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Ethics Essay/Case Assignment

1) Internal Control is a structure/system that an organization/business sets up to ensure reliable financial reporting, efficient operation, applicable regulations, and most importantly, to safeguard assets from fraud. There are four important elements that make up an effective system of internal control. Separation of Duties- This is the vital policy where two different people handle the accounts and operations of assets. This involves cross-checks and is a double entry system which is critical in preventing fraud and also knowing who is accountable for what when mistakes are made. Transaction Authorization- All transactions are authorized (recorded, initiated, submitted, and processed). Documentation and Records- A company needs to keep track of all accounts and financial statements that are transacted and authenticated by the company in one financial year. This ensures that public finances arent misused. Also Government agencies can demand financial records of the company, without any notice. The internal controls in accounting help the company to produce financial records in short notice. Independent Checks: Auditors of the company can conduct surprise checks within the organization to check whether the internal controls are working effectively or not. Regarding separation of duties, if the same person has custody and also accounts for an asset, many things can go wrong. For one, they can steal from the company without anybody realizing it. Separation of duties primary goal is to deter fraud and detect errors. When one person is in charge of all the accounting tasks: approving write-offs,

depositing cash, and reconciling bank statements etc. then it is easy for them to make sure the money goes to them rather than to the company they are working for. Separation of duties makes sure that those with access to assets are kept accountable for them.

2) Firstly, Rourke should try and make sure this is not attempted fraud but just an accident, because overstating net income is fraudulent financial reporting, which can lead to investors believing a company is doing better than they actually are, enticing them to invest in or loan money to the company, which they may not have done had they known what the companys actual numbers were. Rourke should check how the overstatement of net income was calculated, because if Dunn had accounted expenses as assets then it would be clear he was involved in fraudulent financial reporting. If it is ultimately not clear whether Billy Dunns errors were deliberate or accidental, then Rourke cannot incriminate Dunn because there is no clear evidence of fraud. Consequently the best thing to do is to correct the accounting error, keep a close eye on Dunn in the future, and make sure the mistake doesnt happen again. 3) 1. Proper separation of duties- Nobody was checking Flynns actions regarding Downtown Kalamazoos assets. Had there been a proper separation of duties, it wouldnt have been possible for Flynn to embezzle all that money without anyone noticing. No person or department should completely be able to complete a transaction without being cross-checked by another person or department. 2. Adequate Records- All major transactions should be supported by either hard copy or

electronic records; this way if anything needs to be reviewed it will be easy to check for any errors.

3. Limited Access- Access to assets should be limited to the person or department that each specific transaction pertains to. For example if it is access of cash it should only be accessed by the treasurers department.

4. Proper Approvals- No transactions should be processed without proper approval from management. The bigger the transaction, the more specific the department that approves it. Different departments should handle hiring and firing of employees, purchases of items on credit, and sales to customers on accounts.

4) Dear Store Manager, There is an internal control weakness in your company pertaining to its record of transactions. A company needs to have adequate records of all transactions to assure that there will be no fraud committed by any employees. Since there are no records of transactions, an employee can just total the amount of all transactions and then understate the number, and take the difference as his/her own. For example if the days sales are $2000 the employee can report sales of $1500 and pocket $500 without anyone noticing. The way to prevent this theft is to support all transactions by either hard copy record or electronic statements. This way nobody can falsify the sales amounts. Additionally you can have two people handling the accounts and this way they will cross check each others amounts and make sure neither are in err or are committing fraud.

5) A. This leaves too much power in the hands of the purchasing agent. The agent can overstate the price paid for the diamonds and pocket the extra money because there is no separation of duties. There needs to be proper approvals for each company purchase. The person in charge of buying the diamonds shouldnt also be in charge of the invoice for that payment, or be signing the checks. It makes it much too easy for that person to change the value of the invoice and then sign the check off to himself for his personal benefit. A way to fix this would be to divide the labor between multiple people. Have one person in charge of purchasing the diamonds, another in charge of the invoices, and a third person in charge of signing the checks, this way each person can check on the others numbers to make sure they are the same, and if there is a case of fraud there is a way of checking who is responsible for it. B. There needs to be proper approvals in regards to hiring and firing replacements for when she is on business ventures. There needs to be a Human Resources department that appoints a replacement for her when she is away and if they are not doing an adequate job then they find another replacement. It shouldnt be her responsibilty to monitor how the interim manager is doing while she is away. C. J.T. Durfee can easily take advantage of the city of Maron. He handles all the accounting and can easily manipulate the numbers to ultimately transfer the citys funds into his own account, using fraudulent schemes. A way to stop this is to give him less control over the citys accounts. The responsibilities need to be spread out to multiple people to ensure that no employee takes advantage of the city. There needs to be separation of duties and proper accounts of all cash flows with comparisons and compliance

monitoring. No person should be able to completely process a transaction from beginning to end without being cross-checked by someone else. There should also be a budget established for the citys day to day management activities.