Rose Samuel Instructor Angela Sneed ACC 412 April 10, 2012 Case 3.

5 Goodner Brot
hers Inc. In this case I will identify five key internal controls objectives of
Goodner's Huntington sales office, key control weaknesses that were evident in t
he Huntington unit's operation, control policies that may have alleviated the co
ntrol weaknesses and parties that were at least partially responsible for the in
ventory losses Goodner suffered. I believe should the five key internal controls
objectives of Goodner's Huntington sales office are: - Segregation of duties be
tween members that initiative, approve, implement, and record - Procedures to au
thorize transactions - Requirements for documentation and audit trail before pro
cessing transaction - Limitation to physical access - Independent reconciliation
The key internal control weaknesses that were evident in the Huntington units ar
e: 1. Unrestricted access to the accounting system. Besides the Huntington facil
itys bookkeeper, the units sales manager and two sales representatives had unrestr
icted access to the accounting system. The sales reps routinely accessed, review
ed, and updated their customers accounts.

2. Unrestricted access to the inventory storage areas. Sales representatives had

direct access to the inventory storage areas. During heavy sales periods, sales
reps often loaded and delivered customer orders themselves. 3. Transactions not
being recorded in a timely manner. The sales reps often jotted the details of a
transaction on a piece of scrap paper, and finally passed it on to the bookkeep
er or used it to enter transaction data directly into the accounting system.
4. Lack segregation of duties. The duty for record keeping for an asset and the ph
ysical
custody of that asset should be assigned to different individuals. As mentioned
previously, sales reps can get access to the accounting system in order to enter
transaction data and update their customers accounts. In addition, sales represe
ntatives had direct access to the inventory storage areas. All of them violate se
gregation of duties principle.
5. Lack managements supervision. The management must monitor its effectiveness on
a
periodic basis. The most effective way to evaluate controls is through spot chec
ks of control performance and evidence of review, such as selecting a sample of
transactions and viewing evidence that they were approved. 6. Lack a physical co
unt of inventory. The average interval between the internal audit inventory coun
ts, which typically ranged from 15 to 20 months, is too long time. When employee
s have been stealing inventory, the theft will show up as a difference between t
he balance in the inventory account and the amount physically counted. The follo
wing control policies that may have alleviated the control weaknesses are:
1. Segregation of duties Segregation of duties means that the related activities s
hould be
handled by different clerks. The management should define individual employee re
sponsibilities for inventory control. This establishes a climate of accountabili
ty. Splitting

responsibilities makes different staff responsible for distribution and receivin

g, and control access to inventory. These separations of duty are set in place t
o make it harder for one employee to commit inventory theft without having to in
clude an accomplice 2. Installation of surveillance cameras. Install security ca
meras to detect theft in warehouse. Watch for unusual behavior on the security v
ideos. The presence of unauthorized personnel in warehouse should alert the mana
gement a problem exists.
3. Physical security. Good physical security is another way to stop inventory th
eft. All
merchandise should be physically guarded and locked; access should be limited to
authorized personnel only. In stalling time locks and alarms can also help prev
ent theft.
4. Keeping a record of custody. Keeping an inventory record of custody can remov
e easy
opportunities to steal inventory. A record of custody can provide a chronologica
l list of steps that show the transaction of inventory from start to finish. Whe
n the record is poorly maintained, the chances of the theft increase because the
chance of being caught decreases. 5. Running physical inventory. Like accountin
g audits, the management can make physical inventory checks a surprise to determ
ine if the inventory control system is the same as the physical count of the. Ge
nerally, the more frequent the inventory audit the better able the management wi
ll be to spot and correct the problem. 6. Fraud reporting hotlines. It is also he
lpful to encourage employees to anonymously report suspected frauds to company h
otlines or Web pages.
7. Training and education. Any education or traning should be emphzised the ille
gal conduct
in any form eventually costs everyone in the company through lost profits, adver
se publicity, decreased moral, and productivity.

In addition to Woody Robinson, other parties were at least partially responsible

for the inventory losses Goodner suffered include: (a) Al Hunt, the owner of Cu
rcios Tires, (b) T.J. Goodner, the CEO of Goodner Brothers, Inc., (c) Ross Goodne
r, the COO (the chief operating officer) of Goodner Brothers, Inc., (d) The CFO
of Goodner Brother, Inc. (e) Felix Garcia, the Huntington sales manager, and (f)
the internal auditor. The manager did not follow up on the complaints and so mi
ssed the chance to discover the problem early. Management intentionally understa
ffed so that segregation of duties was not possible so the opening made it tempt
ing. Without the opening, this may never have occurred. Internal audit did not c
ount often enough or the problem may have been found sooner. The friend could ha
ve refused to buy the stolen tires and so limited Woody s ability to continue pr
ofiting on a large scale. Internal controls exemplify a companys policy for pilot
ing business in a reliable way, guarding delicate information concerning to cust
omers and business operations and regulating the capability of employees and man
agers to commit fraud or embezzlement. Goodner Brothers lack of internal control
s is an example of what auditors look for when they begin an audit of a company.
An employee of this tire wholesaler was in a severe financial predicament. When
He realized there was a lack of internal controls, the employee took full advan
tage of his employer`s weakness by stealing a hefty amount of its inventory and
ultimately sold for profit.

Work-cited "FEDERAL INFORMATION SYSTEMS CONTROLS AUDIT MANUAL." GAO. Feb. 2009.
Web. 10 Apr. 2012. <http://www.gao.gov/assets/80/77142.pdf>. "Chapter 7 Financia
l Accounting." SMCCD.NET. Web. 10 Apr. 2012. <http://www.smccd.edu/accounts/nurr
e/online/chtr7fa.htm>.