Controllership - E2

Form 8-K

A public company is required to file Form 8-K to report a material, undisclosed event.

Form 10-K

Annual reports

Form 10-Q

Quarterly reports

Timing of annual report filings

The 10-K filing deadline depends on the size of the company.

Form S-1

The Form S-1 is the default stock registration form used if no other registration forms or exemptions from registration are applicable.

Form S-3

The Form S-3 allows companies to incorporate a large amount of information into the form by reference, which is generally not allowed in a Form S-1.

Form S-8

The Form S-8 allows companies to register securities that it offers to its employees and consultants under an employee benefit plan

When reviewing the flowcharts for control weakness, five general control objectives should be kept in mind:

1. Authorization 

2. Recording

3. Safeguarding

4. Reconciliation

   1. Valuation

Internal Controls of Cash

1. Control check stock

2. Control signature plates

3. Separate responsibility for the cash receipts and bank reconciliation functions.

4. Require that bank reconciliations to be completed by people independent from the cash receipts and disbursement functions

5. Require that petty cash vouchers to be filled out in ink'

6. Compare the check register to the actual check number sequence

I

Internal Controls of Receivables

1. Confirm payment terms with customers

2. Require approval of bad debt write-offs

3. Require approval of credits

4. Match invoiced quantities to the shipping log

5. Verify invoice pricing

Internal Controls of Inventory in Transit

1. Audit shipment terms

2. Audit the receiving dock

   1. Reject all purchases that are not preapproved.

Internal Control of Inventory Accounting

1. Conduct inventory audits

2. Control access to bill of material and inventory records

3. Keep bill of material accuracy levels at a minimum of 98%

4. Pick from stock based on bills of material

Internal Control of inventory Valuation

1. Audit inventory material costs

2. Audit production setup cost calculations

3. Compare unexpected product costs to those for prior periods

4. Review sorted list of extended product costs in declining dollar order

   1. Control updates to bill of material and labor routing costs.

Internal Controls of Fixed Assets

1. Ensure that fixed asset purchases have appropriate prior authorization

2. Compare capital investment productions to actual results

3. Verify that correct depreciation calculations are being made

4. Verify the fair value assumptions on dissimilar asset exchanges.

5. Ensure that capital construction projects are not delayed for accounting reasons

Internal Controls of Current Liabilities

1. Include an accrual review in the closing procedure for bonuses, commissions,

   property taxes, royalties, sick time, vacation time, unpaid wages, and warranty claims.

2. Review accrual accounts for unreversed entries

3. Create standard entiesfor reversing journal entries

4. Include a standard review of customer advances in the closing procedure

5. Include an accrual review in the closing procedure for income taxes payable

Internal Controls of Contingencies (IMPORTANT)

1. Include an assessment on contingent debt guarantees in the closing procedure.

2. Include an assessment of debt covenant violations in the closing procedure

3. Include an assessment of debt covenant violations in the budgeting process and interim financial planning

4. Include an assessment of all contingency reserves in the monthly closing procedure

Revenue Recognition When Right of Return Exisits

1. Include a sale return allowance calculation in the standard closing procedure

2. Verify the amount of the return allowance against actual experience

3. Review the condition of returned inventory

All these levels can be included in three groups:

1. Strategic

2. Tactical

3. Operational

What is Fraud?

An intentional financial misstatement or misappropriation of funds.

Fraud is not an unintentional mistake, such as an incorrect accounting estimate, the application of a cost to an incorrect account, or a lost inventory tag during a physical count.

Common Types of Fraud:

Sell company assets

The conditions that lay the foundation for fraud include:

• Poor internal controls or a poor internal control environment

• Existence of heavy financial pressure on individuals

• Other sources of pressure

• Contributing conditions

The responsibility for an effective internal control system

rests with management.

Management override probably WOULD NOT occur include:

• Management compensation is directly and substantially affected by operating results, and those results tend to be erratic.

• The management of the business unit is under extreme pressure to achieve specific earnings

Management override that is MORE COMMON occur include:

• Reserve estimates. Inventory reserves, reserves for doubtful accounts, tax accruals, and litigation reserves, among others, may be understated in order to increase profits.

  • Depreciation allowances. Depreciation rates on machinery and equipment might be changed.

Auditing for Fraud include:

• Too much transactions

• Ineffective use of audit time

• Audits have time limits

• Trend analysis is not sufficient

• Perpetrators know the procedures

  • Fraud is hard to recognize

What tools can be used to hone in quickly on likely fraud situations?

• Watch the environment

• Watch the controls

• Watch employee lifestyles

• Be avaliable