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Chapter 11 Internal Control - Exercise

InnoVat Inc., a software company in Shenzhen, China, has various internal control components reflecting its organizational structure, risk assessment, control activities, and monitoring practices. Key elements include a concentrated power structure, rigorous authorization for business trips, physical asset examinations, and independent checks on accounting records. The management also emphasizes performance indicators and reviews internal audits to ensure effective governance.

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7 views2 pages

Chapter 11 Internal Control - Exercise

InnoVat Inc., a software company in Shenzhen, China, has various internal control components reflecting its organizational structure, risk assessment, control activities, and monitoring practices. Key elements include a concentrated power structure, rigorous authorization for business trips, physical asset examinations, and independent checks on accounting records. The management also emphasizes performance indicators and reviews internal audits to ensure effective governance.

Uploaded by

Marcus Wong
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 11 Internal Control - Exercise

InnoVat Inc. a listed company on the Shenzhen stock exchange is a software company
developing and manufacturing products related to internet security. It is located in Shenzhen,
China. The following facts are collected by InnoVat’s auditor during the interim audit. Which
internal control component does each item reflect?

1. T.J. Wang, the founder of InnoVat is an ex-army officer and values formal structure and
disciplines. Thus, the company adopts an organizational structure characterized by high
concentration of power at the headquarter and well-defined lines of reporting and
accountability.

Control environment – Organizational structure

2. Due to fierce business competition the company occasionally sells its product at a price
that barely covers the costs. Karen Lee, the accounting manager monitors this trend
closely in order to decide whether inventory values should be adjusted accordingly

Risk assessment

3. Every business trip of sales representatives needs to be authorized by Kevin Lin, the
sales manager, and overseas trips will need to be pre-approved by David Zhang, sales
director.

Control activities – Authorization

4. The accounting and administration divisions physically examine the company’s fixed
assets every year and ensure all recorded assets exist.

Control environment – physical control of assets

5. Under the pressure from investors and financial analysts, the management team sets its
goal to increase sales by 50% during the year of 2017. The historical growth rate of sales
is 25-30% in the past several years.

Control environment

6. The management team reviews internal auditors’ report on internal control in its
quarterly meetings.

Control framework - Monitoring

7. The Human Resource division issues a clear policy that explains the key performance
indicators used in evaluating employees at each level.
Control environment – Human resources

8. InnnoVat uses SAP and Oracle ERP Cloud.

Communication and information

9. The board of directors has 11 members. Two are ex subordinates of T.J. in the army, two
are his alumni in college, and two are CEOs of companies where T.J. serves as an
independent director.  interlock does not violate the independence rule

Control environment - Board of Directors

10. Accounting records including all vouchers are kept in safes with authorized access only.

Control activities – Physical control of assets

11. Bank reconciliations are prepared by an accountant not related to cash transactions and
reviewed by Karen every month.

Control activities – Segregation (separation) of duties / independent check of performances

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