Question

Which internal control procedure would be most effective in dealing with the following threats?

(a) Receiving-dock personnel steal inventory and then claim the inventory was sent to the warehouse.

(b) A company is late in paying a particular invoice. Consequently, a second invoice is sent, which crosses the first invoice’s payment in the mail. The second invoice is submitted for processing and also paid.

  (c) The petty cash custodian confesses to having “borrowed” $12,000 over the last five years.

   (d) Each Friday, approved supplier invoices that are due within the next week are routed from accounts payable to the treasurer’s department for payment. The cashier and treasurer are the only employees authorized to disburse funds, either by EFT or by printing a check. Checks are printed on dedicated printer located in the treasurer’s department, using special stock paper that is stored in a locked cabinet accessible only to the treasurer and cashier. The paper checks are sent to accounts payable to be mailed to suppliers.

(e) Monthly, the cashier reconciles the bank statements and investigates any discrepancies with recorded cash balances.

(f) A receiving clerk noticed that four cases of MP3 players were included in a shipment when only three were ordered. The clerk put the extra case aside and took it home after his shift ended.

(g) An employee of the finishing department walked off with several parts from the storeroom and recorded the items in the inventory ledger as having been issued to the assembly department.

Answer 1

a) For this type of threat, physical audits of assets is the internal control procedure to protect from this threat.

In this physical assets are being traced down and records are being prepared on how much inventories are received and among then how much was sent to the warehouse. This will help keeping the records of which inventory is going where. The warehouse will also make a report of receiving inventories. And if it will not receive inventory, it can be claimed that inventory did not reach here and hence fraud can be controlled.

b) Here, standardized financial documentation, is much more effective as according to this all the invoices and other documents are made up to standards and recorded properly so that it can be easy to review the records and see which payments are due and which are not. And accordingly we can pay the payments. Also one internal control procedure that is daily and weekly trail balances is helpful in this because it help check the balances and would reflect which payments are pending.

c) To protect from such threat, internal procedures like the approval authority requirements is very useful as in the process of borrowing cash it is needed to be approved by the organization and no employee alone can borrow money from anybody.

d) For this type of fraud the procedure of separation of duties is very helpful as the duty will not be only under cashier and treasurer but also would be distributed among other employees and hence fraud can be controlled.

e) Daily or weekly trial balances can help in keeping regular records and hence recuces the chance of discrepancies as fast and early as it could be detected and hence this is useful for such threat.

f) Physical audits of assets is effective in this threat as the employee cannot take with him any object like the MP3 player because all would be recorded and same amount will be dispatched and counted everywhere. Hence no fraud can be made.

g) Physical audit of assets is again here effective in this case as proper audit of all assets and inventories are done and records are properly maintained. Hence one can check whether the part was being issued to assembly department or not and hence fraud can be controlled.