Case 3.5 Goodner Brothers, Inc.

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1.Goodner Brothers set ambitious sales goals. In order to achieve these goals, they were known to undercut their competitor’s prices. In the text, it is pointed out that “To compensate for low gross profit margin, Goner scrimped on operating expenses, including expenditures on internal control measures.” Goodner Brothers should have not saved on internal control measures so they could have caught Woody stealing their inventory. Goodner Brother’s should have had more employees to have an appropriate check and balances strategy. The bookkeeper should have been the one entering invoices into the computer while having someone check her work to make sure no fraudulent activity took place. Having Woody enter inaccurate amounts of orders into the computer allowed him to steal the vast amounts of inventory. Also, Goodner Brothers should have had two executives approve the purchase of inventory from wholesalers. When Woody brought inventory from a fictitious outside wholesaler, Al should have had another executive sign off on the approval of the transaction. Then Al would not have had a conflict of interest with dealing with his friend Woody’s fraudulent activity. Finally, Goodner Brothers should have kept a closer eye on their inventory. They needed someone to watch over the inventory at all times. Perhaps Goodner should have had a guard who would only let deliverymen and sale reps enter the ware house if they had the proper invoices to do so. There were a lot of internal control weaknesses at Goodner Brothers. They should have had implemented proper internal control measures in order to prevent the fraud committed by Woody. Goodner Brothers lack of internal controls is an example of what auditors look for when they begin an audit of a company. In the article Revisiting Materiality, Gist and Shastri point out that an audit staff can reduce audit failures if they act with due care. In order to act in due care, the staff needs to maintain an attitude of professional...
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