Question

For each of the scenarios described below identify 2 control procedures that could have prevented the problem and explain why each of the controls would have helped.

a) you manage a sales firm, and you give laptops to all salespeople. salespeople can input orders and submit them electronically while on the road. you have had a few problems with this system. In one instance an order for 5 pcs was input b the salesperson as 500 pcs. in another case, the salesperson failed to input a delivery address.

b) a computer programmer from the payroll department created a fake employee number and entered this employee in the payroll database. she then prepared paychecks for this fake employee using the payroll systems and sent them to her own po box address.

c) two brothers have lived in Texas all of their lives. joe worked for a local retailer in the account payable department, and John owned the local hardware store. the brothers created several dummy companies that sold fictitious merchandise to the retailer. joe had the retailer pay for this merchandise, and then he wrote off the missing goods as damaged inventory.

Answer 1

(a): In this situation a preventive internal control procedure is required so that instances of error is deterred. Here the salespeople sometimes make errors when inputting orders and this can be prevented by two control procedures – the control environment and the control activities.

The control environment refers to the policies and practices as put in place by the top management of a company. The control environment consists of organizational structure, management’s philosophy, HR policies etc.

Control activities refer to the policies and procedures that management has established to meet its objectives regarding financial reporting.

First of all errors are occurring as there is a problem of assignment of authority and responsibility, which is a part of the control environment component. There should be someone above salespeople who review the entries by salespeople before finalizing it. All entries should be verified by people who are at a senior level than salespeople so that errors are detected and then removed.

Secondly control activities should be established so that there are in-built systems in which salespeople are mandated to review their orders after inputting them but before finalizing them. The salespeople should cross check their inputted data with their orders again so to verify accuracy.

(b): In this situation the control procedures that are required are the control environment and risk assessment. Risk assessment involves identification and analysis of risks.

Here the computer programmer from the payroll department has a free hand and through the control process of control environment a supervisor should be appointed for the programmer. This will enable that all the work of the programmer will have to be approved by the supervisor and so there will be no further manipulation of the payroll database.

Secondly risk assessment will act a preventive control and by proper identification of risks loopholes in the system will be plugged in a manner so that future manipulation of database will not be possible.

(c): In this situation the control procedures that are required are the control environment and information and communication. Information and communication refer to the activities used to record and process an organization’s transactions.

Here also there should a supervisor above Joe so that the account payable transactions are properly monitored and supervised and that Joe does not have a free hand to make payments. With a supervisor he will also not be able to write off the missing goods as damaged inventory.

Secondly there should be proper information and communication so that transactions are recorded in a systematic manner and there is no room left for uncalled for entries in the accounts payable account.