Goodner Brothers, Inc. Internal Control Issues 1. List what you believe should have been the three to five key internal control objectives for Goodner’s Huntington sales office. 1. Assets Safeguard The padlock and other some security are used as a physical protection of Goodner’s inventory from stolen by unauthorized person. 2. Authorization of Transaction Goodner’s policy said that the new customer required an approval of the sale manager for the credit sale. The objective of this policy is to control the authorization of employee by using an approval from the senior manager to determine the credit term of new customer. . Top-level reviews Annual review by the internal audit is used in order to inspire the operation and compare the performance with a plan of the business, so that the company can find out that there are any problems or fraud or not. 4. Human Resource Policies and Practices Goodner’s policy about hiring an employee is relied on honesty and integrity of the employee which is required 3 strong as references and preferably from reputable individual with some connection to Goodner Brother. 5. Adequate Document and Records
The computerized accounting system is used at each Goodner sales outlet. The system will record the sale and purchase transactions which were recorded by the bookkeeper and sales representative. So the company can record all transaction from each sale outlet. 2. List the key internal control weaknesses that were evident in the Huntington unit’s operations. Internal control weaknesses: 1. Unrestricted access to the accounting system, cause the large volume of sales and purchase transaction often swamped (possible to be double recorded) 2.
Recording transactions didn’t in timely basis, instead of record from source of documents; the sales representative just recorded the entry from the scrap paper that they jotted things down. 3. Lack of segregation of duties: 3. 1 The sales person is also the one who recorded transactions. 3. 2 Shipping and billing are in the same function. 3. 3 The sales person is allow to directly access to the inventory storage and can load and deliver to customers by themselves. 3. 4 The sales person is the one who count for checking the ending inventory and completed the count sheet. 4.
Took only year-end physical inventory to bring its perpetual inventory records into agreement with the amount of inventory actually on hand. (Inventory observation just only 1 time per year) 5. Poorly design to keep and record the inventory shrinkage, make it’s difficult to observe the inventory actually on hand. 6. No reconcile items sales in sales invoices, all shipping documents with the stock card take out. 7. Fail to review the customer complaint report by sales managers, even though this is one of the important sources to get the fact and give the sense of the skeptical signs. 8.
No any confirmation to any customer about the products delivered, no any document 3. Develop one or more control policies and procedures to alleviate the control weaknesses you indentified in responding to Question 2. Objective: 1. All recorded transactions are properly authorized, valid (occurred), complete, and accurately. 2. Assets (cash, inventory and data) are safeguarded from loss and theft. 3. Business activities are performed efficiently and effectively Internal Control Procedures: Sales entry should be authorized, valid, complete and accurately -The accounting system should be restricted for only authorized person The transactions should be recorded in timely basis -The transactions should be recorded only from source of documents (ex. Sales invoice) -The transaction should be approved by authorized person Correct shipping and billing to customers -Reconciliation of sales order and pick up inventories -Use of bar code scanner and RFID tags to record picking and shipping (write off inventory, immediately -Field checks and completeness test if data entries perform manually. -Packing slip and bill of lading should not be printed until accurate shipment has been verified. -Segregating the shipping and billing functions Sales orders, picking tickets, packing slips, and sales invoices should be sequentially numbered and then periodically accounted for and every shipment is entered into the computer system. To protect the theft of inventory -Inventories keep in a secure location with restricted access. -Warehouse and shipping employees should sign the document accompanying the goods at the time the goods are transferred from inventory to shipping -Inventory should be released for shipping only with approve sales order. -Wireless communication and RFID tags can provide real-time tracking which help to reduce the theft. Physical count made periodically or surprised check -The employees responsible for inventory custody should be held accountable for any shortage. To protect the theft of cash Segregation of duties: -Handing cash or checks and posting remittances to customer accounts. A person performing both of these duties could commit the special type of embezzlement called lapping -Handing cash or checks and authorizing credit memos. A person performing both of these duties could conceal theft of cash by creating a credit memo equal to the amount stolen. Issuing credit memos and maintaining customer accounts. A person performing both of these duties could write off as uncollectible amount owed by friends. -Monthly statement mailed to customer provides another layer of control, because customers would notice the failure to properly credit their accounts for payment remitted. -Set the policy that all customer payment should be in cross cheques (pay to Goodner Brothers, inc. only) and also inform this policy to the customers. 4. Besides Woody Robinson, what other parties were at least partially responsible for the inventory losses Goodner suffered?
Defend your answer. There are several more parties beside Woody Robinson that responsible for the inventory losses Goodner suffered. Obviously, the company itself should review and improve their internal control as that their internal control is very weak. In this case study, there are several departments of the company that is directly responsible. In fact, Internal Audit Department is the most important department that responsible for this situation because internal control is like the foundation, if the foundation is good everything will be easier.