Question

You must label each answer with the number of question. Each question must have at least three sentence answers. There is no maximum sentence, use as many as you wish to thoroughly answer the question. All answers must be complete sentences using proper grammar and spelling.

Angelina is in the rental property business. She employs property managers who collects rent, arranges for repairs, and runs advertisements in the local newspaper.

The property managers transfer cash to Angelina monthly. The property managers prepare their own bank reconciliations. Bob, the manager in Lansing has been stealing from the company. To cover the theft, he overstates the amount of the outstanding checks on the monthly bank reconciliation. As a result, each monthly bank reconciliation appears to balance. However, the balance sheet reports more cash than is actually in the bank.

Angelina is currently putting his entire business up for sale. In negotiating the sale of the business, Angelina is showing the balance sheet to prospective buyers.

1. List all who could be harmed by this theft and identify in what ways could they be harmed?

2. Explain internal controls.

3. Discuss specific internal controls that were lacking in this situation.

4. If you start a company, what are the most important internal controls to implement?

Answer 1

1

The Fraud could harm MS. Angelina because this will affect the organizations reputation and lack of internal control is exposed.

It will harm auditors as this shows negligence on duty from their part.

Prospective buyers also could be harmed by this because they believe that the balance sheet shows true and fair view but actually is not so.

2

Internal control is a process for assuring of an organization's objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies.

Helps to comply with laws and regulations and preventing employees from stealing assets or committing fraud.

It can help improve operational efficiency by improving the accuracy and timeliness of financial reporting.

3

Segregation of duties is a fundamental element of internal control and that is not followed here.

The property managers prepare their own bank reconciliations; it should be done by one another person.

Use of petty cash log is missing here which helps to list every purchase you make using petty cash funds and every sum you add to replenish the fund.

A petty cash fund is a box of money; you may choose to implement an internal control by locking the box and only allowing access to a limited number of individuals.

4

Internal controls are usually established based on a risk-oriented approach when starting a company it should be ensured that organization frame internal control policies by focusing on high risk areas.

Should frame internal control procedures to safe guard the organization’s assets.

Internal controls policies including proper segregation of duty help to prevent fraud.

By following internal controls documentation, employees get a better understanding of the company processes and practices, which helps to establish the company’s practices.