Smart Trading Incorporated (STI), is a subsidiary of Compton Falls Enterprises.

Question

Smart Trading Incorporated (STI), is a subsidiary of Compton Falls Enterprises. STI is a securities trading firm specializing in debt and equity securities transactions mostly traded on the NASDAQ. Based on your conversation with management, you discovered the following:

1. The petty cash custodian confesses to having “borrowed” $9,010 over the last two years. The custodian promises to repay every penny, with interest, as soon as possible.

2. An employee in accounts payable maintains the accounts payable subsidiary ledger.

3. In May of 2016, STI was notified that their proprietary information would be broadcast on the Internet if they did not pay a $17 million fee. The hacker was caught by the FBI before any damage was done.

4. In November of 2015, STI customers were notified by e-mail that their accounts had been compromised and were being restricted unless they re-registered using an accompanying hyperlink to a Web page that had STI’s logo, home page design, and internal links. The form had a place for them to enter their credit card data, ATM PINs, Social Security number, date of birth, and their mother’s maiden name.

5. When entering a large credit sale, the clerk typed in the customer's account number as 45982 instead of 45892. That account number did not exist. The mistake was not caught until later in the week when the weekly billing process was run. Consequently, the customer was not billed for another week, delaying receipt of payment.

6. A batch of 73 time sheets was sent to the payroll department for weekly processing. Somehow, one of the time sheets did not get processed. The mistake was not caught until payday, when one employee complained about not receiving a paycheck.

7. To facilitate working from home, an employee installed a modem on his office workstation. An attacker successfully penetrated the company’s system by dialing into that modem. Again, due to the diligent efforts of Tommy Lew, sensitive customer information was not compromised, according to internal sources.

Requirements: Review the seven items listed and decide whether they represent an internal control strength or weakness.

Document any assumptions to support your conclusions.

For each internal control weakness identified, explain why it is a weakness and recommend a way or ways to correct the weakness.

Explanation / Answer

Internal control means the plan, procedure and actions of management to ensure the orderly management of business according to sound business principles.

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