Question

You are the auditor of Epsilon Ltd (“Epsilon”), a small business specialising in metal fabrication. Epsilon employs 60 welders and metal workers.

The owner, John, works occasionally with the accountant, Mary, but spends most of his time dealing with marketing and operations.

Mary keeps all of the financial records in a computer which uses an MYOB integrated financial package. She is quite familiar with the security system provided by MYOB, and has implemented the password access control over all modules to prevent unauthorised persons from assessing them. She also uses Microsoft Excel to track the work schedule of the workers, their hours of work including overtime, and other payroll information. Mary is proud of her abilities with the computer and runs a paperless office.

When she works from home, she transmits the results to the office computer via modem. The access by modem is protected by a password.

Due to the heavy workload, John has delegated most of the office functions to Mary, including cash receipts, bank deposits, and cheque writing. Occasionally, he reviews the financial records with her.

Mary has been working for John over the past five years and has never taken a vacation. John views Mary as very competent, reliable, and possessing good computer skills.

Note: You may assume that any procedures which are not documented above have not been performed. Required: You are reviewing Epsilon’s internal control system. (a) Identify FOUR (4) weaknesses in Epsilon’s internal control, and

(b) Explain why each is a weakness.

Answer 1

(a)	Internal Control Weaknesses:
	1. All functions of cash receipting, bank deposits, and cheque writing are performed by a single person.
	2. There is no authorization for the cheques.
	3. No bank reconcilation is prepared and reviewed periodically.
	4. The employee has never taken vacation.
(b)	Reasons:
	1. There is no segregation of duties as the custody, authorization, and recording functions for the cash transactions are all handled by Mary. There is thus a high possibility of fraudulent transactions.
	2. There is no separate authorization of the payments for which the cheques are written by Mary which could lead to unauthorized/incorrect payments being made.
	3. A bank reconciliation which is an important internal control tool for preventing and detecting frauds is not prepared and reviewed which could cause frauds to go unnoticed.
	4. There is no job rotation of employees. Employees need to be encouraged to take leaves while other employees manage their work to eliminate fraudulent activity being conducted by one employee.