How Control Weaknesses Can Lead to Fraud In your Discussion, you will be faced w

Question

How Control Weaknesses Can Lead to Fraud
In your Discussion, you will be faced with a potentially fraudulent situation. This is something that you might face in your auditing career as well. How would you handle these types of difficult situations?

You are auditing the internal controls of the Kemmons Corporation and you have found several material weaknesses in their system. You discuss the internal control weaknesses with the president. He states that he will make the necessary changes personally and tells you that there is no need to tell the board about the weaknesses. He does not want to bother the busy board members with these details, and he states the board is only involved with major items such as policy changes.

As a new auditor, how would you respond to the president?
If you were the audit partner on this engagement, would your response change? Why or why not?

Explanation / Answer

Internal controls of a company are important parts of its overall operations. A strong internal contro system will provide many benefits to a company like :

- lower external audit costs,

- Better control over the assets of the company and

- reliable information for use in decision making.

A company with weak internal controls is putting itself at risk for employees theft, loss of control over the information relating to day to day operations and other ineffeciencies in operations and decision making that can damage to its business.

In a situation when there are material weaknesses found in the system it is auditors responsibility to inform to Board of Directors (BOD). In organization to accomplish all the varied responsibilities, it is normally given a necessary ststus with adequate authority and freedom. The internal audit function is generally report to board of directors through the audit committee. The responsibility of the internal auditors is to compare 'what is" in the company with "what should be" in the company and report to the management with their findings. so in this case to report to Board of directors. In additions to their findings, the internal auditors develops and communicates suggestions and recommendations for improvement.

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