Here is a little bit of background of the milstone:The following items were found while conducting the audit of internal control and the audit of the financial statements. Students should consider whether the item is a significant deficiency or a material weakness based on the other facts presented in the case and the materiality limits set in Milestone Two.Several transactions were not recorded correctly in subsidiary ledgers; transactions were not material, either individually or in aggregate.There are a significant number of intercompany transactions monthly. The transactions are related to inventory transfers between warehouses and marketing costs allocation between the business units. The intercompany transactions are frequently material. A formal management policy requires monthly reconciliation of the intercompany accounts; however, there is no process to ensure that the procedures are performed consistently. The result is a lack of timely reconciliations and differences in intercompany accounts that are frequent and significant.Accounts receivable subsidiary ledgers are not reconciled to the general ledger account in a timely and accurate manner. There is a formal policy; however, no formal process or procedure is followed to complete this task. The differences between the subsidiaries and ledger accounts required an audit adjustment of $376,000.There was a lack of adequate cut-off procedures to ensure the timely recording of certain period-end accruals. This resulted in an audit adjustment of $3,578,000.The second and fourth items are considered material weaknesses, and the first and third would be significant deficiencies based on the information provided above and the materiality limits that have been set. Students should make this differentiation and provide how they should be addressed, including recommendations for improvement. In addition to these items, the case provides information related to the qualifications of the new controller (Carol McKay) that students should address.Below are the COSO framework components of internal control that would be affected, and the students could address the items presented above. These are subjective guidelines and are not exhaustive on how students could interpret the deficiency and which component it belongs to.Transactions not properly recorded: Control activities and monitoringIntercompany transactions: Control activities and monitoringReconciliation of subsidiary ledger: Information and communicationLack of procedure: Control environmentNew Controller: Control Environment and Risk Assessment
