The items below were found while reviewing internal controlduring your evaluation. Consider whether the item is a significantdeficiency or a material weakness based on the other factspresented in the case and the materiality limits set in MilestoneTwo:

? There were several instances of transactions that were notproperly recorded in subsidiary ledgers; transactions were notmaterial, either individually or in aggregate.

? There are a significant number of intercompany transactionsmonthly. The transactions are related to transfers of inventorybetween warehouses and the allocation of marketing costs betweenthe business units. The intercompany transactions are frequentlymaterial. There is a formal management policy that requires monthlyreconciliation of the intercompany accounts; however, there is noprocess to ensure that the procedures are performed consistently.The result is a lack of timely reconciliations, and differences inintercompany accounts that are frequent and significant.

? Accounts receivable subsidiary ledgers are not reconciled tothe general ledger account in a timely and accurate manner. Thereis a formal policy, however, there is no formal process orprocedure that is followed to complete this task. The differencesbetween the subsidiaries and ledger accounts required an auditadjustment of $376,000.

? There was a lack of adequate cut-off procedures to ensure thetimely recording of certain period-end accruals. This resulted inan audit adjustment of $3,578,000.

Specifically, the following critical elements must beaddressed:

Required:

Evaluate the following components within an organization forgaps in internal controls, and explain how each can beimproved:

A. Control environment

B. Risk assessment

C. Information system

D. Control activities

E. Monitoring activities

Guidelines:

The critical elements that must be addressed in yoursubmission are the key components of the COSO Framework: controlenvironment, risk assessment, information system, controlactivities and monitoring activities. You need to evaluate thetransactions in each of these critical elements. This means youshould provide examples (real examples - more than the standard)and apply the concept. I do not need you to define each of theseareas, but you need to know what each definition means. You mustdemonstrate how to strengthen and improve the controls in each ofthese areas with better control procedures – not fillerinformation. You may need to refer to your text to gain anunderstanding of what these components mean to formulate yourargument and provide support. If you just provide a definition ofthese five components, it will not be sufficient