Question

Question 1
SimonBlankConstructionCompanyhastwodivisions.The president(Chris Simon) manages the roofing division. Simon delegated authority and responsibility for the management of the modular manufacturing division to John Gault. The company has a competent accounting staff and a full- time internal auditor.UnlikeSimon’sprocedures, however, Gault and his secretaryandleallbids for manufacturing jobs, purchase all materials without competitive bids, control the physical inventory of materials, contract for shipping by truck, supervise the construction activity, bill the customer when the job is finished, approve all bid changes, and collect the payment from the customer. With Simon’s tacit approval, Gault has asked the internal auditor not to interfere with his busy schedule.
Required:
a. deficiencies in internal control: A deficiency in internal control exists when control is designed, implemented or operated in such a way that it is unable to prevent, or detect and correct, misstatements in the financial statements on a timely basis, control necessary to prevent, or detect and correct, misstatements in the financial statements on a timely basis are missing.
I. Controls for granting credit to new customers were not adequate. In particular, the credit department did not adequately check the credit-worthiness of customers with an outside credit agency.
ii. There were inadequate physical safeguards over the company’s inventory. No safeguards prevented employees from stealing high-value inventory parts
Identify three deficiencies in internal control and identity and one fraud that could occur.

b. Indicate whether each of the following controls is relevant to ensure that only valid cash payments are made.

Segregation of duties
a. Daily cash payments reconciled to posting to payable accounts.
b. Use of pre-numbered cheques.
c. Reconciliation of daily payments reports to electronic d. cash payment transfers and cheques issued.
e. supplier statements reconciled to payable accounts regularly.
f. Monthly bank reconciliations of bank statements to the ledger account.
g. Supplier statements reconciled to payable accounts regularly.
h. Independent review of supplier invoices or statements and reconciliation of supplier invoice with trade payable records.
I. Preparation and review of monthly bank reconciliations
j. Electronic cash payments and the issue of cheques should be can only be done by authorised staff
k. Electronic cash payments and cheques prepared only after all source documents have been independently approved.
l. Cash payments must be reviewed by the manager before release.
m. Agreement of monthly cash payments journal to general ledger posting.
n. Payable accounts reconciled to the general ledger control account.
I. Independent approval and review of general ledger account assignment.

Answer 1

Required : Identify three deficiencies in internal control and identify and one fraud that could occu

Three deficiencies in internal control :

1) Lack of segregation of duties

2) Lack of Control envoirnments

3) Lack of information system relevant tp financial reporting

When one person is given the sole responsibility of two conflicting tasks the risk of fraud increases so by giving all responsibility to Gault and his secretary the company has increased the chances that fraud could occur.

b. Indicate whether each of the following controls is relevant to ensure that only valid cash payments are made.

i. Segregation of duties

viii. Independent review of supplier invoices or statements and reconciliation of supplier invoice with trade payable records.

ix. Preparation and review of monthly bank reconciliations

xi. Electronic cash payments and cheques prepared only after all source documents have been independently approved.

x. Electronic cash payments and issue of cheques should be can only be done by authorised staff