1. List what you believe should have been the three to five key internal control objectives of Goodner’s Huntington sales office.
The Goodner’s Huntington sales office should have implemented the following internal control objectives:
1. The reliability of financial reporting, which relates to the timely and accurate recording of transaction, and it makes sure that financial reports are reliable and free of material misstatement. In addition, it also deals with the physical security of assets; which means the assets are only used for business purposes and are safeguarded from unauthorized use.
2. Timely feedback on the achievement of operational or strategic goals, which deals with the achievement of the business strategy and implementing business tactics that make sure that the business strategy has been accomplished, which in turn, reveals whether the operations of the company are effective and efficient.
3. Compliance with laws and regulations, which make sure that all the employees comply with all applicable laws and regulations, which in turn, reveals whether the company is in compliance with the laws and regulations.
2. List the key internal control weaknesses that were evident in the Huntington unit’s operations.
Internal control weaknesses that were evident in the Huntington unit’s operations were the following.
I. The company relied heavily on the honesty and integrity of employees they hired instead of implementing an extensive system of internal controls. This had contributed to not having an appropriate internal system to check on prospective employees and periodic employee performance evaluations; which in, turn it would had revealed that Woody had significant debt outstanding and the manager would had followed on the customer’s complaints.
II. Since Woody had direct access to the inventory storage areas and had clearance to often load and deliver customer orders himself, the company did not have proper physical security of inventory. In addition, he was able to include himself as a part of three-person, internal audit team (consists of inexperience delivery workers) that occasionally counted inventory. Thus, having a proper physical security of assets is very important to having effective internal controls in place, and it would had limited Woody’s ability to carry out his actions.
III. Since Woody, as sales representative, had unrestricted access to the accounting system, the company did not implement an appropriate segregation of duties, which in turn, it allowed Woody to easily perpetrate the fraud. He was able to do majority of the functions characteristic to the purchasing cycle such as authorize the purchase orders of the well-established customers, approve the purchase order returns, and issue credit memos.
IV. The company had inappropriate accounting enterprise resource planning (ERP) system. Their ERP system was more characteristic for small-size companies rather than large-size companies such as Goodner Brothers, Inc.
V. The company had (in my opinion) inadequate business strategy that was heavily focused on increasing sales, and put little emphasis of having extensive system of internal controls. In order to achieve their ambitious operational and strategic goals, the company significantly cut on operating expenses, including expenditures on internal control measures, which in turn, it significantly exposed them to fraud risk.
3. Develop one or more control policies or procedures to alleviate the control weaknesses you identified in responding to Question 2.
Internal control policies that would alleviate the control weaknesses should be the following:
➢ The company should purchase adequate accounting ERP system and implement proper separation of duties, where each employee would have access to one functional side of the purchasing cycle. In addition, the managers should be able to run audit trail...
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