Case Study: Internal Controls and F

Case Study: Internal Controls and Fraud (From IIA Research Foundation "Case Studies in Internal Auditing" Volume 4)

Standards and Ethics

Please note there is no one right answer for these assignments. You should consider different points of view on the ethical issues before drawing your conclusions.

Objective

This case study is designed to expose students to a variety of conditions that may or may not indicate a fraud has been committed. Consideration must be given to errors that are present in a normal business environment, internal control weakness accepted by management, as well as obtaining an understanding of procedures and their long-range effect on business. Control weaknesses by themselves are not major problems. The combination of the control weaknesses, coupled with the inexperience of the internal auditor and a limited audit budget present real life situations. Students need to understand the overall control environment and not just deal with individual procedure errors.

Control weaknesses by themselves are not major problems. The combination of the control weaknesses, coupled with the inexperience of the internal auditor and a limited audit budget present real life situations. For example, does the auditor know when to expand an audit test, discontinue tests, and ask for additional data? What information is needed, who should respond, and what reliability should be placed on the information? Does the auditor know what is necessary to support an audit recommendation or, more importantly, to provide evidence in a criminal case?

Required

Please read all of the requirements carefully and make sure your paper addresses each item. It would be helpful for your own use to develop a high-level process map. This assignment is to be completed using only the materials authorized for use in this class. A rough guideline to adequately complete the assignment is 5-6 single-spaced pages. If you have any questions as to what is expected, please contact the instructor.

1. If you were part of the audit team, what additional questions would you ask to gather more audit evidence? You need to focus on what is most important to this case. You must come up with at least 15 relevant questions. You must have some questions for each of the five areas: receiving, loom teardowns, customer orders, disposal of residues and scrap metal, and administration of the loom reclamation program. You must indicate what you hope to learn from each question (i.e., what is the intent of the question?) and to whom the question would be addressed.
2. Identify your top four internal control weaknesses in order of materiality in each the following five areas: receiving, loom teardowns, customer orders, disposal of residues and scrap metal, and administration of the loom reclamation program. Please make sure you address the most important control weaknesses.
3. For each observation identified in #2, write your recommendation(s) to strengthen internal controls over the loom reclamation program. Make sure each recommendation is clearly associated with an observation(s) from #1. One recommendation can cover several internal control weaknesses.
4. In your opinion, has a fraud been perpetrated? If so, what evidence supports the allegation? Is it firm enough to convict the person(s) in court? Please explain the rationale for your conclusions.




Background

Many of Tarheel Textiles' old Draper looms have recently been replaced with more modern and efficient weaving machines. Instead of being junked or scrapped, these surplus looms are sent by the plants to the supply support division where they are stripped of all useable parts. These parts are reconditioned, stored, and placed on perpetual inventory records as used supply items.

Manufacturing facilities within Tarheel route all of their purchase orders for Draper loom parts through the supply support division. This includes orders made out to Draper Company and all other vendors from whom Draper parts can be purchased. Supply support reviews its inventory records (and will hold the order for no more than one day) to determine the availability of used parts generated from the loom stripping program. If parts are available within Tarheel, the purchase order to the vendor is altered and the supply support division ships the available parts automatically to the ordering plant. The altered purchase order is then sent to the vendor.

This program has resulted in substantial savings to Tarheel. Also, many of these older parts are in short supply and are, therefore, difficult to obtain within a reasonable delivery time.

Operation

The loom reclamation program operates as follows:

Receiving:

1. Plant sends to the supply support division all surplus Draper looms. These looms may or may not be operative, but would have been scrapped at the plant, or otherwise disposed of, had they not been shipped to supply support.
2. Plant prepares a shipping document, which accompanies each shipment of looms. This shipping document lists each asset shipped, identified with the Tarheel fixed asset tag number.
3. The shipping plant prepares the necessary reports to transfer these surplus items to the supply support division fixed assets ledger.
4. The looms are transferred, unloaded, and placed in a 3-1/2 acre fenced-in field.
5. Shipping documents are sent to the administrative office, where looms listed on the shipping document are compared to the quarterly printout received from corporate accounting which lists all assets transferred to supply support during the quarter.
6. The administrative area keeps a manual listing of looms. This list is reconciled quarterly with the computer-generated fixed asset ledger received from corporate accounting.

Loom Teardowns:

1. Looms are torn down daily (as many as time permits). The teardown process includes:
- Removing the Tarheel Textile asset tag number.
- Stripping the asset of all useable parts.
- Reconditioning these parts.
- Storing any salvageable metal and the residue (or carcass) in a central area. The residue is usually loom frame and some useable pieces of metal.
2. A loom teardown report is prepared weekly. The report lists by identification tag number each loom torn down during the week. Sometimes, however, tag numbers are missing from the looms--many of the looms are old and thus the tags have been jarred loose or have fallen off during shipment.
3. This report is sent to the administrative office where it is used to authorize removal of these looms from the fixed assets accounting records. The tag number identifies assets on the ledger.
4. The loom parts salvaged as a result of the loom teardown are collected. A quality control person reviews each part to determine whether it is reusable as is, needs to be reconditioned, or should be sold as scrap metal. The reusable parts are eventually sent to the supply room and placed on perpetual inventory records for accountability.

Sale of Reconditioned Loom Parts:

Written Customer Orders:
1. The computer generates a shipping document based on a written customer order. The customer may be a Tarheel Textiles plant or another company.
2. The shipping document is reviewed in the supply room. If inventory records indicate reconditioned Draper loom parts are available in bins, these parts will be used to fill the order. If inventory records show no parts available, the supply room clerk copies these part numbers/descriptions on a sheet of paper.
3. This sheet of paper goes to the loom teardown supervisor. Crew members will go out to looms in the field and strip the needed parts from the looms.
4. These parts are sent to the supply room, along with the piece of paper, for review and to make ready for shipment.
5. The shipping supervisor loads goods onto the truck. He checks against notice of shipment to assure accuracy of loading.
6. The loaded truck leaves premises.

Telephone Orders:
1. Verbal orders received from customers, either by the supply room or the loom teardown supervisor, are handled similarly except that no written customer order exists. All information is written on an order form
2. The two supervisors coordinate selection of parts, either from supply room bins or stripped from looms in the field.
3. After the parts have been pulled and the order is ready for shipment, the supply room supervisor contacts the administrative area so that a shipping document may be prepared, based on the items listed on the order form.
4. The shipping document is sent to the shipping supervisor.
5. The shipping supervisor loads goods onto the truck. He checks against the notice of shipment to assure accuracy of loading.
6. The shipment leaves the premises by Tarheel Textile truck, customer truck or common carrier.

Disposal of Residues and Scrap Metal:

1. The loom teardown supervisor usually receives customer orders verbally. Johnstone & Company is the primary customer to whom Tarheel sells loom residues and scrap metal. A company representative will often come to Tarheel, select loom residues and scrap parts he wants to purchase from those available, and supervise the loading of his truck.
2. The loom teardown supervisor calls the administrative area and requests a shipping document be prepared since company policy prohibits any vehicle from leaving the premises without a notice of shipment. The supervisor gives the office all the information necessary to prepare the document.
3. The truck leaves the premises from the loom field through the main gate.

The Telephone Call

Mr. Arthur Thomas, the buyer in corporate purchasing responsible for the disposal of Tarheel Textiles' surplus assets (including the sale of all parts from the supply support division), received a telephone call from a person who stated he had previously worked for Tarheel Textiles. The caller alleged that the supervisor of the loom teardown program at Tarheel's supply support

Kết quả (Việt) 1:

Case Study: Kiểm soát nội bộ và gian lận (từ IIA nghiên cứu nền tảng "nghiên cứu trường hợp trong kiểm toán nội bộ" tập 4)Tiêu chuẩn và đạo Đức Xin lưu ý đó là không có ai phải trả lời cho các bài tập. Bạn nên xem xét khác nhau quan điểm về các vấn đề đạo Đức trước khi rút ra kết luận của bạn. Mục tiêu Nghiên cứu trường hợp này được thiết kế để lộ các sinh viên đến một loạt các điều kiện mà có thể hoặc có thể chỉ ra một gian lận đã cam kết. Xem xét phải được trao cho lỗi xuất hiện trong một môi trường kinh doanh bình thường, kiểm soát nội bộ yếu được chấp nhận bởi quản lý, cũng như có được một sự hiểu biết về thủ tục và hiệu quả tầm xa của họ về kinh doanh. Kiểm soát các điểm yếu của mình không phải là vấn đề lớn. Sự kết hợp của các điều khiển điểm yếu, cùng với sự thiếu kinh nghiệm của kiểm toán nội bộ và một hạn chế kiểm toán ngân sách hiện tại cuộc sống thực tế tình huống. Học sinh cần phải hiểu môi trường kiểm soát tổng thể và không chỉ đối phó với từng thủ tục lỗi. Kiểm soát các điểm yếu của mình không phải là vấn đề lớn. Sự kết hợp của các điều khiển điểm yếu, cùng với sự thiếu kinh nghiệm của kiểm toán nội bộ và một hạn chế kiểm toán ngân sách hiện tại cuộc sống thực tế tình huống. Ví dụ, kiểm toán viên biết khi nào để mở rộng một bài kiểm tra kiểm toán, ngừng cung cấp các bài kiểm tra và yêu cầu dữ liệu bổ sung? Những thông tin nào là cần thiết, Ai nên trả lời và độ tin cậy những gì nên được đặt trên các thông tin? Kiểm toán viên biết những gì là cần thiết để hỗ trợ một đề nghị kiểm tra hoặc quan trọng hơn, để cung cấp bằng chứng trong một vụ án hình sự? Yêu cầu Xin vui lòng đọc tất cả các yêu cầu một cách cẩn thận và đảm bảo rằng giấy của bạn địa chỉ mỗi mục. Nó sẽ là hữu ích để sử dụng riêng để phát triển bản đồ quá trình cao cấp. Nhiệm vụ này là để được hoàn thành bằng cách sử dụng chỉ có các vật liệu được ủy quyền để sử dụng trong lớp này. Một hướng dẫn thô để hoàn thành đầy đủ nhiệm vụ là 5-6 single-spaced trang. Nếu bạn có bất kỳ câu hỏi nào về những gì được mong đợi, xin vui lòng liên hệ với người hướng dẫn. 1. nếu bạn là một phần của đội ngũ kiểm toán, những câu hỏi bổ sung nào bạn yêu cầu để thu thập bằng chứng kiểm toán hơn? Bạn cần phải tập trung vào những gì là quan trọng nhất cho trường hợp này. Bạn phải đi với ít nhất 15 câu hỏi có liên quan. Bạn phải có một số câu hỏi cho mỗi năm lĩnh vực: tiếp nhận, loom teardowns, đơn đặt hàng của khách hàng, xử lý số dư lượng và kim loại phế liệu, và các quản trị của chương trình cải tạo dệt. Bạn phải chỉ ra những gì bạn hy vọng sẽ học hỏi từ mỗi câu hỏi (tức là, những gì là mục đích của câu hỏi?) và người mà câu hỏi nào được giải quyết. 2. xác định điểm yếu kiểm soát nội bộ top 4 của bạn theo thứ tự của các vật chất trong mỗi năm lĩnh vực sau đây: tiếp nhận, loom teardowns, đơn đặt hàng của khách hàng, xử lý số dư lượng và kim loại phế liệu, và các quản trị của chương trình cải tạo dệt. Hãy đảm bảo bạn địa chỉ các điểm yếu quan trọng nhất của điều khiển. 3. đối với mỗi quan sát được xác định trong #2, viết của bạn recommendation(s) để tăng cường kiểm soát nội bộ trong chương trình cải tạo dệt. Đảm bảo rằng đề nghị mỗi liên kết rõ ràng với một observation(s) từ #1. Một đề xuất có thể bao gồm một số điểm yếu kiểm soát nội bộ. 4. theo bạn, có một gian lận được gây ra? Nếu vậy, những gì bằng chứng hỗ trợ các cáo buộc? Là nó vững chắc, đủ để kết án người tại tòa án? Hãy giải thích những lý do cho kết luận của bạn. Nền tảngNhiều người trong số hàng dệt Tarheel cũ Draper dệt mới đã được thay thế với máy dệt hiện đại và hiệu quả hơn. Thay vì junked, hay tháo dỡ, những khung thặng dư được gửi bởi các nhà máy đến bộ phận hỗ trợ cung cấp nơi họ đang bị tước đoạt tất cả các bộ phận sử dụng được. Những bộ phận reconditioned, lưu trữ, và được đặt trên hồ sơ tồn kho vĩnh viễn là nguồn cung cấp được sử dụng mục. Cơ sở sản xuất trong Tarheel đường tất cả các đơn đặt mua hàng cho các bộ phận loom Draper thông qua bộ phận hỗ trợ cung cấp. Điều này bao gồm các đơn đặt hàng làm ra để công ty Draper và tất cả các nhà cung cấp khác từ người mà Draper phần có thể được mua. Cung cấp hỗ trợ đánh giá các hồ sơ tồn kho (và sẽ giữ cho không nhiều hơn một ngày) để xác định sự sẵn có của các bộ phận được sử dụng được tạo ra từ loom tước chương trình. Nếu phần có sẵn trong Tarheel, mua hàng cho các nhà cung cấp là thay đổi và cung cấp hỗ trợ đoàn tàu có các bộ phận tự động cho các nhà máy đặt hàng. Thay đổi đơn đặt hàng sau đó được gửi đến các nhà cung cấp. This program has resulted in substantial savings to Tarheel. Also, many of these older parts are in short supply and are, therefore, difficult to obtain within a reasonable delivery time. OperationThe loom reclamation program operates as follows: Receiving: 1. Plant sends to the supply support division all surplus Draper looms. These looms may or may not be operative, but would have been scrapped at the plant, or otherwise disposed of, had they not been shipped to supply support. 2. Plant prepares a shipping document, which accompanies each shipment of looms. This shipping document lists each asset shipped, identified with the Tarheel fixed asset tag number. 3. The shipping plant prepares the necessary reports to transfer these surplus items to the supply support division fixed assets ledger. 4. The looms are transferred, unloaded, and placed in a 3-1/2 acre fenced-in field. 5. Shipping documents are sent to the administrative office, where looms listed on the shipping document are compared to the quarterly printout received from corporate accounting which lists all assets transferred to supply support during the quarter. 6. The administrative area keeps a manual listing of looms. This list is reconciled quarterly with the computer-generated fixed asset ledger received from corporate accounting. Loom Teardowns: 1. Looms are torn down daily (as many as time permits). The teardown process includes: - Removing the Tarheel Textile asset tag number. - Stripping the asset of all useable parts. - Reconditioning these parts. - Storing any salvageable metal and the residue (or carcass) in a central area. The residue is usually loom frame and some useable pieces of metal. 2. A loom teardown report is prepared weekly. The report lists by identification tag number each loom torn down during the week. Sometimes, however, tag numbers are missing from the looms--many of the looms are old and thus the tags have been jarred loose or have fallen off during shipment. 3. This report is sent to the administrative office where it is used to authorize removal of these looms from the fixed assets accounting records. The tag number identifies assets on the ledger. 4. The loom parts salvaged as a result of the loom teardown are collected. A quality control person reviews each part to determine whether it is reusable as is, needs to be reconditioned, or should be sold as scrap metal. The reusable parts are eventually sent to the supply room and placed on perpetual inventory records for accountability. Sale of Reconditioned Loom Parts: Written Customer Orders: 1. The computer generates a shipping document based on a written customer order. The customer may be a Tarheel Textiles plant or another company. 2. The shipping document is reviewed in the supply room. If inventory records indicate reconditioned Draper loom parts are available in bins, these parts will be used to fill the order. If inventory records show no parts available, the supply room clerk copies these part numbers/descriptions on a sheet of paper. 3. This sheet of paper goes to the loom teardown supervisor. Crew members will go out to looms in the field and strip the needed parts from the looms. 4. These parts are sent to the supply room, along with the piece of paper, for review and to make ready for shipment. 5. The shipping supervisor loads goods onto the truck. He checks against notice of shipment to assure accuracy of loading. 6. The loaded truck leaves premises. Telephone Orders: 1. Verbal orders received from customers, either by the supply room or the loom teardown supervisor, are handled similarly except that no written customer order exists. All information is written on an order form 2. The two supervisors coordinate selection of parts, either from supply room bins or stripped from looms in the field. 3. After the parts have been pulled and the order is ready for shipment, the supply room supervisor contacts the administrative area so that a shipping document may be prepared, based on the items listed on the order form. 4. The shipping document is sent to the shipping supervisor. 5. The shipping supervisor loads goods onto the truck. He checks against the notice of shipment to assure accuracy of loading. 6. The shipment leaves the premises by Tarheel Textile truck, customer truck or common carrier. Disposal of Residues and Scrap Metal: 1. The loom teardown supervisor usually receives customer orders verbally. Johnstone & Company is the primary customer to whom Tarheel sells loom residues and scrap metal. A company representative will often come to Tarheel, select loom residues and scrap parts he wants to purchase from those available, and supervise the loading of his truck. 2. The loom teardown supervisor calls the administrative area and requests a shipping document be prepared since company policy prohibits any vehicle from leaving the premises without a notice of shipment. The supervisor gives the office all the information necessary to prepare the document. 3. The truck leaves the premises from the loom field through the main gate. The Telephone Call Mr. Arthur Thomas, the buyer in corporate purchasing responsible for the disposal of Tarheel Textiles' surplus assets (including the sale of all parts from the supply support division), received a telephone call from a person who stated he had previously worked for Tarheel Textiles. The caller alleged that the supervisor of the loom teardown program at Tarheel's supply support