Name:

Case: Evaluation of Internal Controls

Situation A. In evaluating the internal control over inventory for the Williams Oil Services Company, an
auditor learns that the warehouse receiving clerk is responsible for ordering parts for supply inventory
use in drilling services, counts the inventory when received at the dock, records the receipts into the
inventory ledger, and takes the annual inventory, No supervisor reviews the receiving clerks work.
Missing internal control characteristics:
-

Separation of duties: The receiving clerk does many tasks that should have been done by people
specializing in it
Compliance Monitoring: The receiving clerk completes an entire transaction from beginning to
end that too without getting it crosschecked by someone else
Limited Access: Here a clerk completes an entire process giving him an opportunity to have lots
of confidential information at hand of various types
Proper approvals: The clerk takes no approval from his supervisor

Possible Problems:
-

There is a possibility of theft as the clerk is the only one who does the entire transaction, has
access to confidential information and no one to keep a check on him
The clerk is only a receiving clerk thus he might not have the knowledge of the parts and end up
ordering wrong, misfit, unwanted, parts
The clerk can document wrong information
All the above possible problems can cause loss of money, time, profit, resources, etc.

Possible Solutions:
-

William Oil Services should implement the separation of duties control procedure by dividing the
work according to the people who specialize in it so that right things happen. A receiving clerk
should only receive goods and a person having knowledge of the parts and knows how to order at
proper price should order it.
Proper approval system should be put in place so that there is no error and if there is any, it can be
corrected.
There should be a limitation to access data depending on the nature of his/her duties
It also looks like there is no computerized system in place. If so, there should be a system where
one can record the receipt of the inventory
There should be a supervisor appointed and the approval process should go through him.

Situation B. Nicole Lopez handles employee travel and expense reports for Scott Sales Services. With the
growth in the economy, the sales team began traveling extensively gaining new business. Because of the
2

heavy volume, she no longer required the sales team to provide original airline, hotel, or car rental
receipts. She told them to just keep their meals under the $100 per day per diem and no receipts were
required. She allowed them to use their own credit cards so they could get the frequent flyer points. She
required them to turn in a summary of the travel expenses quarterly.
Missing internal control characteristics:
-

Adequate Records: Nicole Lopez does not document the transactions efficiently. Due to large
volume she suggests a way around, so that no receipts are required
Proper approvals: It looks like Nicole Lopez does not need to take approvals from her supervisor
as she is able to suggest a way out and probably get away with it

Possible Problems:
-

It is evident that this situation suggests a fraud since Nicole Lopez tells the sales team to keep
there per diem below $100 so that they do not need to produce receipts. Though there is less
personal gain for her here (in a way that she has to do less work) it can be a fraudulent act. The
company can suffer losses
There is no proper documentation of the information and can give rise to problems during audits
or while paying the taxes.

Possible Solutions:
-

The possible solution here is having proper adequate records. These records help justify any
transaction that is in question. Audit can happen anytime or the tax department can ask for
information and if the company is unable to provide it, the company is in trouble. Thus proper
recordkeeping is of utmost importance and the only solution
Also, proper approval of the transactions/ decisions should go through the supervisor or manager
to help prevent frauds.

Situation C. Michael Jordon is a new employee hired from Craigs List recommended by a co-worker.
Mike was hired as a Human Resource Assistant. Mikes first day on the job he is told that he should
follow his own judgments when deciding how employee issues such as hiring and firing of employees,
sexual harassment, and ethical infractions should be handled.
3

Missing internal control characteristics:

Control Environment: Mike was hired and on day 1 he was given the complete authority to
handle sensitive issues as per his judgment. There is no control what so ever. He was not given or
briefed about the set policies and procedures of the company. There is no handbook of the rules of
the company.
Proper Approvals: Mike takes decisions on his own with any approval

Possible Problems:
-

Handling sensitive issues like firing of employees, sexual harassment, needs experience and also
needs to go through proper channels and approvals. A handbook of set rules and policies comes in
handy while addressing such issues. Also, such issues have to go through proper approvals
whenever required. The company can do injustice to an employee if the decision taken is
incorrect. It will tarnish the image of the company.
An employee may have experience handling such issues previously but still he has to know about
the new companies rules and regulations as what is right for one company can prove to be wrong
for the other one.

Possible Solutions:
-

The company should definitely have a rule book in place.

References:
Harrison, Walter T., Charles Horngren, C. William Thomas. Financial Accounting, VitalSource
for DeVry University, 9th Edition. Pearson Learning Solutions, 02/2013. VitalBook file.