Please write in your own words and phrases.
Tìm Johnson, CPA, is the senior in-charge on an audit of a medium
sized ($20M in assets) client, Dalton Enterprises, Inc. This client
is a family owned and operated corporation. Mr. William Dalton (67
years old) is the president who micro-manages all aspects of the
business except the finance area, which he leaves entirely to his
son, Chauncy, who has been newly appointed as the VP of Finance.
Chauncy, recently graduated with an MBA, and majoring in finance,
is responsible for administering all the financial and accounting
aspects of the business including the appointment of the auditors.
Chauncy replaced Herb Castle who retired after thirty years with
the organization. George Smerlas as controller reports directly to
Chauncy. The audit report has never circulated outside the
organization. The report provides a basis for the tax return which
George prepares. It also provides Mr. Dalton with supplemental
schedules including comparative aging schedules and a detail
comparative listing along with the changes in all of the general
ledger accounts. Mr. Dalton used the audit report, along with the
management letter, for administrative control purposes. While
analyzing the travel and entertainment expenditures, which were
substantially ($20,000) higher than last year's amount, Tim noted
that most of the increase was attributable to payments made on
Chauncy's behalf. The supporting documentation for these
expenditures were very sketchy and, in most cases, the only
documentation was a check request initiated by Chauncy. All other
T&E expenditures, including the modest payments on Mr. Dalton's
behalf, were properly documented. When queried about this
documentation problem, George acknowledged that the company's
policy of having the immediate supervisor of the person requesting
payment for T&E approve the voucher were circumvented here. But
considering the circumstances, George was not concerned about the
problem. When asked about the $25,000 travel advance due from
Chauncy, George replied, "He signed your confirmation request
acknowledging the amount due, didn't he?" Tim decided to discuss
the problem of lack of approvals and documentation with Chauncy.
Chauncy's response was to questions why the auditors would be
skeptical of his honesty and motives here. He also stated that it
was typical of "bean counters" to pursue areas that are of little
significance, while ignoring areas where efficiency could be
improved. He ended the interview by asking, "What are we paying you
guys for anyhow?" All other audit areas and financial statement
disclosures are deemed satisfactory.
What are the issues of internal control faced by the given
firm? Suggest preventive and corrective measures to rectify the
problem.