2.

In a manufacturing firm, employees typically fill out two different documents regarding their
time worked. What are they? Why are there two?
ANS:
The two documents are the time card and the job ticket. Two are required because the time
card records all the time worked by an employee during the period while the job ticket details
the time by project.

7. Why does the payroll process lend itself to batch processing?
ANS:
Payroll lends itself to batch computerization because it is processed at fixed time intervals
which permit some time lag. Processing the payroll file usually involves most employees each
time it is processed, which is an efficient use of computer resources and can be accomplished
with a single pass through the file.

9. Discuss the fundamental risk and control issues associated with fixed assets that are different
from raw materials and finished goods.
ANS:
AUTHORIZATION CONTROLS. Because fixed assets are requested and employed by end-
users asset acquisitions should be formal and explicitly authorized. Each material transaction
should be initiated by a written request from the user or department. In the case of high-value
items, there should be an independent approval process that evaluates the merits of the request
on a cost-benefit basis.

SUPERVISION CONTROLS. Because capital assets are widely distributed around the
organization, they are more susceptible to theft and misappropriation than inventories that are
secured in a warehouse. Therefore, management supervision is an important element in the
physical security of fixed assets. Supervisors must ensure that fixed assets are being used in
accordance with the organizations policies and business practices.

INDEPENDENT VERIFICATION CONTROLS.
1. Periodically, the internal auditor should review the asset acquisition and approval procedures to
determine the reasonableness of key factors including: the useful life of the asset, the original
financial cost, proposed cost savings as a result of acquiring the asset, the discount rate used, and
the capital budgeting method used in justifying decisions to buy or dispose of assets.
2. The internal auditor should verify the location, condition, and fair value of the organizations
fixed assets against the fixed asset records in the subsidiary ledger.
3. The automatic depreciation charges calculated by the fixed asset system should be reviewed and
verified for accuracy and completeness. System errors that miscalculate depreciation can result in
the material misstatement of operating expenses, reported earnings, and asset values.

10. Describe an internal control that would prevent an employee from stealing a computer and
then reporting it as scrapped.
ANS:
Supervisors must authorize the disposal of the computer. Unless so authorized, the record will
continue to show that the employee is responsible for the computer.

11. Describe an internal control that would prevent the payment of insurance premiums on an
automobile that is no longer owned by the company.
ANS:
Perform an annual physical inventory of fixed assets and adjust the records to reflect assets no
longer on hand. Prepare reports about the disposal of assets.

12. Describe an internal control that would prevent the charging of depreciation expense to the
maintenance department for a sweeper that is now located in and used by the engineering
department.
ANS:
Prepare reports about the transfer of fixed assets. Perform an annual physical inventory and
note the location of assets. Budget and then hold each department accountable for
depreciation expense for assets located in each department.

13. Describe an internal control that would prevent the acquisition of office equipment which is
not needed by the firm.
ANS:
A higher organizational level or other appropriate person authorizes fixed asset acquisitions;
part of the authorization is showing that a need for the asset exists.

14. What negative consequences result when fixed asset records include assets that are no longer
owned by the firm?
ANS:
On the financial statements, assets will be overstated and depreciation expense could be
overstated. Assets on property tax returns will be overstated and too much tax will be paid.
Insurance premiums will be paid on nonexistent assets.
I. Executive Summary
LongXi Machinery Works (Longxi) was a state-owned enterprise in Zhangzhou,
Fujian. It was founded in 1957 as a result of the merger between machinery works from
Sichuan province and an agricultural machinery plant owned by the city government of
Zhangzhou. For quite some time since their first operation started, LongXi was focused on
the production of various single and multi-cylinder diesel engines primarily for the agricultural
sector. These engines were used in the powertrains of four-wheel and three-wheel tractors,