solution

Management has requested a special audit of the recently established electronic controls systems division because the last three quarterly profit reports seem to be inconsistent with the division’s cash flow. The division sells customized control systems on a contract basis. A work-in-process (WIP) record is established for each contract on the WIP master file, which is kept on magnetic disk. Contract charges for materials, labor, and overhead are processed by the WIP computer program to maintain the WIP master file and to provide billing information. The preliminary audit has revealed that not all costs have been charged against the WIP records. Thus, when contracts are closed, reported profits have been overstated. It is now necessary to determine the reason(s) for this loss of control.