Goodners Huntington Sale office

1. List what you believe should have been the three to five key internal control objectives of Goodner's Huntington sales office.

1) Operations objectives:

a) Strengthen the dominant market share through huge volume sales at undercutting price;

b) Achieve the profitability goal when revenue is relevant low by cutting cost;

c) Ensure the employees are reliable, so they can safeguard inventory and other resources against loss.

2) Financial reporting objectives:

a) Preparation of reliable financial statements to secure the loan from bank

3) Compliance objectives:

a) Ensure every aspect of business operation is in compliance with relevant regulations and rules

2. List the key internal control weaknesses that were evident in the Huntington unit's operations.

The components of internal control include control environment, risk assessment, control activities, information and communication, and monitoring. In the Huntington unit's operations, key internal control weaknesses mainly lay in the following three components:

1) Control environment weaknesses:

a) Neglected "tone at the top": Goodner's executives preached one dominant theme: Volume. Under such business philosophy, the sales manager of Huntington unit only paid attention to sales, and neglected the importance of internal control.

b) Limited internal control means: Relay heavily on the honesty and integrity of the employees instead of internal control for cost saving consideration.

2) Control activities weaknesses:

a) Lack of duty segregation and authorizations:

Every employee of Huntington unit held concurrent roles. To be specific, the sales manager supervised other employee while worked a sale district; the sales representatives acted as bookkeepers, warehousemen and delivery workers upon demand besides making sales; the receptionist doubled as secretary and bookkeeper; and the delivery workers also worked in the unit's inventory warehouse. Such blending of functional activities increased the risk of error or inappropriate actions taken by any single individual.

b) Poor enforcement of performance reviews and follow-up activities:

Sales manager of Huntington unit only collected the performance information, e.g. the customer complaints against sales representatives, as part of his routine procedure, but he never worked on reviewing the performance and solving relevant problems. Instead, he simply threw these complaints back to the sales representatives, letting them deal with the matters without any follow-up regarding the results.

c) Inefficient and ineffective IT control:

i. Lax IT access control:

Unrestricted accesses to the accounting system were granted to different level of employees without control. The receptionist, sales manager and sales representatives all had full accesses.

ii. Weak IT application control:

The sloppy computerized accounting system consisted by an off-the-shelf general ledger package and a hodgepodge of assorted accounting documents. Such system could not provide accurate, systematical and up-to-date financial and operating information to management for monitoring and decision making purpose.

iii. Loose documentation practice:

Transaction information was jotted on scrap paper rather than entered into computer system on timely basis. Such practice would impair the rigorous and comprehensive of information.

d) Weak physical access control:

Except the padlocks, the storage areas didn't have other physical protection for inventory, nor did they have inventory managing policy and procedure in place. Thus, everybody can go into the storage areas.

e) Poor enforcement of independent verifications and reconciliations:

Huntington unit only performed physical inventory count at the year-end, and such count was carried out by its own staff. Besides, Huntington unit's accounting records were not adjusted for deficient tires disposed during the year until the year-end physical inventory was taken.

3) Monitoring weaknesses:

a) Insufficient supervision from management:

Huntington unit did not have a management personal who performed managing, monitoring and evaluating duties on the overall operation of this unit. Sales manager was supposed to manage sales and other employees, but managing the overall operation of Huntington unit was not his primary duty. Due to the lack of supervision, Woody was able to steal tire in various ways, from intended wrong charging to client's accounts to cheating on credit memo relating to returned tires; from taking advantage of consigned tires returning to faking deficient tires disposal. None of these ways could be an effective way or be a long-time hiding way if proper supervision and control was in place.

b) Weak internal audit team:

i. The company's 14 sales outlets shared the central two-person audit team, which apparently needed more heads.

ii. Internal audit team was not able to perform as they were required according to the company's policy. For example, company policy dictated internal auditor count inventory annually, but the internal audit team usually did it every 15-20 months.

iii. Internal audit team didn't have enough duo professional care. For example, they didn't show any professional suspicion when the significant shrinkage of inventory happened in the year-end inventory count in 1996.

3. Develop one or more control policies or procedures to alleviate the control weaknesses you identified in Question 2.

In order to alleviate the control weaknesses identified in Question 2, I suggest Goodner take corresponding control policies and procedures as listed below:

1) Redesign the control environment at entity-level:

a) The company's volume-driven-only philosophy should be revisited by the board of directors and senior management at the corporate level. The importance of risk management and internal control should be