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. . 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 test and look for red flags, such as modification of journal entries on the regular basis related to certain employee, particularly if those modification are done past 30 days. ? The company should have a proper check on prospective employees. This means that besides following up on employment references and background check, the company should also do credit check on prospective and current employees and look for significant debt structure, which would raise some warning flags. The company should establish an independent internal audit team, consist of experience inventory managers. It should also restrict access to employees, whose roles and duties are related to inventory management. Furthermore, it should improve inventory management, particularly related to reruns and defective tires, by having a systems and processes in place that identify inventory requirements, set targets, provide replenishment techniques and report actual and projected inventory status.
Finally, it should install security cameras, particularly in the larger storage areas, that would improve physical security of the inventory. ? The company should perform periodic performance evaluation on their current employees. It should also update the job description and duties for all the mangers, where they should look for red flag and follow up on customer complaints, particularly if there are significant number of complaints being submitted towards certain employee. The company should revisit their business strategy and set up more realistic operational and strategic goals, which in turn, it would enabled them to have a larger budget devoted to internal controls efficiency; thus, decreasing their exposure to fraud risk. 4. Besides Woody Robinson, what other parties were at least partially responsible for the inventory losses Goodner suffered? Defend your answer. A partial responsibility, for the inventory losses Goodner suffered, should take the sales manager, Felix Garsia, for not following up on the customers’ complaints.
Instead of being a rubber stamp manager, he could have been more alert and professional. If he had paid attention on Woody’s sales transactions, he would had noticed many “red” flags, such as significant number of credit memos, corrected purchase orders, ect. In addition, he neglected the fact that the year-end inventory count produced a difference between the physical inventory and the book value of $12,000 or increase of 0. 5% from the previous year. He considered that the shrinkage wan not excessive; thus, it was not worth it scheduling a meeting to discuss the reasons or take a recount action.
Finally, if he considered that he was overworked by spending too much time on increasing sales, he could had brought that fact to management instead of using it as excuses for devoting “little time to monitor his unit’s accounting records. ” By not doing his job adequately and professionally, he directly contributed to Woody’s fraud to be easily perpetrated. In addition, the regional CPA firm that did the Goodner’s annual audit, could also take some responsibility due to the fact that it had never paid much attention to the internal controls of the Goodner’s sales offices.
The text does not state whether auditing of the internal controls was part of the audit plan and whether the company paid for those services. However, the CPA firm should have advice the company about the benefits of having a effective and efficient internal controls system. If they were supposed audit internal controls for the company, they should definitely take some of the responsibility for the inventory losses Goodner suffered. Finally, Woody’s friend Al could had been more skeptical regarding the heavily discounted tires and he should had followed up on his suspicious about Woody’s story.
Being in that business for a long time, he should had known that “when something is so cheap, it may be just too good to be true. ” In my opinion, the fact that his uneasiness was growing regarding the source of cheap tires, it is telling me that he sensed or knew that Woody was getting the tires through illegal routes, but he just decided to be silent due to his significant financial gain from selling the discounted tires. Thus, he may also take some of the responsibility for the inventory losses Goodner suffered.
