William Schall
Case Study 2
Accounting 504
The five internal controls are:
Smart Hiring Practices and Separation of Duties. In a business with good internal controls, no important duty is overlooked. Each person in the information chain is important. The chain should start with hiring. Background checks should be conducted on job applicants. Proper training and supervision, as well as paying competitive salaries, helps ensure that all employees are sufficiently competent for their jobs. Employee responsibilities should be clearly laid out in position descriptions.
Comparisons and Compliance Monitoring. No person or department should be able to completely process a transaction from beginning to end without being cross-checked by another person or department.
Adequate Records. Accounting records provide the details of business transactions. The general rule is that all major groups of transactions should be supported by either hard copy documents or electronic records.
Limited Access. To complement segregation of duties, company policy should limit access to assets only to those persons or departments that have custodial responsibilities.
Proper Approvals. No transaction should be processed without management’s general or specific approval. The bigger the transaction, the more specific approval it should have. For individual small transactions, management might delegate approval to a specific department.
Situation a. In evaluating the internal control over cash payments of Yankee Manufacturing, an auditor learns that the purchasing agent is responsible for purchasing diamonds for use in the company’s manufacturing process, approving the invoices for payment, and signing the checks. No supervisor reviews the purchasing agent’s work.
Problems: Comparisons and Compliance Monitoring, Adequate Records and Proper Approvals.
Solutions: Yankee manufacturing breaks