Please read and answer the two questions. Then number as 1 and 2
1) Create a scenario where external auditors determined that a company’s internal controls were deficient, but such a deficiency might not mean that a material weakness existed. Â· Ascertain the impact on the audit plan if additional deficiencies are discovered on other related internal controls. Â· Support your position.
2) Please read the rebuttal and answer in 5-to 6 sentences
Let’s assume the inventory valuation and obsolescence is being reviewed during the audit process. The company completes a physical inventory count each quarter and they analyze the inventory with the highest consumption rate. The company investigates the automatic inventory posting system by weighted moving average cost for raw materials and standard cost for Finished goods and work in process goods. The calculation and posting mechanism is perfectly designed and valuation errors can only come from date entry issues. The auditor determines no material weakness and not internal control process issues are present in the inventory valuation system. To keep control of obsolescence issues, the company should do monthly checks using the lower cost or market value test for the slow moving and highly price volatile items. The auditor will probably plan to do sample checks of these items in the audit process. However, if control deficiencies are found in the inventory valuation for finished goods the auditor will want to investigate further. At times, inventory may have been shipped and invoiced, but the the billing process has not been completed. Other times, the shipping may not have been completed even though billing was complete and the items are mistakenly included in the inventory count. The auditor will want to modify their audit plan so they can spend more time looking at the accounting process and control processes of the finished goods. This will lead to the inventory records for each month of the past year needing a review to ensure material misstatements in regards to the inventory of the finished goods are discovered. So, the deficiency in control processes for finished goods leads to the audit plan needing to be modified extensively to check for any internal control weaknesses.
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