Case Study on Internal Control
Hello World Pty Ltd is a resort company based on the Lakes Entrance. Its operations include boating, surfing, diving and other leisure activities, guest rooms, two and three bed apartments. Abi and Tim Scott own the majority of the shares in the Scott Group, which controls Hello World Pty Ltd. Tim is the chairman of the board of directors for both companies and Abi is a director of both companies as well as CFO of Hello World Pty Ltd.
Tim and Abi have a fairly laid-back management style. They trust the employees to work hard for the company and reward them well. Tim tells you that his staff, particularly accounts department are very loyal, enjoy their jobs so much they have never taken annual leave and hardly any sick leave. Tim and Abi have not bothered much in the past for policies and procedures, but they have requested account staff to start documenting the more common procedures. They do not conduct formal performance reviews; they rely on their staff to tell them when there is a problem.
There are three employees in accounts department; the most senior and the head is Tom Smith. He reports directly to Abi. He is in his fifties and planning to retire in two to three years. He delegates most of his work to his two accounts staff Meg and Kate, as he is busy developing policy and procedure manual for the department. The delegated work include opening mail, processing payments and receipts, banking funds received, reconciliations, posting journals and processing payroll. Meg is a recent charted accountant graduate. Kate works part time for three days and she is responsible for posting all journal entries into the system and the payroll function. Meg does the rest of the duties but they often help each other on busy periods. Kate authorises Meg’s transactions and Meg returns the favour by authorising Kate’s transactions. Together they make the account balance.
Required:
Internal control components (LO 3 & LO4)
(a) Explain how the internal control components are usually adjusted to meet the needs of small entities. What advantages and disadvantages does this bring?
(b) Assess the internal controls at Hello World. What changes would you recommend?
Communication with management
(c) Write a management letter to Tim and Abi Scott.
Source: Auditing: A Practical Approach, 2e