What breached of Internal Control were there and what modifications to procedures would you implement?

‘How to do it company, is a company, which provides information & products for the DIY sector. It has grown significantly in the past few years and turnover has increased from around $3 million to $ 15 million per annum.

 

The company was originally managed by owners who, as it grew hired staff from predominantly amongst people that they knew or were already known to other staff. Staff numbers has grown from less than 10 to over 60 during this period and many employees were married to, or in relationships with, others within the company.

 

Audits are conducted annually and the audit company is well regarded and has been doing the audits since the company began. The auditors are regarded as part of the team and attend the Christmas function each year.

At most the recent Christmas function, one of the auditors, commented to the general manger, as an aside during the conversation, that he was surprised that given the increased in turnover that the yearly profits were not higher.

The general manager decided that during the Christmas break he would look at the auditor’s report and review the situation. The auditor’s report’s report made no such statement but after examining the figures it was apparent that profits should have been higher.

When the office re-opened he requested the auditors to undertake an examination specifically to discover why it was so.

The auditors investigated and reported that the section manager responsible for major purchases had paid invoices to a company which he and his wife owned. The amounted paid to the company was in excess of $500,000.00

The section manager was responsible for signing off on the work completed, supplies received, and authorizing payments. His wife was responsible for issuing the cheques. Both were signatories to the cheque account.

What breached of Internal Control were there and what modifications to procedures would you implement?

Prepare a 4-5 page report outlining your course of action.

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