Question

E4-25B. (Learning Objectives 1, 2: Describe fraud and its impact; Explain the objectives and components of internal control) Identify the internal control weakness in the following situations. State how the person can hurt the company. a. Mandy Morrison works as a security guard at POST parking in Oklahoma City.
Morrison has a master key to the cash box where customers pay for parking. Each night Morrison prepares the cash report that shows

(a) the number of cars that parked on the lot and

(b) the day’s cash receipts. Judy Gibson, the POST treasurer, checks Morrison’s figures by multiplying the number of cars by the parking fee per car. Gibson the deposits the cash in the bank

. b. Sophie Peterson is the purchasing agent for Pinkerton Sports Equipment. Peterson
prepares purchase orders based on requests from division managers of the company.
Peterson faxes the purchase order to suppliers, who then ship the goods to Pinkerton. Peterson receives each incoming shipment and checks it for agreement with the purchase order and the related invoice. She then routes the goods to the respective division managers and sends the receiving report and the invoice to the accounting department for payment.

Answer 1

1Fraud refers to wrongful or incorrect act which leads to loss to an organization against which a fraud is conducted.Any fraud affects an organization in an adverse manner and in case of financial frauds reduces profitability.

Internal control and it's objectives:

Internal control is a process for assuring achievement of an organization's objectives in operational effectiveness and efficiency and reliable financial reporting.

It's objectives are as follows:

-Reliability of financial reporting

-Effectiveness and efficiency of operations

-Compliance with applicable laws and regulations

(a) In the case of Morrison, the security guard the internal control deficiencies are as follows:

- The cash box authority and the report making for cash receipts are both done by Morrison. He can easily embezzle cash and show that less number of cars were parked during the day since Gibson only checks mathematical accuracy.

- Gibson deposits the cash in the bank after checking the correctness of the amount. The job should be assigned to another person as he also has the access to the cash reports and can manipulate them.

B. Peterson is already in charge of preparing the purchase orders that agree with the division manager's requirements. The job of checking whether the shipped goods comply with the purchase order or not should be assigned to the technical department as they have more knowledge of quality of products. The technical department can approve the invoices and send them to the accounting department which can release the payment after checking for compliance with commercial terms.