Question

Simon Blank Construction Company has two divisions. The president (Chris Simon) manages the roofing division. Simon delegated authority and responsibility for management of the modular manufacturing division to John Gault. The company has a competent accounting staff and a full-time internal auditor. Unlike Simon's procedures, however, Gault and his secretary handle all bids 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.

Give this scenario a letter grade based on risk management through internal controls and identify two potential frauds that could occur based on the current structure. Suggest at least one improvement to reduce the risk of fraud.

Answer 1

Solution:-

In the given situation, the internal controls was in the modular manufacturing division are would be very weak.

John Gault and his secretary handle all the work in the division including acquiring every one of the materials with no focused offers, control the physical stock of materials,entering into contract for transportation by truck,supervision of the development movement, charging the client when the activity is done, favoring all offered changes and gathering the installment from the client.

There is no keep an eye on their exercises. They can undoubtedly enjoy extortion exercises without anybody thinking about it.

The potential frauds was based upon the current structure:-

1. John Gault and his secretary could collaborate and buy the material at a cost higher than the market cost from their known providers and offer the value contrast among themselves.

2. John Gault can lose some stock by demonstrating abundance amount issued to creation than the real amount issued.

Now suggested the Improvement to reduce that the risk of fraud :-

1. As of now every one of the obligations lies with Mr. John. He has the opportunity to do anything the manner in which he needs. The responsibilities in the division must be isolated with different people in the office rather than just Mr. John taking care of the considerable number of exercises.

2. Transactions including high subsidizes ought to require composed endorsement by Mr. Chris Simon.