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Rose Samuel Instructor Angela Sneed ACC 412 April 10, 2012 Case 3.5 Goodner Brothers Inc.

In this case I will identify five key internal controls objectives of Goodner's Huntington sales office, key control weaknesses that were evident in the Huntington unit's operation, control policies that may have alleviated the control weaknesses and parties that were at least partially responsible for the inventory losses Goodner suffered. I believe should the five key internal controls objectives of Goodner's Huntington sales office are: - Segregation of duties between members that initiative, approve, implement, and record - Procedures to authorize transactions - Requirements for documentation and audit trail before processing transaction - Limitation to physical access - Independent reconciliation The key internal control weaknesses that were evident in the Huntington units are: 1. Unrestricted access to the accounting system. Besides the Huntington facilitys bookkeeper, the units sales manager and two sales representatives had unrestricted access to the accounting system. The sales reps routinely accessed, reviewed, and updated their customers accounts.

2. Unrestricted access to the inventory storage areas. Sales representatives had direct access to the inventory storage areas. During heavy sales periods, sales reps often loaded and delivered customer orders themselves. 3. Transactions not being recorded in a timely manner. The sales reps often jotted the details of a transaction on a piece of scrap paper, and finally passed it on to the bookkeeper or used it to enter transaction data directly into the accounting system.
4. Lack segregation of duties. The duty for record keeping for an asset and the physical

custody of that asset should be assigned to different individuals. As mentioned previously, sales reps can get access to the accounting system in order to enter transaction data and update their customers accounts. In addition, sales representatives had direct access to the inventory storage areas. All of them violate segregation of duties principle.
5. Lack managements supervision. The management must monitor its effectiveness on a

periodic basis. The most effective way to evaluate controls is through spot checks of control performance and evidence of review, such as selecting a sample of transactions and viewing evidence that they were approved. 6. Lack a physical count of inventory. The average interval between the internal audit inventory counts, which typically ranged from 15 to 20 months, is too long time. When employees have been stealing inventory, the theft will show up as a difference between the balance in the inventory account and the amount physically counted. The following control policies that may have alleviated the control weaknesses are:
1. Segregation of duties Segregation of duties means that the related activities should be

handled by different clerks. The management should define individual employee responsibilities for inventory control. This establishes a climate of accountability. Splitting

responsibilities makes different staff responsible for distribution and receiving, and control access to inventory. These separations of duty are set in place to make it harder for one employee to commit inventory theft without having to include an accomplice 2. Installation of surveillance cameras. Install security cameras to detect theft in warehouse. Watch for unusual behavior on the security videos. The presence of unauthorized personnel in warehouse should alert the management a problem exists.
3. Physical security. Good physical security is another way to stop inventory theft. All

merchandise should be physically guarded and locked; access should be limited to authorized personnel only. In stalling time locks and alarms can also help prevent theft.
4. Keeping a record of custody. Keeping an inventory record of custody can remove easy

opportunities to steal inventory. A record of custody can provide a chronological list of steps that show the transaction of inventory from start to finish. When the record is poorly maintained, the chances of the theft increase because the chance of being caught decreases. 5. Running physical inventory. Like accounting audits, the management can make physical inventory checks a surprise to determine if the inventory control system is the same as the physical count of the. Generally, the more frequent the inventory audit the better able the management will be to spot and correct the problem. 6. Fraud reporting hotlines. It is also helpful to encourage employees to anonymously report suspected frauds to company hotlines or Web pages.
7. Training and education. Any education or traning should be emphzised the illegal conduct

in any form eventually costs everyone in the company through lost profits, adverse publicity, decreased moral, and productivity.

In addition to Woody Robinson, other parties were at least partially responsible for the inventory losses Goodner suffered include: (a) Al Hunt, the owner of Curcios Tires, (b) T.J. Goodner, the CEO of Goodner Brothers, Inc., (c) Ross Goodner, the COO (the chief operating officer) of Goodner Brothers, Inc., (d) The CFO of Goodner Brother, Inc. (e) Felix Garcia, the Huntington sales manager, and (f) the internal auditor. The manager did not follow up on the complaints and so missed the chance to discover the problem early. Management intentionally understaffed so that segregation of duties was not possible so the opening made it tempting. Without the opening, this may never have occurred. Internal audit did not count often enough or the problem may have been found sooner. The friend could have refused to buy the stolen tires and so limited Woody's ability to continue profiting on a large scale. Internal controls exemplify a companys policy for piloting business in a reliable way, guarding delicate information concerning to customers and business operations and regulating the capability of employees and managers to commit fraud or embezzlement. Goodner Brothers lack of internal controls is an example of what auditors look for when they begin an audit of a company. An employee of this tire wholesaler was in a severe financial predicament. When He realized there was a lack of internal controls, the employee took full advantage of his employer`s weakness by stealing a hefty amount of its inventory and ultimately sold for profit.

Work-cited "FEDERAL INFORMATION SYSTEMS CONTROLS AUDIT MANUAL." GAO. Feb. 2009. Web. 10 Apr. 2012. <http://www.gao.gov/assets/80/77142.pdf>. "Chapter 7 Financial Accounting." SMCCD.NET. Web. 10 Apr. 2012. <http://www.smccd.edu/accounts/nurre/online/chtr7fa.htm>.