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    Internal Controls of Choate and Choate

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    Choate and Choate is an advertising agency that employs 625 salespersons, who
    travel and entertain extensively. Each month, salespersons are paid both salary and
    commissions. The nature of their jobs is such that expenses of several hundred dollars
    a day might be incurred. In the past, these expenses were included in each salesperson's
    monthly paycheck. Salespersons were required to submit their expense reports,
    with supporting receipts, by the 20th of each month. These reports would be
    reviewed and then sent to data entry in a batch. Suitable controls were incorporated
    on each batch during input, processing, and output. This system worked well from a
    company viewpoint, and the internal auditor was convinced that, while minor
    padding of expense accounts might occur, no major losses had been encountered.
    As interest rates began to climb, the salespersons became unhappy. They
    pointed out that they were often forced to carry several thousand dollars for an entire
    month. If they were out of town around the 20th, they might not be reimbursed
    for their expenses for two months. They requested that Choate and Choate provide
    a service whereby a salesperson or his or her representative could submit receipts
    and expense reports to the accounting department and receive a check almost immediately.

    The data processing manager said that this procedure could be done. A computer
    terminal would be set up in the accounting office, along with a small printer.
    The salesperson's name would be entered along with the required expense amount
    broken down into the standard categories. A computer program would process these data to the proper accounts and, if everything checked out suitably, print the check on presigned check blank stock in the printer.

    1. Appraise the strengths and weaknesses of the current system.
    2. Design a system of internal controls to minimize the risk of fraud of loss.

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    Solution Preview

    1. Appraise the strengths and weaknesses of the current system.
    There are several strengths in the current system. When a salesperson submits his expense reports with receipts these reports are reviewed. At this review stage if there are any anomalies they would be detected and any misstatement prevented. For instance if there were any expenses that were not allowed these would be detected at the review stage and the expense report sent back to the respective sales person. Also, if there was any expense that required a receipt and the receipt were missing, the expense report could be sent back to the sales person for rectification.
    Another strength of the current system is that there is a 10 day gap between the day the expense reports are submitted and the day the when the money is disbursed to the employees, this allows for checking and reviewing the expense reports and finding out if the reports are in order.
    Another important strength of the current system is that thee were suitable controls at input, processing and output stage. These controls would easily spot and weed out any unusual expense that was billed. For example, if there were some four figure expenses, they would be spotted at the data entry stage and reviewed for veracity. Similarly, if there was a pattern of expenses that was unusual it would be detected at the input stage. Finally, at the output stage the controls would mean that there was some scrutiny and appraisal of the figures on the output sheet and any extraordinary figures would be noticed and investigated. It is because ...

    Solution Summary

    This posting discusses the current system of Choate and Choate. It also discusses the internal controls of Choate and Choate