Assessmen t II : T u to rial Exercise – In tern al Contro l

Due Date: 24 October 2022

Value: 30%
Length: Approximately 3 hours

Instructions
Style & Format
Tutorial Exercise must be word-processed, not hand written, word size 12 with ‘Times New
Roman’ font type and 1.5 spacing. Table and graphs should be accurately formatted and one
must show all related workings. (HINT: Follow the Marking criteria as it is how your answer will
be marked)

Please list any references (books, articles, web-based material) you use at the end of your
assignment in alphabetical order, using the referencing style seen in academic articles (i.e. within
text references and bibliography, as in the Harvard referencing style).

Submission
Tutorial Exercise should be uploaded on to the Moodle before the due date. Document should
be uploaded in Microsoft Word Format and Excel if Used. Softcopy must have accurate file
name; it must have the student ID number and assessment it corresponds to. For example, if your
student ID is s11065736; your filename must be “s11065736_TutorialExercise”.

NOTE: The table and solution should not be in Picture Format. If the solution contains Picture
Format Tables for solution, straight 10 marks will be deducted or ZERO will be awarded.

Late Assignment submission will not be marked unless prior arrangement has been made with
the Course Coordinator. If late assessment is marked then the penalty of 10% per day applies.
Assignment submitted after solution has been uploaded will neither be accepted nor marked.

Plagiarism
Students found copying will straightaway be awarded Zero (0) marks. Please note that Inventory
Assessment is individual work thus perform the question on your own. All assessment uploaded
will go through Turnitin Software that provides the originality check on the assessments. All
students will be penalized if found to copying or letting others copy their work.

Refer to page 16 of Introduction and Assessments which gives thorough details of plagiarism and
actions taken for academic misconduct.
Questions
A. Topic: Internal Control Problem 1
Characters: Harry, Manager of Theatre Franchise. Peter, Assistant Manager of Theatre. Diana, Staff
Accountant of Franchise. Judy, Ticket seller and cashier. Ronald, Doorman.

Diana is a college graduate with accounting as her major and is planning to take the CPA exam. She recently
accepted the Staff Accountant’s position with the ZZ Cinema Franchise. There are 20 theatres that are
owned by the Franchise in a widely spread geographic area.

Harry is manager of all the locations of the theatre franchise and Peter, distantly related to him, is the

Assistant Manager working solely at his location. Judy sells tickets from a glass cage and collects the cash
from patrons. At the end of the last show, he adds up the cash receipts, reconciles his sales and hands over
unsold tickets and cash to Peter. Ronald, the doorman, collects the tickets from incoming patrons, tears the
tickets into two, hands over one to the patron and drops the second half into a little locked box which Peter
picks up at the end of the day. Peter prepares the bank deposit slip, deposits the cash in the bank, and keeps
the bank receipts and the unsold tickets in the office safe to which he has the only key. Peter also prepares
the bank reconciliation statements and submits weekly sales reports to Diana.

Of late, Peter has volunteered quite frequently to speed up ticket sales on crowded days by working Judy’s
station at the sales counter. Harry has not objected to this practice. During the past month Peter has been
seen driving a fancy new Lexus to work and seen dining with an attractive blond at the town’s expensive
restaurants. Diana finds from Peter’s reports that sales have shown no change from previous weeks, even
though there appears to be an obvious and significant increase in movie theatre attendance during the
summer season. This puzzles Diana, who suspects this apparent discrepancy is being pocketed by Peter.
More puzzling, why hasn’t Harry also noticed this problem? Diana wonders if she should report her
suspicions to someone in authority. After all, she has no proof. More importantly, should she go to Harry?
He might be involved in this possible scam. What should she do?

Required:

1. What are some of the internal control issues highlighted in the case?
2. What are the benefits to the owners, Harry and Diana, if Peter is fired?
3. What are the costs to the owners if Peter continues?
4. What are the costs if Diana does nothing?
5. Do the owners have a right to expect Diana to blow the whistle on Peter?
6. What Actions Should Be Taken?
a. Should Diana report?
b. Should she do nothing?
B. Topic: Internal Control Problem 2

SMART Company manufactures smartphones and tablets. Its main customers are retailers who then
sell to the general public. The company’s manufacturing is spread across five sites and goods are stored
in its nine warehouses located across the country.

You are an audit supervisor of SMART Company and in preparation for the forthcoming audit for the
year ending 30 September 2022, you are reviewing the following notes your audit manager has provided
you with in relation to the company’s internal controls.

SMART Company has a small internal audit (IA) department. During the year IA started a programme
of physically verifying the company's assets and comparing the results to the non-current assets register,
as this type of reconciliation had not occurred for some time.

To date only 15% of assets have had their existence confirmed as IA has experienced significant staff
shortages and several members of the current IA team are new to SMART Company.

During the year, SMART Company conducted an extensive reorganisation of its manufacturing process
to improve efficiency. Due to the significant number of employee changes required, the human
resources department (HR) have been very busy and to ease their workload during this period the
payroll department have assisted by setting up any new employees who have joined the company.

In January 2022 the wage rate paid to employees was increased by the HR director and he notified
payroll by emailing the payroll supervisor.

A new sales ledger system was introduced in May 2021 and will continue to be run in parallel with the
old system until IA has completed its checks between the two systems.

New customers obtained by the sales team are required to undergo a full credit check; on the basis of
this a credit limit is proposed by sales staff and approved by the sales director and these credit limits
remain static in the sales system.

Monthly perpetual inventory counts are undertaken at each of the nine warehouses, as a full year-end
inventory count is too disruptive for the company.

High value items are stored in a secure area in each warehouse. Access is via a four digit code, which
for convenience is the same across all sites. Due to the company's reorganisation programme some of
the monthly inventory counts were not performed.

Bank reconciliations are undertaken monthly by an accounts clerk and details of all reconciling items
are included. Where the sum of the reconciling items is significant, the reconciliation is sent to the
financial controller for review. In order to maximise cash balances the finance director approves all
purchase invoices for payment 75 days after receipt of the invoice.

Control activities are the policies and procedures which help ensure that management directives are
carried out.

Required: Describe FOUR different types of control activities and, for each type, provide an example
control a company may implement.
 Marking Criteria for Tutorial Exercise One (30%)
Criteria Weighting Marks
gained
1. What are some of the internal control issues highlighted in the
case?
10
2. What are the benefits to the owners, Harry and Diana, if Peter is
fired?
6
3. What are the costs to the owners if Peter continues? 6
Internal
4. What are the costs if Diana does nothing? 6
Control
Internal Problem 1 5. Do the owners have a right to expect Diana to blow the whistle
6
Controls on Peter?
6. What Actions Should Be Taken?
a. Should She Report
b. Should she do nothing 6
Explain your choice
Internal Describe FOUR different types of control activities and, for each
Control type, provide an example control a company may implement 15
Problem 2
Formatting Document should be well organized and accurately formatted (correct
5
headings, dollar signs, etc.)
TOTAL 60