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The Goodner Brothers, Inc. audit case is based off the story of two men who have been friends since their childhood: Woody Robinson and Al Hunt. Now as adults, Mr. Hunt works for an auto supply store while Mr. Robinson works for Goodner Brothers, Inc. , a tire wholesaler in Huntington, West Virginia. In the Goodner case, internal auditors were conducting their annual inventory counts of Goodner Brothers, Inc. and determined that their numbers were lower than the book inventory numbers by $143,000.
As it would with any company, the misstatement of inventory raised red flags forcing the company to contact their independent audit firm to investigate the inventory shortage.
The investigation concluded that the company did not have adequate internal controls and that many issues involving Mr. Robinson existed. Below I have detailed my overall opinion, the issues surrounding the company, and future internal control procedures that might help limit inventory theft and access to accounting records.
At the conclusion of the investigation, the company ultimately filed a lawsuit against Mr.
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Robinson, thus meaning he was terminated from the company prior to the lawsuit. I agree with this action because it was the only solution to setting a new tone at the top. If the company is to implement new internal control procedures, they needed to send the message to other employees that theft will get you fired. I believe that the company should have implemented the following internal control objectives into their daily operations in order to safeguard assets and accounting records.
First, the company should segregate the duties of authorization, implementation, and recording between three or more individuals to reduce the risk of fraud.
As stated in the case, “besides the Huntington facility’s bookkeeper, the unit’s sales manager, and two sales representatives had unrestricted access to the accounting system. ” Segregating the accounting duties between three or more bookkeepers would have helped the company catch Mr. Robinson’s fraud.
Secondly, the company should implement an internal control that only allows sales managers to authorize transactions in order to eliminate double entry or false transactions. A key objective resulting from this case should be directed at the limitation to inventory by sales representatives. A fourth internal control objective should be related to independent reconciliation of inventory by internal auditors or external auditors instead of sales representatives and delivery workers.
The fifth control objective should include semi-annual employee reviews which would have helped identify customer complaints against Mr. Robinson earlier in the year thus reducing the amount of fraud that occurred. As for the actual internal controls in place, many weaknesses existed that allowed Mr. Robinson to steal “approximately $45,000 of inventory. ” These weaknesses included the unrestricted access to the accounting system, lack of segregation of duties, neglected tone at the top, and unrestricted access to off-location storage warehouses.
In order for Mr. Robinson to steal the amount of tires he did without anyone noticing, he needed to hide his tracks. Being a sales representative and having direct access to the accounting system and storage warehouses was destined to be a disaster. A functioning internal control procedure would have prevented the unlimited accounting access and the amount of tires missing. The company’s lack of segregation of duties allowed Mr. Robinson to personally adjust inventory amounts and debit and credit customer accounts without any authorization from a superior.
The neglected tone at the top can be contributed to the company’s two founders, T. J. and Ross Goodner, who had always “relied heavily on the honesty and integrity of the employees they hired. ” Despite intial hiring on honesty and integrity, the owners never followed up with employees to see if they were staying honest. A few simple fixes could have prevented the fraud to reach the level it did. With every internal control weakness a company needs to identify either a control policy or control procedure that will help prevent error or fraud from occuring in the future.
Based on my suggestions as to what weaknesses existed at Goodner Brothers, Inc. I have suggested the policies or procedures that could be implemented to help prevent future issues. The internal control I would implement to hinder employee access to the accounting system would be to secure all computer programs with individual usernames and passwords to prevent access from others. The bookkeeper should be the only employee with access to the accounting system and to test this procedure the company would need to try and access the software without a username and password.
To monitor the storage warehouse situation, the company should install computer scanning systems and video cameras at each location to supervize whether tires are being scanned in and out upon delivery and pick-up and to determine who and when these transactions are taking place. Semi-annual reviews should be conducted by sales managers to evaluate their sales representative. In addition, strengthening the tone at the top mentality should lie in the hands of each owner by personally reviewing all sales managers to create a top down effect.
Having internal controls is one thing, but how the company evaluates that control is a matter all by itself. Being an independent auditor, it is our job to understand an entity and its environment, including its internal control, but at times we may suggest internal controls and how to test the control in its environment. Under SAS No. 109 (AU 314. 54), the following states what an auditor should do in regards to an entity’s internal control: Obtaining an understanding of internal control involves evaluating the design of a control and determining whether it has been implemented.
Evaluating the design of a control involves considering whether the control, individually or in combination with other controls, is capable of effectively preventing or detecting and correcting material misstatements. Further explanation is contained in the discussion of each internal control component below (see paragraphs . 67 through . 101). Implementation of a control means that the control exists and that the entity is using it. The auditor should consider the design of a control in determining whether to consider its implementation.
An improperly designed control may represent a material weakness fn 15 in the entity’s internal control and the auditor should consider whether to communicate this to those charged with governance and management. When suggesting internal controls for the company, the independent auditor should follow the above process in order to evaluate and test internal controls. In business, internal controls act as the gate keeper for most mistakes. Once a minor mistake is missed by the human eye, controls are in place to help detect anything that has gone unnoticed.
In the Goodner case, $143,000 worth of inventory went missing without anyone noticing for over a year. As shown in the above discussion, internal fraud can go unnoticed for a long period of time if the proper controls are not in place or even used. The Goodner Brothers, Inc. case demonstrated that anyone with access to accounting records other than the bookkeeper can manipulate accounts at ease; opening the door wide open for fraud to occur. The company should have implemented various internal controls that would have significantly cut down on their weaknesses years ago in order to catch theft similar to Mr. Robinson’s.
Goodner Brothers Audit Case. (2020, Jun 02). Retrieved from https://studymoose.com/goodner-brothers-audit-case-new-essay
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