Internal Controls of Choate and Choate

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.