12. Evaluation of Internal Controls: The Never Sink Canoe (NSC) Company
Segregations of Duties Issues
Control Weakness 1: Transaction authorization should be separated from transaction
Control Weakness 2: Asset custody should be separate from record keeping responsibility.
The accounting clerk has cash receipts and check writing responsibility and also sets up AP and
AR accounts and updates those accounts.
Control Weakness 3: Asset custody should be separate from record keeping responsibility.
Accounting Records Issues
Control Weakness: Adequate source documents, journals, and ledgers need to be in place to
Fraud Potential:Sales staff need only submit a form to claim reimbursement but no proof of the
Control Weakness: Verification procedures are checks on the accounting system to identify
Fraud Potential: The fraud potential has been previously discussed regarding commissions
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13. Documenting System and Evaluating Controls
a. Flowchart of Process
1. Kickback fraud— The clerk selects the supplier and also places the order. He is thus in position
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3. Theft of inventory—the clerk can remove inventory from the warehouse, sell it, and adjust the
14. Analysis of Flowchart, Internal controls
a)
b) The following possible fraud could be committed:
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15. Evaluating Internal Controls: Warehouse manager
a) Flowchart
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b. The following segregation of functions problems exist:
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c. The following frauds could result from these control weaknesses:
1. Kickback fraud—Since Mirchandaniis selects the supplier and also places the order, he could
2. Vendor fraud—Mirchandaniis authorizes, orders, and receives the goods; he could establish
3. Theft of inventory—Mirchandaniis can simply remove the assets from the warehouse, sell them,
16.EVALUATION OF PAYROLL CONTROLS
a. flowchart 3–16.
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b. The following segregation of functions problem exists:
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c. The following frauds could result from these control weaknesses:
i. Kickback fraud—the forman permits employees to inflate the hours worked and approves
ii. Nonexistent employee fraud—After an employee leaves the company, the