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    Choate and Choate is an advertising agency that employs

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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.

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

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    Solution Preview

    1. Appraise the strengths and weaknesses of the current system.
    The strengths of the current system is that necessary checks on the expenses are performed before paying the reimbursement to the salesperson. The advantage is that this current system is strongly fraud-proof. Currently, all receipts are being reviewed manually before being lodged into system. Thus, it is almost impossible for someone to lodge a fraudulent/wrongful ...

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