CPA. Identify the specific procedures that Morgan should follow i
> Distinguish between batch processing and online real-time (OLRT) processing. In which of these systems is strong internal control over input most easily attained? Explain.
> A primary requirement of effective internal control is a satisfactory plan of organization. Explain the characteristics of a satisfactory plan of organization for an information systems department, including the relationship between the department and th
> Many companies have part or all of their IT processing done by cloud service providers. a. What controls should the company maintain to ensure the accuracy of processing done by a cloud service provider? b. How do auditors assess internal control over ap
> An integrated test facility (ITF) is a method used primarily by internal auditors for testing IT based system controls. Discuss the advantages and disadvantages of implementing an ITF.
> Discuss how generalized audit software can be used to aid the auditors in examining accounts receivable in a fully IT-based system.
> The use of test data is one method of performing tests of processing controls in an IT-based system. Identify and discuss several other methods by which auditors may test internal processing controls over IT activity.
> Auditors encounter the use of user operated computers on almost every audit engagement. a. How do user operated computers differ from large computer systems? b. When are the auditors concerned with internal control over the use of user operated computers
> Internal auditing is a staff function found in virtually every large corporation. The internal audit function is also performed in many smaller companies as a part-time activity of individuals who may or may not be called “internal auditors.” The differe
> Many CPA firms are taking a business risk approach to audits. Define what is meant by business risk. Provide an example of a business risk that could result in a risk of material misstatement of the financial statements.
> During your first audit of a medium-size manufacturing company, the owner, John Bell, explains that in order to establish clear-cut lines of responsibility for various aspects of the business, he has made one employee responsible for the purchasing, rece
> Assume that you are auditing the financial statements of Wexler, Inc. As you are reviewing the work on internal control, you become concerned about the adequacy of documentation. Describe the required documentation of internal control matters.
> Management is responsible for establishing effective internal control for its organization, including measures to prevent, deter, and detect fraud. Appendix 7A describes antifraud programs and measures. Required: a. What are the three major categories o
> Adherence to generally accepted auditing standards requires, among other things, a proper understanding of the existing internal control. The most common approaches to documenting the understanding of internal control include the use of a questionnaire,
> Henry Bailey, CPA, is planning the audit of The Neighborhood Store, a local grocery cooperative. Because The Neighborhood Store is a small business operated entirely by part-time volunteer personnel, internal control is weak. Bailey has decided that he w
> The auditors’ consideration of internal control begins with obtaining an understanding of the client’s internal control. Required: a. Describe the remaining stages of the auditors’ consideration. b. Provide examples of audit procedures that are performe
> Auditors may restrict substantive procedures based on the results of tests of controls. Required: a. Discuss and contrast the concepts of the planned assessment of control risk and the revised assessment of the risk after tests of controls have been per
> The definition of internal control as contained in COSO’s Internal Control–Integrated Framework and the professional standards is quite broad and comprehensive. Required: a. Define internal control and its purpose. b. Explain the major concepts that are
> Management is responsible for designing and maintaining its organization’s internal control. In designing internal control, management must consider controls related to each of the five major internal control components: the control environment, risk ass
> Perform an Internet search to access the text of the Securities Exchange Act of 1934. Read and summarize the internal control requirements of Section 13(b)(2) of the act.
> Describe the two types of misstatements due to fraud. Which one generally is of more concern to the auditors?
> In every audit engagement, the auditors should identify fraud risks that may require an audit response. Described below are four circumstances or factors that may create an increased risk of material misstatement of the financial statements due to fraud.
> SEC filings of certain public companies can be accessed from EDGAR (Electronic Data Gathering, Analysis, and Retrieval system), which has the following Internet address: www.sec .gov/edgar.shtml. Required: a. Describe four significant business risks of
> Richard Foster, an assistant auditor, was assigned to the year-end audit work of Sipher Corporation. Sipher is a small manufacturer of language translation equipment. As his first assignment, Foster was instructed to test the cutoff of year-end sales tra
> In designing further audit procedures, the auditors should assess the risks of material misstatement of the financial statements. Required: a. Describe the auditors’ general approach to such risk assessment. b. Identify potential responses to financial
> Listed below are several of the auditors’ general objectives in performing substantive procedures on an asset account: 1. Establish the existence of assets. 2. Establish that the company has rights to the assets. 3. Establish the completeness of recorded
> John Wells, CPA, is planning the audit of CVG Services, Inc. As a result of his risk assessment procedures, Wells has identified several fraud risks. Required: a. Explain in detail how Wells might respond to risks of material misstatement of the financi
> The auditors sometimes decide to allocate the amount of materiality for planning to various financial statement accounts. Required: a. Explain why auditors typically decide to allocate materiality for planning to individual financial statement accounts.
> In planning every audit, the auditors are required to consider materiality for audit purposes. Described below are financial statement data from two separate companies: Required: a. Develop an estimate of the appropriate materiality amount for planning
> Auditors should plan and perform their audits to provide reasonable assurance of detecting material misstatements in financial statements, including those resulting from fraud. Required: a. Distinguish between fraudulent financial reporting and misappro
> A CPA has been asked to audit the financial statements of a nonpublic company for the first time. All preliminary discussions have been completed between the CPA, the company, the predecessor auditors, and all other necessary parties. The CPA is now prep
> Criticize the following statement: “Throughout this audit, for all purposes, we will define a ‘material amount’ as $500,000.”
> Assume that you have been assigned to the audit of Lockyer Manufacturing Company. You have completed the procedures for gathering information about the company and its environment, including internal control. a. Describe the next stage of the audit proce
> Explain the meaning of the term documentation as it pertains to computers and an information systems department. How might a client’s documentation be used by the auditors?
> Explain briefly what is meant by an “online real-time system.”
> An information systems department usually performs numerous IT processing functions that would be separated in a manual system. Does this imply that separation of duties is not a practical means of achieving internal control in a computerized system? Exp
> Distinguish general control activities from application control activities and give examples of the types of controls included in each of these broad categories.
> What is cloud computing?
> Distinguish between user control activities and manual application control activities.
> What is meant by a local area network?
> Describe the audit technique known as tagging and tracing. What is the purpose of the technique?
> Do auditors usually begin their consideration of internal control over IT activities with a review of general or application control activities? Explain.
> Discuss what is meant by the phrase “shopping for accounting principles.” What mechanisms have served to prevent this practice by management?
> Discuss the nature of end user computing.
> Is it probable that the use of IT will eventually eliminate the audit trail, making it impossible to trace individual transactions from their origin to the summary totals in the financial statements? Explain.
> Explain briefly what is meant by electronic data interchange (EDI). How does EDI affect a company’s audit trail?
> Explain briefly what is meant by a malware and ransomware.
> What are the advantages of a virtualized client/server infrastructure?
> Describe briefly the controls that should be established over the operation of a workstation to prevent use by unauthorized personnel.
> What is the difference between an Internet-based and an intranet-based information system?
> What is meant by “authentication of the user” and how may authentication be achieved?
> Define and give the purpose of each of the following controls: a. Record counts b. Limit test c. Validity test d. Hash totals e. Missing data test
> What is blockchain technology and how could it eventually change financial reporting and auditing?
> State the purpose and nature of an engagement letter.
> The number of personnel in an information systems department may limit the extent to which segregation of duties is feasible. What is the minimum amount of segregation of duties that will permit satisfactory internal control?
> List and describe the major components of an information system.
> One basic concept of internal control is that no one employee should handle all aspects of a transaction. Assuming that a general category of transactions has been authorized by top management, how many employees (or departments) should participate in ea
> Identify the four types of control activities and describe how each type contributes to effective internal control.
> Describe the two types of monitoring and provide an example of each.
