Identify the internal control weakness in the following situations. State how the person can hurt the company. A. Jerry Miller works as a security guard at ALTEX parking in Denver. Miller has a master key to the cash box where commuters pay for parking. Each night Miller prepares the cash report that shows (a) the number of cars that parked on the lot and (b) the day’s cash receipts. Sandra Covington, the ALTEX treasurer, checks Miller’s figures by multiplying the number of cars by the parking fee per car. Covington then deposits the cash in the bank.
B. Sharon Fisher is the purchasing agent for Manatee Golf Equipment. Fisher prepares purchase orders based on requests from division managers of the company. Fisher faxes the purchase order to suppliers who then ship the goods to Manatee. Fisher 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.
C. The external auditor for Mattson Financial Services takes a global view of the audit. To form his professional opinion of Mattson’s financial statements, the auditor runs no tests of Mattson’s financial statements or of the underlying transactions. Instead, the auditor computes a few ratios and compares the current-year ratio values to the ratio values a year ago. If the ratio values appear reasonable, the auditor concludes that Mattson’s financial statements are okay.

Identification of the Internal Control Weaknesses:

A.  There is no segregation of duties and there is lack of access control.  Jerry Miller as a security guard is not expected to have a master key to the cash box.  With this he can pilfer the cash.  If he prepares the report that shows the number of cars that parked on the lot, he is not supposed to also prepare the day's cash receipts.  Otherwise, he can state any number of cars as parked that he likes, and which corresponds to the cash he might leave in the Cash box since he also has a master key.

B.  There is no segregation of duties and there is lack of supervision,  proper reconciliations, and assets audit.  Sharon Fisher handles purchase transactions from the beginning to the close all alone with a third party.  This exposes the company to procurement frauds and collusion with suppliers.  She can purchase assets for the company at prices that would enrich her personally.

C. Forming an audit opinion on the basis of ratio analysis of last year's comparative financial statements exposes the company to audit risks.  While ratio analysis is part of the basis for forming audit opinions, it is surely not the first audit procedure to obtain audit evidence to support his audit opinion on the financial statements.  An auditor is expected to obtain sufficient audit evidence and perform audit substantive tests of financial statement assertions.  He or she is also expected to review the internal control system to ensure that it is operating effectively after establishing its existence and reviewing changes in internal controls.

Explanation:

Internal Controls are controls established by management in order to help it achieve business goals.  There are many internal controls, including Separation of Duties, Access Controls , Authorization and Approvals, Asset Audits, Reconciliations, and Data Backups.  The purposes of internal controls are to establish the reliability of financial reporting, ensure timely feedback on the achievement of operational or strategic goals, and achieve compliance with financial management laws, and accounting regulations.

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