The internal audit of Margaret River Wines is conducting a review of the sale department. He finds that over the last 2 years the number of sales administration staff in the Western Australia branch has been reduced by half. It appears that the reduction from 8 clerks to 4 clerks is due to management target of maintaining profit per employee. In the last management planning meeting it was felt that 4 clerks would be sufficient. The 4 clerk included 3 ex sales staff who wanted to change to an office job instead of continued travelling. In reducing staff numbers management considered it necessary to retain the experienced staff. Six months ago2 of the experienced staff left for personal reasons and were replaced by junior clerk with no sales experience. Also the other remaining experienced clerk was promoted to supervise a sales region and was rarely in the administration office. The resulting vacancy has not been filled. Required: Discuss the attitudes of management in reducing staff numbers Identify the risk that the internal auditor needs to take into account in the internal audit of the Western Australia sales function. Case Scenario 2 The owner of a busy city restaurant used the following system of internal control for sales. Employees entered all pre-numbered customer bills into the cash register and, at least once each day, the bookkeeper batched the sales dockets, listed them on a deposit sheet and made the related bank deposit. The owner then matched the totals on the deposit sheet with the amounts shown in the stamped deposit book, and believed this to be adequate supervision. The owner's supervision of the bookkeeper, however, was inadequate, especially because the bookkeeper was responsible for handling the cash (the bank deposit) and related records (customer bills, cash register tapes and deposit sheets). In fact, over a three-month period, the bookkeeper skimmed a portion of each day's cash receipts by omitting some of the cash sales bills and pocketing the corresponding amounts. The owner might have uncovered the fraud by using any one of these listed methods. • Segregating duties. The owner rejected this method because he trusted the bookkeeper and did not want to incur the cost of an additional employee. • Accounting for all pre-numbered bills. The owner opted not to use pre-numbered bills because it was too time-consuming. The bookkeeper intentionally did not list the bills in numbered order on the deposit sheet and pre-numbered books were issued out of sequence to waiters and waitresses. • Matching daily cash register tapes to the daily cash deposit. The owner rejected this simplest and most appropriate method; not wanting to check his employee's work in this way because the tapes were a messy 'dog's breakfast' kept in a shoe box by the bookkeeper, entirely by design, of course, to cover up the fraud. The owner eventually uncovered the fraud when the bookkeeper became too greedy and withheld a bit too much from what the owner knew was an especially good cash sales day, which raised his suspicions and led to an investigation. Required: Identify the control laps in the given case on the part of the owner and please suggest the possible ways to prevent in future. Case Scenario 3 ABC Metal Company employs nearly hundred production workers and has the following payroll procedures: i. The personnel department maintains the personnel records which contain details of engagement, authorisation of pay, weekly deductions, absences, etc. ii. Employees sign on and off in a time book which is held by the paymaster. iii. Daily hours are computed by the payroll clerk from the time book and overtime is paid on the basis of overtime requisition forms which are approved by the production foreman. iv. Weekly payroll sheets are prepared in duplicate by the assistant paymaster (the rate of pay and fixed deductions are obtained from the employee earning records which are maintained in the payroll department). v. A clerk in the accounts department sends the duplicate copy of the payroll sheets to an armoured car agency which prepares a pay envelop for each employee. vi. The payroll cheque is signed by the paymaster and is presented to the agency on the day of the distribution. vii. The paymaster distributes the pay envelop to the employees, identifying each employee personally. viii. Any unclaimed wages are handed over to the cashier along with a list of the employees involved. ix. If the unclaimed wages are not collected after two months they are banked in a special payroll bank account. Required: Identify the weaknesses of internal control and list your suggestions for improving the ABC's internal control as per above information. Part B- Short answer questions 1. A data entry person inputs the date (15 February 2000) into the amount field of an account by error when entering a receipt, resulting in an amount of $1.522 million. What internal control was missing? Could something like this happen in your business? 2. An invoice being paid twice is a very common problem in many businesses. How would you pick this up in your business? What internal control systems would help prevent this problem? 3. What are the important internal control concerns in an e-commerce environment? List them. Describe the purpose of the internal audit and the function the internal audit provides to an organisation. Why is an audit committee a useful tool of internal control and good governance? Explain what assurance an effective internal control system may provide for a company's management. In each instance, give a practical example. Explain how the personnel, organization structure and management supervision affect internal control environment. What is an accounting system? why it is important to management? Discuss the purpose following concepts in relation to application controls. i. Input controls ii. Processing controls iii. Output controls Identify and explain three documentation techniques that are widely used in the monitoring internal control procedures.