Cheater Inc.’s Controls Harvard Case Solution & Analysis

Cheater Inc.’s Controls Case Study Solution

Introduction:

Cheater Inc. is a public listed company operating in the USA, as a public listed company, Cheater Inc. have to follow various laws and regulations which are imposed by the SEC as listing requirement and from the national government. The main laws and regulations which are imposed because of the listing are the adherence to Sarbanes Oxley Act, auditing requirement and financial reporting requirements.

As a public listed company it is compulsory for Cheater Inc. to fulfill all the provisions and sections of Sarbanes Oxley act, failure to do so will result in heavy fines and penalties. As the Sarbanes Oxley act is a rules based approach the Cheater Inc. must have to follow all the provisions of the act. In addition to this, the Cheater Inc. must have to prepare the financial statements of the company in accordance with the generally acceptable accounting practices (GAAP).

This is also mandatory for the Cheater Inc. because of the public limited status. Not only they have to prepare the financial statements according to the US GAAP but the management must also have to hire an external independent auditor to audit the financial statements in order to give reasonable assurance to the shareholders and regulatory authorities that the financial statements are free from material misstatement.

In order to carry the audit, the shareholders have selected an audit firm to conduct the audit of financial statements, the planning materiality set by the auditor is $3.75 million. The audit engagement team have identified three risk of material misstatement in the revenue, the audit engagement team have performed initial testing regarding the controls and they have shown positive indications regarding the controls.

Key considerations when evaluating the design and testing of the operating effectiveness of the internal controls:

It can be said that there are many key considerations which should have to be given when assessing the testing the operating effectiveness of the internal controls in any organization, furthermore, if the internal control systems are automated the several additional factors needs to be consider. The following considerations should have to give when testing the operating effectiveness of the internal control environment of a public listed company.

Nature of operations:

The nature of the operations are one of the most important consideration which the auditor should have to give when evaluating the operating effectiveness of the internal controls of an organization. If the nature of operations are complex, technical and require high level of skills and knowledge, the operating effectiveness of the systems will be more difficult to assess. Whereas if the nature of operations is simple and straightforward the controls can be very robust and effective.

Integrity of the personnel design the internal controls:

One of the most important thing which needs to be critically evaluated is the integrity, history and competency of the individuals responsible for designing, implementing and reviewing the performance of internal controls. If the internal controls are designed by the person whose integrity and independence is impaired, the operating effectiveness of the systems cannot be guaranteed.

Furthermore, if the person responsible for designing internal controls lacks competency the systems cannot aid in achieving their ultimate goals. For example, if the automated internal controls systems is designed by an inexperienced undergraduate student, the systems will contain many technical issues and faults which would have been avoided if the system are developed by an experienced individual or firm.

Internal audit:

The internal audit department is responsible for maintaining the performance of the internal controls of the organization. If the independent and effective internal audit department is present in the organization, it is highly likely that the controls will operate effectively and effeciently as well. On the other hand, if the internal audit department is not effective and independent, the operating effectiveness of the internal controls cannot be guaranteed. In order to ensure the operating effectiveness of the public listed companies, it is mandatory for them to maintain a sound and independent internal audit department which will ensure the operating effectiveness of the internal controls.

Cheater Inc.’s Controls Harvard Case Solution & Analysis

 

 

Nature of the controls:

There are three type of internal controls operating in any organization, these are preventive, detective and corrective internal controls. Internal controls which aims to prevent the error or fraud from occurrence are called preventive controls. Whereas if the control is used for detecting the potential transactions which could lead to misstatement, non-compliance, fraud and error are called detective controls.

Finally the controls which correct the wrong transactions or which can resolve the issue are normally called as corrective controls. In order to determine the operating effectiveness of the internal control an auditor firstly should have to determine the nature of the internal control. Without knowing the objective and characteristics of the control an auditor cannot assess the operating effectiveness of the internal controls especially for the control which are highly automated...................

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