ACCT 4225 University of Waterloo Internal Cost of Banking Procedures Discussion Paper

ACCT 4225 University of Waterloo Internal Cost of Banking Procedures Discussion Paper
ACCT 4225
Case #3
(Modules 3 to 6)
Date: September 15, 2020
Role: CPA Team of Advisors hired to support management in developing an appropriate system of
internal controls for a new company that has been created to provide a Covid-related service or product
(note: it will be up to the Team to decide what product or service the company is focused on – pick just
one product or service to simplify the processes)
Client: Covid Response Company A has just started up and its first year end will be August 30, 2021.
The company reports using ASPE and the financial statements will be audited to meet bank loan
covenants, one of which pertains to accounts receivable (they are pledged as collateral for the business
startup and equipment loan the company took on in summer 2020).
Background: You are in the stage of reviewing the background information that the client has been
able to provide in advance of your meeting (it’s pretty sketchy – which is par for the course for new
clients and start up businesses):




The bank loan they were able to get was for $500,000 using the personal guarantee of the sole
shareholder Chaman Anders.
They currently have 4 employees – Chaman and three others (they have capacity to work fulltime but some are not yet 100% busy)
Business has been booming and they have had no time to document their processes and do any
record-keeping yet. The bank is providing online payroll processing and Chaman is the admin as
they have full control of the banking activities.
They optimistically project to have sales of $1M to $2M in a full year.
Key Deliverables: Chaman wants advice and clear documentation of the process that should be
followed for handling the purchase-payables-payments cycle. They expect a report with the following
Part A: Process Advisory Services
1. A process flowchart focused on the most important, i.e. key, controls for handling purchases
necessary to carry out the company’s main business. Focus on the main trade goods purchased
(equipment is already in place), the inventory management, and how to/ who pays the bills
(10 marks)
o Hand-drawn flowcharts are acceptable (make sure its legible, rough draft acceptable for
individual submission) – just scan/ photo and append or embed photo in doc
o Or use software (excel, ppt, word… that would be the order of apps I would work with)
and print screen or paste special (image) in doc
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2. Documented list of key purchasing/payables/payment controls the company should implement.
Be sure to capture how the company should capture evidence of the controls (e.g. signatures,
reports, document types) being followed and articulate the audit objective/financial statement
assertion(s) that are supported by putting these controls in place. Your list of controls must be
tailored to the company. The cost of the controls should be considered when making
recommendations (i.e. the company does not have capacity to invest significant dollars).
(45 marks)
Control Identified
(group by Purchases,
Payables, Payments)
Control Description
(provide sufficient
detail for the
company to
implement and
follow)
Financial
Statement
Assertion(s)/
Audit Objective(s)
related to the
control
Evidence that is
important to record/
track (explain why)
a. Purchases
b. Payables
c. Payments
3. A list of daily or weekly and month-end banking procedures the company should complete.
Note: almost all of the company’s receivables are handled electronically due to covid restrictions
minimizing the use of cash. Provide an example of a bank reconciliation that Chaman can use to
keep on top of the banking (be sure to tailor the steps to the company specifics) and explain the
key steps.
o Banking procedures list (8 marks)
▪ Note: procedures you identify should be provided in a list format and NOT in a
written paragraph format.
o Example bank reconciliation and explanation of steps to complete (10 marks)
Part B: Research and Communication
4. Prepare a brief explanation of how Covid Response Company A should address the presentation
and disclosure of their debt (identified on the bank confirmation that Chaman expects to use –
see attached) identifying what the auditors will be looking for in financial statements. Include a
quotation from the appropriate accounting framework, i.e. the relevant CPA Guidance and
Standard Collection (Accounting and Assurance) section. Feel free to note any advice about how
Chaman should handle the bank confirmation (5 marks)
5. Chaman is also worried about how the auditors will audit the company’s inventory account.
They have heard horror stories from their friends about auditors doing sampling and then
messing up and having to redo inventory procedures. Investigate the audit standards, provide a
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brief explanation of what steps the auditors need to follow when sampling inventory (so
Chaman can make sure they’re prepared and monitor the auditors to see that they follow
through). Provide a quote from the assurance standards to support your explanation, (including
the CAS # reference and specific paragraph reference). Make a list of steps that Chaman can
expect the auditors to follow when they test inventory (including how the auditors’ tests serve
to gather evidence in support of the financial statement assertions/ audit objectives related to
inventory).
o
Research standard quotation (2 marks)
o
Explanation (2 marks)
o
List of auditor’s inventory procedures (15 marks)
Audit Procedures that should be performed
for Inventory
Financial
Statement
Assertion(s)/
Audit
Objective(s)
related to
the control
Evidence that is
gathered (explain how it
relates to the audit
objective)
Note: the CPA Guidance and Standard Collection is found on the Knotia site which is under the
CICA link on Blackboard
Page 3 of 4
Bank Confirmation
(Areas to be completed by client are marked §, while those to be completed by the financial institutions are marked t)
Financial Institution
Client (Legal name) §
(Name, branch and full mailing address) §
Covid Response Company A Ltd.
2415 NE Street
Calgary AB T2U 2U2
Bank of Calgary
Main Branch
1111 Main Street
Calgary AB T2U 2U2
The financial institution is authorized to provide the details
requested herein to the below noted firm of accountants.
§Chaman
Confirmation Date § Sept 30, 2020
Anders
_______________________________________________________________________
Client’s authorized signature
1. Loans and Other Direct and Contingent Liabilities (If balances are nil, please state.)
Nature of
liability/
Contingent
liability t
Interest Rate
Date Paid to t
Due Date t
$40,000 due
annually Sept 1
Demand
Loan
4%
August 31, 2020
Loan
5%
August 31, 2020
Date of
credit
Agreement t
Amount and
Currency
outstanding t
01/09/20
$480,000
01/09/20
$20,000
Additional Credit Facility Agreements
Covid Response Company A has an operating line of credit up to $50,000 with a 4% interest rate of which the
company has borrowed $37,716. Interest paid to August 31, 2020. The line of credit is secured by the company’s
accounts receivable.
2. Deposits /Overdrafts
Type of
account §
Account number §
Interest
rate §
Issue Date §
Maturity date § Amount and
Currency t
General
1234567
N/A
N/A
N/A
(bracket if overdraft)
($37,716)
Statement of procedures performed by financial institution t
The above information was completed in accordance with the Bank Confirmation Completion Instructions.
Billy Banker
Authorized signature of financial institution
Branch contact W. Banker (000-888-9999)
Name and telephone number
Please mail this form directly to our public accountant in the enclosed envelope.
Name: Maxwell and Yass Accountants
Address: 1234 Side Road
Required: Calgary AB T2C 2C2
Required:
the following requirements as concisely as possible (for example any audit
Telephone:Complete
000 – 888-9998
Page 4 of 4
ACCT 4225
Fall 2020
Group #: ______________
Each group report is expected to address the following elements:
Part A: Internal Control Process Advisory Services
Purpose: Present the evaluation of controls over purchases-payables-payments process (including
cash handling/ banking).
Element
Mark Allocation
1. Flowchart of the Purchases-Payables-Payments process, that
includes
a. Identification of key points of control
b. Identification of personnel roles
c. Identification of key documents/ systems
2. Detailed list of key purchasing/payables/payments controls.
a. Description of control to implement, tailored to
company
b. Identify related financial statement assertion/ audit
objective that is supported by controls
c. Identify evidence that should be captured to support
future control testing
d. Cost-effectiveness of control factored
3. Daily/weekly and monthly banking procedures
a. List of procedures
b. Example bank reconciliation and explanation of steps
Total
/10
/45
/18
/73
Part D: Research and Communication
Purpose: Demonstrate knowledge of CPA Handbook and ability to search, synthesize and
communicate technical standards.
Element
Mark Allocation
4. Brief explanation of presentation and disclosure of the debt with
quotation
a. Research standards and communication (4 marks)
b. Advice re: bank confirmation (1 mark)
5. Audit of Inventory
a. Brief explanation of inventory sampling with quotation
b. List of inventory audit procedures
Total
/5
/19
/24
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ACCT 4225
Fall 2020
Overall presentation and Communication (no spelling errors, role
clearly understood, audience needs considered)
Overall Total
/3
/100
NOTE: At the end of the semester a team peer evaluation process will be completed. The individual
marks allocated for this case # 3 will depend upon the outcomes of that evaluation. Those who
contributed should receive the full team mark % assigned to the Case #3; those who did not
contribute should only receive partial credit and less than the available team marks.
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