ACCT436 Internal Control Deficiencies- Case Study

ACCT 436
Internal Control Deficiencies – Case Study
This case for UMGC Acct 436 is a modified version of The Tyronco Foundation©2013 Internal
Auditing Academic Advancement Fund (IAAF) and is solely for use for our class.
The Tyronco Foundation operates worldwide to provide food and medicine to needy individuals in
third-world countries. Thirteen countries currently receive assistance through the program. The
number of individuals who benefited has increased from 407,000 in 2000 to over 721,000 in 2019.
Data for current years are still being tabulated for annual reporting. Contributions are received from
foundations, agencies, governments, and individuals. Tyronco outsources the marketing and collection
processes. The marketing agency publicizes the benefits and collects donations.
The bylaws require that 75% of the funds collected to be distributed directly to benefit t he needy
(benefit expenses). The administration expenses cannot exceed 25% of contributions. Tyronco’s
marketing efforts highlight the guaranteed high percent payoff to the needy. The governing agencies
of several countries require that the attest auditors include the 75% goal in the financial audit.
Background Information
The results of your preliminary work are outlined below:
I. Board-Audit Committee:
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Bernie Lay serves as both the Chairman of the Board and CEO. Bernie was the CFO for five
years before being appointed as the CEO.
The 13 board members are prominent celebrities, politicians, and businesspeople.
The board members are selected by the Chairman of the Board and approved by a majority of
the Board.
The five-member audit committee includes the Chairman of the Board and four members
appointed by the Chairman for a three-year term. The Board consists of a nominating
committee, a risk committee, and a compensation committee.
The Board and the subcommittees meet for one day each quarter. The CFO is responsible for
the agenda and financial reports.
The Chief Audit Executive (CAE) and the external audit partner share a one-hour slot on the
agenda at each meeting.
II. Chief Executive Officer:
The CEO, Bernie Lay, has a military background and has established an autocratic management style.
He feels that this approach will develop a more efficient and effective structure for a decentralized
organization. The CEO has recently determined that distribution costs, which account for 10% of total
costs, should be reclassified from administrative expense to benefit costs since distribution benefits
the needy.
III. Chief Financial Officer:
Scott Z. Best, the CFO, previously served as the supervisor of accounts payable and was promoted by
the CEO. When he worked for the attest auditors, he was the manager in charge of the Tyronco
account. He maintains a strong working relationship with Temple and Duncan, a small regional firm
in Geneva.
IV. Auditing
Temple and Duncan (T&D) have been the low bidder the last three times the organization has
requested attest proposals. The external auditor proposals are reviewed by the CFO, who recommends
a firm to the Audit Committee for approval. Tyronco represents 60% of T&D’s audit and 80% of their
consulting revenues. As part of a cost-cutting move, internal audit sources the collections, payables,
and purchasing audits to Temple & Duncan.
The CEO believes that the external and internal auditors should be able to complete most of their audit
work from headquarters by utilizing technology. Therefore, only 2-3 site visits are made per year.
V. Operating Management:
Each participating country has a country manager selected by the CEO. The managers report directly
to the CFO. The country manager approves quarterly summary reports and forwards them to the CFO
with the quarterly financial statements for review and approval.
The primary headquarters control and review is a quarterly comparison of budget to actual spending
by the CFO and V.P. of Purchasing. The quarterly purchasing reports from the purchasing agents
provide a summary of expenditures by the vendor. There is one line for each vendor on the report. If
the total purchased from a vendor is under $500, the spend is combined on one line item labeled “All
Other.” For each line item, there is a brief description of what was purchased from the vendor. If
spending does not exceed the budget, the review is not extensive.
VI. Purchasing:
The purchasing function is decentralized with a purchasing agent located in each of the 13 countries
that qualify for food and non-prescription medicine. The V.P. of Purchasing at headquarters has
requested that the 13 purchasing agents purchase 50% of all items from vendors in the same country
as the recipients. The agents operate somewhat autonomously and can sole-source or utilize
competitive bids. Local purchases are typically 20-30% higher than a competitive bid process. The
CEO supports this approach since he feels it establishes good relations with local government officials
and businesspeople.
Purchasing agents are provided with a quarterly budget based on the recipients’ demographics.
Adjustments are made to the budget based on actual contributions received from countries,
organizations, foundations, and personal sponsors. The increase in purchases has been approximately
13% per year but varied from a low of +7% to a high of +21% between countries.
VII. Warehouse:
The receiving clerks and distribution manager report to the purchasing agent in their respective
countries. Inventory status reports are issued quarterly to the V.P. of Purchasing, who prepares a
summary report for the CEO & CFO. Inventory shrinkage has increased from 2% to 3% over the last
five years, with the best country at .5% and the worst at 6%.
Requirement:
What are your most significant areas of concern as an internal auditor? You should be able to come
up with at least eight risks (no more than two in any of the seven sections above). List the controls you
would expect to find to mitigate the risk. For the COSO Principle, pick one of the 17 internal control
principles which are most applicable. You can use the table format below. Please ensure enough
descriptive information so that I can understand your responses.
Item
1)
Risk
COSO Principle
Control(s)