Question

Requirements 1.?? Identify the missing internal control characteristics in each situation.

Jade Applications has decided that one way to cut costs in the upcoming year is to fire the external auditor. The business believes that the internal auditor should be able to efficiently monitor the? company's internal controls.
b.	In an effort to minimize the amount of? paperwork, Ross Homes has decided that it will not keep copies of customer invoices related to sales revenue. Ross believes that this effort will minimize the amount of data storage the company will have to pay for.
c.	Elle? Bee, a trusted employee for many? years, has never taken a vacation. The owner believes that? he's lucky that she is so committed to her job.
d.	The Medicine Chest Company keeps a small petty cash fund to handle small cash transactions. Because no one wants to volunteer to be the? custodian, the business manager has decided that all employees should have access to the petty cash. She figures that as long as each employee fills out a petty cash? ticket, then there are proper controls in place.
e.	Due to the cost of maintaining the security? cameras, Wings and More has decided that it will remove the cameras that monitor the cash register.
f.	Bryan? Miller, manager of Hardware? Emporium, prides himself on hiring exceptionally skilled employees who need no training to do their jobs.

2. Identify the possible problem caused by each control weakness.

(1)	Loss of revenue due to? low-quality work.
?(2)	Lost sales due to delay of product development.
?(3)	Theft of cash.
?(4)	Theft of cash and inefficiency.
?(5)	Theft of cash and? inefficiency, lack of support for financial statement transactions.
(6)	Unreliable financial statements and lost credibility.

3. Propose a solution to each internal control problem.

(A)Assign company accoutants to redesign the accounting system.

?(B)Assign one employee to manage the office in the? owner's absence.

?(C)Every organization is? different, so some training is usually required for all employees.

?(D)Have an audit to reduce the risk of false financial statements.

?(E)If the cost outweighs the? benefit, have controls over access to the cash register and separation of duties in regards to counting the cash.

?(F)Keep copies of the customer invoices and look into using electronic copies.

?(G)One person should be responsible for the petty cash fund.

?(H) Require all employees to take vacations.

?(I)Several people should be responsible for the petty cash fund.

Answer 1

1. Identify the missing internal control characteristics in each situation.

1 (a) Firing the external auditor for cost savigs is not a good practise. It is required under law that an external auditor must attest the report on management assessment of its financial statements. It ensure the creditbility of the companies performance and financial health of that periode of time.

1 (b) COSO model of internal control mentions that to implement and maintaining proper control activities, an an organization must develop a sytem of recording its business transactions. There should be seggregation of below four tasks.

1. Authorizing each business transactions.
2. Record keeping of transactions.
3. Custody of assets.
4. reconciliation of the book with custody of assets.

If the company is not maintaining proper sales records, it will weaken its internal controls.

1 (C). Maintain a proper Control Environment to prevent fraud is an important component in COSO framework. An organization should allow its employees to go for vacation. It will reduce the chances of Elle Bee, making a long term relation with the suppliers or related parties and commit fraud.

1 (D). Here, there is no segregation of duties. The Custody of assets and Record keeping and Authorizing each transaction should be separate to prevent fraud.

1 (E). If the cost of maintain the internal control system is excess than its benefits, there should be segregation of duties between the custody of cash register and recording of transactions. A third person should reconcile the records with the custody of assets.

1 (F) According to COSO framework, an organization must attract, train and retain competent individuals and give them proper training time to time. It will help the employees to get better idea about how his job aligned with the overall objectives of the firm.

2. Identify the possible problem caused by each control weakness.

1. If the quality of work is low, company will lose its competitive edge in the market, reduce customer loyalty and loss of operating income.
2. Company may lose its sales, if the product could not be entered into the market on time. Customer may go for alternatives.
3. Theft of cash, will results in the improper segregation of duties and responsibilities. It ultimately results in loss of profit, incorrect accounting entries and incorrect financials.
4. Theft of cash and inefficiencies indicates a weak internal control environment of the firm. It leads to fraud and illegal acts and possible failure of the organization.
5. Theft of cash and inefficiencies and lack of supporting documents for the transactions results in the cooked books and frauds within the organization. Eventually organization may find it difficult to fund its operations and leads to premature death of the firm.
6. Unreliable financials indicate weak internal control environment and alert the investors to stay away from the firm. It will lead to failure of business and bankruptcy.

3. Propose a solution to each internal control problem.

{Note: I assume that student need the solution for part 1 from possible answer choices given in part 3.}

1 (A). Jade Applications has decided that one way to cut costs in the upcoming year is to fire the external auditor. The business believes that the internal auditor should be able to efficiently monitor the company's internal controls.

Answer:

(D) Have an audit to reduce the risk of false financial statements.

1 (B) In an effort to minimize the amount of paperwork, Ross Homes has decided that it will not keep copies of customer invoices related to sales revenue. Ross believes that this effort will minimize the amount of data storage the company will have to pay for.

Answer:

(F) Keep copies of the customer invoices and look into using electronic copies.

1 (C) Elle Bee, a trusted employee for many years, has never taken a vacation. The owner believes that he's lucky that she is so committed to her job.

Answer:

(H) Require all employees to take vacations.

1 (D) The Medicine Chest Company keeps a small petty cash fund to handle small cash transactions. Because no one wants to volunteer to be the custodian, the business manager has decided that all employees should have access to the petty cash. She figures that as long as each employee fills out a petty cash ticket, then there are proper controls in place.

Answer:

(G) One person should be responsible for the petty cash fund.

1(E) Due to the cost of maintaining the security cameras, Wings and More has decided that it will remove the cameras that monitor the cash register.

Answer:

(E) If the cost outweighs the benefit, have controls over access to the cash register and separation of duties in regards to counting the cash.