Question

Understanding the Sarbanes-Oxley Act and identifying internal control strengths and weaknesses. The following situations suggest a strength or a weakness in internal control.

a. Top managers delegate all internal control procedures to the accounting department.

b. Accounting department staff (or the bookkeeper) orders merchandise and approves invoices for payment.

c. Cash received over the counter is controlled by the sales clerk, who rings up the sale and places the cash in the register. The sales clerk matches the total recorded by the register to each day’s cash sales.

d. The employee who signs checks need not examine the payment packet because he is confident the amounts are correct.

Requirements

1. Define internalcontrol.

2. The system of internal control must be tested by external auditors. What law or rule requires this testing?

3. Identify each item in the list above as either a strength or a weakness in internal control, and give your reason for each answer.

Short answer

1. The situation relates to Weakness in internal control.
2. The situation relates to Weakness in internal control.
3. The situation relates to Weakness in internal control.
4. The situation relates to Weakness in internal control.

Step-by-step solution

Step-by-Step SolutionStep 1: Definition of internal control

Internal controls mean to detect the errors from the management of the company.

Internal control

Internal control is a control that controls the internal activities of the company. Internal control is also known as achieving the company’s objective, reliable financial reports, etc. Internal control is also used to increase the efficiency of the company’s employees.

Rule requires the testing of internal control

The Sarbanes-Oxley Act requires that the internal control must be tested by external auditors.

Strength or weakness

1. In this part, the given situation is a weakness of the company. Because of this, the managers assign all the duties to the accounting department. This rule of the separation of duties cannot be followed properly.
2. This situation is also a weakness for the company because the accounting department orders merchandise without the consent of the purchasing department.
3. This situation is also a weakness for the company because, in this, the sales clerk creates the opportunity the steal.
4. This situation is also a weakness for the company because not examining the checks creates human errors.